Current Issues in Executive Compensation

Observations Week of February 14, 2022

Continuing with the trend of Environmental, Social, and Governance (ESG) goal adoption in 2020 and 2021, we are beginning to see more regular adoption and shifts towards specific and measurable ESG goals for 2022. Compared to the early phases of ESG goal adoption, where we would typically see a list of declared metrics without much standardization, companies are beginning to set more specific and quantitative goals with defined weights and payout leverage for 2022. This standardization is partly driven by ESG scorecards being viewed as qualitative goals by institutional investors.  In response, some companies are attempting to frame ESG goals as more quantitative by linking number of goals met to a set threshold/target/and maximum (e.g, target performance equals 50% of ESG goals met).

In addition to ESG goals, some companies are still grappling with the challenge of properly setting financial goals given continued uncertainty in the market. Specifically, some companies are attempting to balance lower target goals for 2022 compared to 2021 target and actual performance while simultaneously avoiding the appearance of consecutive above-target/maximum payouts due to depressed goals and/or adjusted metrics.  

Observations Week of July 5, 2021

As the economy continues to recover from the impact of the COVID pandemic, companies face several challenges stemming from decisions made during 2020. One such challenge includes having overestimated the pace of economic recovery, thereby leading to 2021 bonus plans tracking below threshold following a challenging 2020. Conversely, several other companies have underestimated the economic recovery in establishing 2021 bonus targets and are set to perform beyond maximum. Both situations illustrate how prolonged market uncertainty has led to the difficulty in setting financial goals for 2020 and 2021.

Director compensation, overall, remained flat in 2020. The challenge presented in 2021 is whether any increases to director compensation should be made. While broader director compensation changes for 2021 will not be fully known until 2022, there have been some situations of good company performance, sufficient recovery, or sustained below-market pay levels leading to director compensation increases in 2021. However, overall, we believe that board pay rates will escalate at levels that are lower than historical practice.

Environmental, social, and governance (ESG) metrics continue to be in the forefront of conversations by companies. Several have chosen to highlight the inclusion of ESG metrics in their incentive plans in recent proxies covering 2020, and many have chosen to disclose these metrics (or announce the inclusion of these metrics) for 2021. While ESG metric adoption has generally centered around larger companies, conversations have begun to shift towards potential larger-scale ESG adoption at smaller companies as well for future incentive plans.

Observations Week of May 10, 2021

This week, we have seen increased scrutiny surrounding new ISS “problematic pay practices” among companies. Specifically, ISS has brought attention to large retention awards / one-time awards to executive teams and severance benefits provided to executives that are not described in public filings as terminating involuntarily. Language such as “mutual agreement [of separation]” has been viewed as insufficient, unless further clarified and explicitly tied to involuntary termination.

Environmental, social, and governance (ESG) metrics continue to be an important topic of discussion among companies. With companies more regularly including ESG metrics into annual incentive plans, new discussions have highlighted concerns of the possibility that too many ESG metrics could dilute other established annual incentive metrics or overcomplicate annual incentive plans. Such concerns, however, do leave open the possibility that long-term performance plans could include ESG metrics more commonly in the future.

Observations Week of April 12, 2021

This past week, conversations have focused on long-term equity incentive opportunity and compensation designs impacting the broader stakeholder community.

We continue to see some companies provide a premium to 2021 LTI grants as compared to 2020 awards, with premiums generally intended to enhance retention given the decline in management’s equity values at some companies resulting from the pandemic. Overall reactions from investors and external proxy advisors remain to be seen; however, early indicators suggest large 2021 pay changes have been viewed unfavorably, particularly when viewed as “make whole awards.” These reactions stem from the view that long-term incentives by nature should smooth out short-term swings in compensation.

ESG (environmental, social, and governance) metrics continue to be of interest to companies, with recent discussions extending beyond annual incentive implementation and into long-term incentive designs. Companies continue to debate how to properly calibrate the weighting and measurement of ESG metrics in current and future compensation plans, including (i) the use of mission-based rather than budgeted financial goals, (ii) how ESG metrics play a role if a company misses financial/TSR targets, and (iii) to what extent positive or negative leverage is applied. These discussions are not uniform across companies, as specific ESG metrics vary in applicability and level of importance among different industries.

Observations for Week of March 15, 2021

This past week, pay conversations have centered around 2021 compensation changes and Environmental, Social, and Governance (ESG) metrics.

Companies are facing the challenge of setting pay levels and what, if any, merit increases should be applied to their executive teams. Specifically, several companies are choosing to take more conservative approaches to merit increases as they balance several considerations including (i) any changes made to merit increases for the broader-employee population in 2020, (ii) the extent of financial recovery/impact, and (iii) optics of large pay increases, among others. Partially attributable to increased scrutiny of executive compensation as the pandemic begins to wane, several companies have drawn criticism from proxy advisors and investors for large pay increases and/or large one-time payments despite positive financial performance in 2020.

ESG continues to be an important topic among companies. While ESG metrics have more commonly appeared in annual incentive plans, conversations have also centered on the potential inclusion of ESG in long-term performance plans. Moreover, the appropriate weighting that should be placed on ESG metrics as a percent of a total award opportunity has been debated, noting that investors and proxy advisors highlight the importance of ESG but may be intolerant of a reduction in financial performance metrics.

Observations Week of March 1, 2021

This week, companies have been discussing disclosure of compensation actions taken in response to the COVID-19 pandemic for their 2021 proxies, while simultaneously balancing multiple concerns from external counsel, investors, and proxy advisors. Recurring disclosure themes include how to address:

  • Compensation actions for the executive team, such as salary reductions, freezes, etc.
  • Compensation actions for the broader employee population, such as furloughs, special bonuses for frontline workers, etc.
  • Compensation actions not taken by the Board, such as modifications to in-flight incentive awards
  • Enhanced equity awards for 2021 or adjusted metrics for 2020 awards
  • Use of committee discretion

The level of detail companies choose to disclose will vary and will be dependent on the degree of impact of compensation decisions made during 2020 and/or whether or not prior decisions were previously disclosed in 8-Ks.

ESG (environmental, social, and governance) metrics also continue to be a recurring theme among companies, and we have seen an uptick in the number of companies implementing ESG metrics into their annual and, to a lesser extent, long-term incentive plans.

Observations Week of February 15, 2021

This past week, conversations continue to involve 2021 goal-setting and long-term incentive grant sizes.

2021 Goal-Setting:

During the end of calendar 2020, we observed many off-calendar fiscal year companies defer goal-setting to early calendar 2021 (as opposed to the historical practice of setting goals during late calendar 2020) due to the challenges of forecasting performance in a highly uncertain environment. This week, we have seen this trend of delayed goal-setting apply for many on-calendar fiscal-year companies as well, with several companies choosing to not set goals until March or even the second quarter of 2021, again given the lack of visibility to likely outcomes given the pandemic.

We have also observed several companies revisiting discussions of adding ESG (environmental, social, and governance) metrics to their incentive plans. With the emergence of several prominent companies introducing ESG metrics – especially diversity and inclusion (D&I) – to their 2021 incentive plans, other companies are similarly contemplating the introduction of ESG metrics for either 2021 or 2022. The method in which companies choose to implement ESG metrics in performance plans have varied, with common approaches including performance scorecards, modifiers, or measured quantitative metrics.

2021 Long-Term Incentives:

We continue to see some companies provide a premium to 2021 LTI grants as compared to 2020 awards. With premiums generally intended to make up for lost opportunity in previous LTI grants/performance cycles, some companies are facing internal pressures to provide additional disclosure detailing the amounts and rationale for the grant premiums. In addition, we continue to see companies debate the merits of applying premiums to 2021 awards versus the alternative of augmenting regular ongoing annual LTI with a special LTI grant.

Observations Week of January 18, 2021

This past week, there has been a focus on compensation expectations for the broader employee population, as well as continuing contemplation of 2020 annual incentive payouts and 2021 long-term incentive grant sizes.

Broad-Based Compensation Expectations:

Some companies, especially those not severely impacted by COVID-19 (e.g., technology), are taking the approach that COVID-19 should not impact compensation decisions; as such, in many instances these companies are continuing with normal merit increases for the broader employee population. Conversely, some companies in highly-impacted industries (e.g., retail, REITs, travel, leisure, etc.) are opting for more modest/no merit increases for 2021.

As a result of work-style changes brought about by COVID-19 restrictions, many companies have allowed for remote work for their employees. In certain instances, these employees have chosen to work in less-expensive geographies as compared to their original high-cost employment locations. In response, some companies are discussing removing geographic pay premiums and/or introducing salary grades based on geography.

2020 Bonus Payouts:

Despite challenges brought about by COVID-19, some companies have managed to perform at maximum and are discussing payout strategies, including:

  • Reducing bonus payouts to below-maximum to demonstrate empathy with affected stakeholders
  • Providing bonus adjustments to employees below the executive level
  • Using additional cash funds for charitable donations, refunds to customers, and additional broad-based bonuses to employees.

2021 Long-Term Incentives:

We have seen some companies provide a range of premiums to 2021 LTI grants as compared to 2020 awards. While some premiums are intended to make up for lost opportunity in previous LTI grants/performance cycles, we have observed that other companies are freezing or providing more measured LTI award increases due to affordability issues and in order to obviate potential disclosure concerns.

Observations for the week of January 4, 2021

This past week, we have seen companies focus their discussions on the use of discretion in determining 2020 bonuses and changes in long-term incentive plans.

For 2020 annual incentive payouts, companies are contemplating the extent to which discretion may be applied in determining final bonus payouts as a percent of target, noting the following challenges:

  • Companies are navigating the possibility that the use of too much positive discretion may be viewed negatively by investors/proxy advisors.
  • With many companies’ financial metrics performing below target for 2020, some companies have also adopted the use of “resilience” narratives to explain and justify any subjective actions.
  • Conversely, some companies with financial performance above target are determining how much, if any, discretion should be applied to their executive teams.
  • A less compelling case for the use of discretion given that many companies have experienced an overall stock price recovery (or growth) for 2020.

Adjustments to future long-term incentive plans have been a recurring topic among companies throughout 2020, with some opting to shift from 3-year performance goals to a series of three, 1-year goals and/or shift towards more time-based equity until there is less volatility in the markets. Some companies are also discussing the merits of introducing/reintroducing relative TSR in their performance plans, which obviates the need for goal-setting.

Observations for the Week of November 30, 2020

Continuing with the topics from early November, compensation committees and management teams are continuing to focus on potential adjustments to financial and operating performance results as they consider 2020 bonus payouts and modifications for 2021 bonus and long-term incentive designs:

  • With the 2020 calendar year approaching an end, companies have thus far devoted primary attention toward 2020 bonus funding and in-flight PSUs while simultaneously considering 2021 program design and metrics decisions. For companies that continue to lack clarity on the 2021 economic and financial outlook, consideration is being given to delaying annual bonus and long-term performance plan goal-setting to allow for greater confidence in establishing performance expectations. Similarly, some companies that have long-term performance plans are considering the replacement of traditional 3-year performance goals with three contiguous 1-year performance periods complemented with a 3-year performance “wrapper” such as TSR.
  • We have also seen some companies consider increases to FY2021 long-term incentive opportunities to address unique, company-specific situations. Additionally, some these companies are reevaluating their long-term incentive vehicle mix to determine whether the current mix should be retained or if there should be a slightly higher emphasis on time-vested RSUs, understanding that proxy advisors will criticize any reduction in performance-based equity.
  • The increased attention towards environmental, social, and governance (ESG) metrics among institutional investors and the larger stakeholder community is resonating in incentive design discussions as companies are evaluating the potential use of ESG goals or metrics in their 2021 annual bonus and PSU plans. We have also seen implementation and prevalence of ESG-related goals vary by industry and individual companies.
  • Selected companies have also discussed several disclosure strategies for 2021 proxies, including resilience scorecard narratives to explain any subjective actions taken for 2020 incentive payouts and ESG achievements, even if such metrics are not formally integrated in 2020 performance plans.

Observations for the week of November 2, 2020

This past week, we have seen companies focus their discussions on decisions regarding 2020 annual incentive payouts, goal-setting for FY2021 bonuses, and long-term incentive opportunities for 2021.

For companies in industries that were heavily affected by the pandemic (e.g., retail, REITs, travel, leisure, etc.), 2020 bonus payouts are expected to be well below target. However, several industries have experienced positive financial performance despite the market volatility that has arisen from the COVID-19 pandemic, namely the IT, biotech/biopharma, and consumer product sectors among others. Even companies within industry sectors have experienced different financial outcomes resulting from distinctive business models (i.e. strength of omni-channel strategy).

For 2021 annual bonuses, many companies are choosing to delay goal-setting until better financial line-of-sight is obtainable. We have seen these goal-setting delays range from an additional fiscal quarter to several months. Longer delays are largely associated with more heavily impacted industries.

With several companies that are concerned about retention choosing to grant a premium to 2021 equity grants in lieu of adjusting in-flight equity performance cycles, companies have discussed several strategies to properly design these awards:

  • For companies with long-term awards split between performance-based awards and time-based awards, companies are contemplating a range of options including (a) increasing the proportion of time-based awards to maximize retention; (b) increasing the performance-based portion to ensure that any enhanced equity awards have a strong performance orientation, particularly given likely shareholder scrutiny; and/or (c) for performance shares, increasing the performance zone required for threshold and maximum payouts to account for difficulties in setting financial goals.
  • Many companies are choosing to limit the size of these premium-awards – in many instances between +10% and +20% – in order to avoid the potential perception by investors and proxy advisors of “making-whole” executives for lost long-term incentive value. Furthermore, companies are choosing to limit the magnitude of equity premiums as a strategy to mitigate disclosure challenges in 2022 proxies.

Observations for the Week of October 19, 2020

This past week, we have seen companies contemplate disclosure and metric calculation strategies for their executive and broader employee population incentive outcomes.

Thus far in 2020, we note that several companies have provided “hero bonuses” to their front-line employee populations. As a consequence, there have been discussions surrounding potential adjustments to financial metrics to account for these bonuses, i.e., whether to add back the hero bonus expense as an extraordinary item when calculating adjusted profit metrics for incentive funding purposes. It is likely that 2021 CD&A disclosures will highlight broad-based actions taken by companies to support employees, which will ultimately be viewed favorably by stakeholders, although it remains to be seen how the removal of such actions from the incentive calculation will be perceived by proxy advisors.

We have also seen a greater number of instances of investor and proxy advisor reactions to adjustments in annual bonus payouts as more non-calendar year/fiscal year companies file proxies. So far, the use of resiliency-based discretion has appeared to be acceptable if (i) explained adequately by companies, and (ii) if such adjustments are made within reason and do not make executives whole.

For many companies, make-up LTI awards provide an attractive alternative to in-flight PSU adjustments. While these grants may be intended to replace lost incentive value, companies are exercising caution in how these awards are ultimately calibrated and disclosed so as to avoid any potential negative criticism from investors and proxy advisors. As a result, these supplemental LTI awards are trending towards performance-based equity with multi-year vesting periods.

Observations for the Week of October 5, 2020

This past week, we have seen companies focus their discussions on potential actions for 2020 annual incentive payouts and while planning for 2021 compensation decisions.

Companies should be cautious about using survey and proxy-disclosed compensation data for 2021 planning as the pay targets and values represent “pre-Covid-19” opportunities for most sources of data. These data have to be carefully evaluated relative to the impact of the pandemic on each company as some industry segments have rebounded, while others remain in challenging circumstances. Also, it is important to recognize that some compensation surveys have not included temporary salary reductions in survey data.

On the topic of current year annual incentives, we expect that many investors will accept some adjustments to annual bonus payouts, but not to the extent of making executives completely whole. For those companies likely to pay above target bonuses, they may not apply negative discretion to determine actual payouts but might cap certain components (e.g. individual performance factor) of the incentive award while allowing for formulaic outcomes on the other components (e.g. financial, operational).

On the topic of long-term incentives, we believe that in many cases there will be negative investor reaction to adjustments of performance for open cycles of long-term performance awards outside of approved exceptions in the plans. As a result, some companies are considering supplemental equity grants in 2021. While these grants are intended to replace lost incentive value, in most cases we expect the value delivered will be a percentage of the original target value rather than a complete replacement. The amount of the replacement value needs to be tailored to each company’s unique situation and performance. In addition, some companies are considering shifting measurement of long-term plans from multi-year to single year performance periods with additional vesting to equalize the total performance and vesting periods before and after the change.

In terms of target setting for 2021 incentive plans:

  • Some companies are considering setting half-year goals given the lack of visibility on general economic conditions in 2021. This has to be tempered with the company’s strategy with regard to setting analyst guidance for earnings and other financial metrics.
  • Setting half-year goals can be challenging from a motivational and incentive point of view if there is a strong economic recovery in the latter half of 2021 and second half goals need to be raised significantly over 1st half goals.

Lastly, we are seeing a pronounced trend in interest and discussion of ESG-related issues particularly after the communications by State Street, the World Economic Forum, and the Business Roundtable.

Observations for the Week of September 21, 2020

This past week, we have seen companies focus their discussions on potential actions for pending annual incentive payouts and long-term incentive opportunities for 2021.

Annual Incentives:

  • Companies with Individual Performance Factors (IPF) in their annual bonuses are contemplating appropriate payout levels to recognize employee efforts in a challenging year if financial performance is below threshold.
  • In general, while companies understand that individual performance payouts can be used to differentiate top performers, committees are highly sensitive to the need to align pay and overall performance and will likely avoid maximum individual performance payouts if financial performance is poor. Furthermore, companies with individual performance modifiers versus a weighted individual performance metric are ensuring that total annual bonus payouts do not exceed target opportunities, regardless of individual performance.
  • Several companies introduced “resilience” scorecards in the past few months as part of existing strategic/individual goals in order to measure success in navigating through the challenges brought upon by the COVID-19 pandemic. For these companies, however, resilience scorecards will not justify maximum individual performance payouts (or even target payouts, in most circumstances), especially if financial performance thresholds are not met.

Long-term Incentives:

  • Earlier committee discussions in 2020 included the possibility of in-flight adjustments to existing PSU cycles; however, this strategy appears to be somewhat rare in the market. As a potential alternative, several companies are contemplating the use of additional LTI grants in 2021.
  • For many companies, additional LTI awards in 2021 provide an attractive alternative to in-flight PSU adjustments for reasons including, but not limited to, (i) the potential to strongly motivate performance improvements given current depressed stock prices, (ii) lower stock price starting points for relative TSR measurement, and (iii) simpler and more straightforward disclosure relative to in-cycle adjustments (in addition to deferring disclosure to 2022 proxy statements).

Observations for the week of September 7, 2020

Salaries:

Companies are contemplating whether to enact normal-course merit increases for executives for 2021, especially in highly impacted industries where liquidity may be of concern. While select survey research across U.S. companies forecast an approximate 3% salary budget increase for 2021, it is likely that companies are choosing not to apply merit increases for their executives.

Annual and Long-Term Incentives:

Setting goals for 2021 annual and long-term incentive plans continue to be challenging for companies in several industries. As a result, we are seeing companies contemplate several strategies for their annual and long-term incentives plans going forward:

Companies are generally avoiding in-cycle PSU adjustments, but rather are more willing to adjust current annual incentive plan payouts.

While less common, some companies have made in-cycle PSU adjustments to current performance awards (2020-2022) versus prior cycles. These modifications to in-cycle plans are more likely to occur in heavily impacted industries.

For companies that have not made in-cycle adjustments, other proposed PSU strategies include:

  • Setting larger 2021 PSU opportunities to strengthen retention
  • Replacing 3-year goals with consecutive 1-year goals set at the beginning of each performance year due to the environment of uncertainty
  • Implementing PSUs with combined 1-year, 2-year, and 3-year performance tranches
  • Widening performance goal ranges to account for uncertainty and potential further volatility
  • Use of higher weight on relative financial metrics given the challenges of setting absolute goals

Regardless of strategy, adjustments to future long-term performance plans remain more favorable over replacing performance-based equity with time-based awards from a proxy advisor/optics standpoint.

Observations for the week of July 24, 2020

Salaries:

Companies continue to discuss pay reduction reversals; however, these will likely be industry-specific, with more heavily affected industries (e.g., retail, REITs, travel, leisure, etc.) reversing pay reductions later than less-affected industries.

Salary restorations will likely not be disclosed, especially in instances where reduction sunsets were enacted (e.g., salary cuts through December 31, 2020) or employees were furloughed.

Annual and Long-Term Incentives:

Setting goals for 2021 annual and long-term incentive plans has been challenging for companies in several industries, especially where there is lack of clarity in company prospects. As a result, we are seeing companies contemplate several strategies for their annual and long-term incentives plans going forward:

Annual Incentives:
  • Some companies are choosing to increase or introduce strategic goals that are highly tied and relevant to driving company value in 2021, such as cost control, product launches, divestitures, etc. For several companies, these strategic goals may constitute a large portion of the annual incentive formula.
  • Off-calendar fiscal year companies that were unable to postpone annual goal-setting have considered the use of two, 6-month performance periods to allow for better line-of-sight.
Long-Term Incentives:
  • For 2018-2020 PSUs, a few companies are considering truncating performance through FY19, with payouts prorated for partial performance.
  • For 2021-2023 PSUs, companies are contemplating replacing 3-year goals with consecutive 1-year goals set at the beginning of each performance year. In order to preserve sufficient long-term focus, companies are also considering adding an overarching 3-year metric to act as a modifier or performance hurdle, such as relative TSR, EPS, etc. Additionally, this overarching 3-year metric may also act as a payout floor to allow for a threshold payment if a challenging performance criterion is met (e.g., guaranteed threshold payout if relative TSR is at the 60th percentile regardless of performance of the 1-year financial goals).
  • Some companies have also been more amenable to larger 2021 PSU opportunities in lieu of adjusting current underwater PSU cycles (or split the larger PSU opportunity between 2021 and 2022 to manage the impact on values disclosed in the CD&A and proxy tables).
  • Companies are also considering introducing relative metrics for future PSU grants; however, these will also likely be industry-specific.

Observations for Week of July 10, 2020

This past week, we have seen companies focus their discussions on potential actions for existing and future incentive plans, especially as companies face the challenge of setting appropriate goals for 2021:

  • Discussions surrounding treatment of existing PSU cycles continue as some companies have single or multiple performance cycles tracking toward below threshold payouts. Some companies are discussing various strategies to address these cycles including adjusting financial results for the unforeseen effects of COVID as permitted by plan documents.
  • Due to the difficulty in setting 3-year corporate goals for 2021 PSU plans, some companies are contemplating alternative designs, including replacing 3-year goals with consecutive1-year goals set at the beginning of each performance year. In order to preserve sufficient long-term focus, companies are also considering adding an overarching 3-year metric to act as a modifier or performance hurdle, such as relative TSR, EPS, etc.
  • Additionally, some companies are opting to replace absolute metrics with relative goals to ease the burden of setting performance targets in an uncertain economic environment.

Unrelated to COVID issues, companies are increasingly interested in adding diversity and inclusion (D&I) metrics in their incentive plans, especially in light of increased shareholder interest in environmental, social and governance (ESG) issues. There have been discussions as to which plan (either annual incentive or long-term) these metrics should apply, given that D&I metrics are often long-term objectives for companies but have thus far been mostly limited to annual incentive designs as a scorecard component or goal included in a strategic or individual performance category.

Observations for the week of June 26, 2020

Salaries:

Pay reductions seem to have plateaued. As such, conversations are now turning to when, and how, reduction actions will be reversed.

Despite these conversations, companies are generally taking a “wait and see” approach, understanding that salary restorations may be premature given the uncertainty of the current environment. This is further complicated in instances where companies disclosed pay reductions with no specified end date.

In cases where there have been salary reductions for the broader-employee population, some companies have discussed ways to earn forgone compensation through supplemental bonus opportunities.

Incentive Plans:

There continues to be limited disclosure and documented cases of annual goal resets; companies may have little appetite to disclose such changes unless it serves the potential to be viewed positively by the broader shareholder and stakeholder community.

This being said, several companies have discussed and approved splitting the current annual incentive year into two, six-month performance cycles and resetting goals for the second period. In these cases, the maximum opportunity for plan participants is often set to target.

Other companies have chosen to replace their current annual incentive plan with a half-year plan; this half-year plan would operate under reset goals and have the potential to earn less than a target payout.

Adjustments to existing annual plans to account for the COVID-19 pandemic have also been considered:

  • Companies with non-GAAP adjusted performance metrics are considering the inclusion of an additional adjustment for impacts caused by COVID-19, with the understanding that original goals were set without the anticipation of a global pandemic.
  • Some companies are discussing capping payout opportunities under these circumstances at target, with a potential to earn above-target should the company end up outperforming original, pre-adjusted goals.

Observations for the week of June 12, 2020

This past week, we have not seen many new major developments in executive pay quantum as a direct result of market uncertainty driven by the COVID-19 pandemic. However, we have begun to see other developments and emerging trends:

  • Discussions surrounding treatment of existing PSU cycles have been ongoing for several months now with limited disclosure on company-enacted changes. However, some companies are evaluating the cancellation of existing PSU grants and replacing them with heavily discounted RSU grants. These instances so far have been limited to companies with no clear path to achieving PSU payouts under multiple cycles. Part of the rationale for a cancellation and replacement versus a supplemental grant is that the forfeiture of the original PSU award would prevent executives from the possibility of double-payment in the unlikely scenario that threshold performance criteria are achieved.
  • Companies have discussed the importance of proactive shareholder outreach and disclosure, especially when seeking to justify pay actions during, and as result of, the COVID-19 pandemic, including changes to long-term incentive grants. Shareholder engagement will likely be of greater importance as companies attempt to share their “story” with investors and explain the rationale behind any mid-year pay actions.
  • In light of recent developments across the country, some companies have begun discussions on introducing or increasing ESG metrics in executive compensation programs, focusing mainly on the “social” component and diversity and inclusion in particular. We believe that more Boards will be discussing the incorporation of diversity and inclusion metrics in incentive plans going forward.

Observations for the week of June 5, 2020

Salaries:

  • We have seen little increase in the number of new companies disclosing reductions to executive salaries and/or board cash retainers. Furthermore, we have begun to see some companies discuss scaling back previously enacted salary reductions, especially in instances where reductions were not coupled with a specific end date.
  • Pay reduction reversals will likely be industry-specific, with more heavily affected industries (e.g., retail, REITs, travel, leisure, etc.) reversing pay reductions later than less-affected industries.
  • This being said, we are not certain such reversals will be disclosed, especially in instances where companies have announced broad-based employee actions such as furloughs, staff reductions, and broad-based salary reductions.
  • For many companies, merit increases have been frozen pending more clarity and stability in financial outlook. Similar to reversals in pay reductions, these actions are likely to vary by industry. Early signs point to merit budget reductions in harder-hit sectors, while other industries may provide more typical 3% increases.

Annual Bonuses:

  • While there continues to be limited disclosure of annual goal resets, boards are increasingly contemplating the use of discretion for determining FY2020 bonus plan payouts.
  • Some companies have discussed splitting their current annual incentive year into two performance cycles. However, most companies recognize that such instances must be executed with caution, understanding that proxy advisory firms will focus on outlier companies. Consistent with proxy advisory firms’ desire for contemporaneous disclosure, companies recognize the importance of communicating clearly and comprehensively the rationale for any bonus plan changes.

Long-Term Incentives:

Companies continue to discuss several strategies for existing and future long-term incentive plans, including:

  • Using time-based RSUs with a performance modifier to provide potential upside-only payouts contingent on successful achievement of outperformance goals.
  • Lowering threshold opportunities for the 2020-2022 cycle to achievable, but not guaranteed, performance levels.
  • Keeping 2020 equity grants unmodified but, as a balance to underwater awards, providing larger award opportunities in 2021 (or split between 2021 and 2022 to manage the impact on values disclosed in the CD&A and proxy tables).

On Tuesday, June 2, 2020, Jon Weinstein along with Directors and Boards

Presented a webinar "Compensation Issues in the Recovery–Setting CEO and Senior Management Compensation". The Webinar discussed how most businesses have lost revenue during the pandemic, whether the business has shut down completely or not. While compensation plans and incentives were likely approved before the rise of COVID-19, it may be necessary to adjust economic forecasts and incentive plans. Many CEOs and board members have announced the suspension or reduction of their salaries, but that isn’t where the bulk of compensation lies. How do you adjust incentives in the wake of an “act of God”?

In this webinar topics explored included:

•             How deeply business interruption/revenue losses will affect pay structures and for how long.

•             Alternative incentives in order to keep cash on hand.

•             How to adjust compensation accordingly while retaining the best talent.

Observations for the week of May 29, 2020

Recent weeks have seen a sharp decline in the number of new companies disclosing reductions to executive salaries and board cash retainers. COVID-19 has impacted sectors in meaningfully different ways, with some companies continuing to reel from the rapid economic downturn while others have already experienced stock price recoveries. For those harder-hit organizations, we have seen companies grapple with balancing pay for performance with seeking to recognize overall company stewardship in a difficult environment.

Further, this past week, companies have taken the time to consider several potential actions in their pay programs:

  • Despite above-target performance, some non-calendar year companies are opting to apply negative discretion to bonus plans to position payouts at or below target opportunities. The decision to decrease bonus amounts may be part of broader austerity measures enacted at the onset of the COVID-19 pandemic as well as a desire to demonstrate sensitivity in a challenging time. Conversely, there has been little discussion by companies this week on applying positive discretion to FY2020 bonus plans, although such discretion is likely to be applied by many companies later this year.
  • Some companies are contemplating increasing the weight of strategic measures relative to financial measures in existing or go-forward bonus plans. These strategic measures may be intended to recognize efforts toward ensuring resiliency (such as increased market share, among others) by rewarding demonstrated success in navigating challenging macroeconomic conditions and success in placing companies in stronger positions for the future.
  • Companies continue to contemplate approaches to existing long-term plans. One possibility that continues to be discussed is the complete or partial replacement of future performance-based share plans with time-based restricted shares at a meaningful discount on the grant value, despite the possibility that such adjustments could be met with an adverse reaction from investors and proxy advisors.

Observations for the week of May 22, 2020

Salaries:

  • To date we have seen over 560 companies reduce executive salaries and over 350 companies reduce director cash retainers since the onset of the COVID-19 pandemic, most prominently in severely affected industries (e.g., retail, REITs, travel, leisure, etc.).
  • Given that executive salary reductions are voluntary, the total number of companies reducing executive and/or broad-based salaries may be larger than reported. In addition, since many new executive pay actions were disclosed in recent 10-Q filings as opposed to contemporaneous 8-K filings, it remains unclear whether or not the rate of executive pay reductions is steadily increasing, plateauing, or reflective of actions taken in earlier weeks/months.
  • Executive salary reductions have also been viewed by some companies more as an indicator of employee and shareholder/stakeholder solidarity, rather than as a cash preservation tool or effort to preserve employment of the broader employee population given the relatively modest impact executive salaries have on overall company financials.
  • In more severe scenarios, some companies have made salary reductions permanent due to projected long-term contraction in company business.
  • In some instances, we have seen executives donate their salaries to several charities, including COVID-19 relief funds.

Annual Bonuses:

  • Some companies are choosing to delay FY19 bonus payouts to executives as a cash preservation strategy.

Long-Term Incentives:

  • Companies continue to take a cautious approach to assessing any adjustment to existing long-term plans, understanding the tradeoffs between applying discretion and/or redesigning plans with the constraint of contemporaneous disclosure of changes requested by proxy advisors. Further, there is an awareness that adjustments could be met with an adverse reaction from investors and proxy advisors.
  • Some companies are contemplating design changes to future LTIP performance cycles (i.e., FY2021), recognizing that major and significant company milestones tied to existing performance cycles would have been achieved or were nearly achieved immediately prior to the COVID-19 pandemic. These changes would not act as a replacement of existing cycles, but rather provide a potential long-term upside opportunity on a go-forward basis.


Observations for the week of May 15, 2020

To date we have seen over 480 companies reduce executive salaries and over 300 companies reduce director cash retainers since the onset of the COVID-19 pandemic, most commonly in severely affected industries (e.g., retail, REITs, travel, leisure, etc.). However, this week we have seen a decline in the number of new companies disclosing reductions. We do note that disclosure of such actions is often voluntary, so the figures being tracked may actually understate the prevalence of pandemic-related executive and director compensation reductions.

As the second fiscal quarter progresses, companies are taking time to discuss the treatment of existing annual bonus and long-term incentive cycles:

  • While there continues to be limited disclosure and known cases of annual goal resets, boards are increasingly contemplating the use of discretion for determining FY2020 bonus plan payouts, while recognizing the challenging balance between rewarding for performance and ensuring alignment with shareholder/stakeholder interests. To that end, companies are beginning to discuss building frameworks and guiding principles for the application of discretion at year-end. Such principles may be intended to recognize efforts toward ensuring resiliency – both in terms of business and employees – during these times of high market uncertainty.
  • A limited number of severely affected companies are choosing to calibrate equity awards for management and the board at a stock price that is higher than the current value, recognizing that current stock price levels may be overly depressed as result of market uncertainty and may potentially experience a sharp increase in the near future. The decision to increase the grant share price has also been paired with the need to mitigate share usage in existing equity plan reserves.
  • Companies continue to discuss the possibility of granting options in lieu of other existing equity vehicles for their long-term incentive plans. However, this strategy has seen tepid support, as companies recognize the balance between the motivational value from the potential upside opportunity provided by options today and the possibility of being viewed negatively by shareholders/stakeholders as being overly opportunistic.

Observations for the week of May 8, 2020

Salaries:

  • Executive salary cuts and board cash retainers continue to occur most prominently in severely affected industries (e.g., retail, REITs, travel, leisure, etc.), although some companies in less-affected sectors have taken salary actions.
  • Companies have also discussed and tabled salary cuts as a potential future action pending changes in the market or their financial situation.
  • Executive salary reductions have also been viewed by some companies more as an indicator of employee and shareholder/stakeholder solidarity, rather than as a cash preservation tool given the relatively modest impact on overall financials. Severely affected companies that choose to cut salaries specifically as a method of cash preservation have often taken additional austerity measures such as bonus cuts, broader employee salary cuts, suspending 401(k) matches, etc.
  • Conversely, some companies have provided additional benefits to front-line workers, including one-time bonuses, temporary pay increases, and relief funds covering telemedicine, childcare, etc.

Annual Bonuses:

  • While many companies are continuing to take a “wait-and-see approach” toward incentive plan adjustments for the current year, discussions surrounding when and how goals could be reset are beginning to take place, especially as Q3 2020 approaches, but tempered by the requirement for disclosure of such changes by the proxy advisory firms.
  • Disclosure on annual goal resets have been limited, and are have been largely used by only micro-cap or small cap companies at this point.
  • A few companies are discussing splitting their current annual incentive year into two performance cycles, each with a prorated target incentive.

Long-Term Incentives:

  • Companies continue to take a cautious approach to assessing any adjustment to existing long-term plans, understanding the tradeoffs between applying discretion and/or redesigning plans with the constraint of contemporaneous disclosure of changes requested by proxy advisors and shareholder perceptions.
  • Similar to changes in annual bonus performance periods, some companies have discussed splitting existing long-term performance periods into multiple measurement periods and applying performance to prorated target awards.
  • However, there is limited discussion for changes in plan designs that are based on relative metrics, such as relative TSR, given the “self-correcting” nature of such metrics.

Observations for the week of May 1, 2020

We continue to see executive salary reductions (now more than 400 companies) and director cash retainer cuts (more than 225 companies) most commonly in severely affected industries (e.g., retail, REITs, travel, leisure, etc.), although companies in less-affected sectors have also taken salary actions. We also have found strong linkage between companies that have reduced executive salaries and board cash retainers with companies that have announced broad-based employee actions such as furloughs, staff reductions, and broad-based salary reductions. Most of these companies have not indicated a definitive end date to the reductions, but rather intend on reevaluating salaries and retainer reductions when greater clarity and stability emerges in the financial outlook.

Further, this past week, companies have also taken the time to consider several potential actions in their pay programs in response to ongoing macroeconomic uncertainty:

  • Companies are continuing a “wait-and-see approach” toward incentive plan adjustments or goal setting for the current year for both annual and long-term plans.
  • Some companies have also considered the use of a more balanced annual incentive scorecard, including the introduction of company-wide strategic goals to reflect broader organization priorities. Financial goals, however, would still account for the majority of the annual incentive plan scorecard.
  • Boards are increasingly contemplating the use of discretion for determining FY2020 bonus plan payouts, while recognizing the challenging balance between rewarding for performance and alignment with shareholder/stakeholder interests.
  • For long-term incentives, some companies are considering adjusting the mix of 2020 equity grants to decrease the proportion of performance shares in exchange for a higher proportion of time-based equity awards. However, companies may be hesitant about the introduction of absolute stock price leveraged equity vehicles not recently used, such as stock options, given the potential external perceptions of “market-timing” and desire for contemporaneous disclosure from proxy advisors of such significant design changes.

Observations for the week of April 24, 2020

Salaries:

  • Executive salary cuts continue to occur most prominently in severely affected industries (e.g., retail, REITs, travel, leisure, etc.), although some companies in less-affected sectors have taken salary actions.

Annual Bonuses:

  • Most companies are continuing to take a “wait-and-see approach” toward incentive plan adjustments for the current year.
  • Limited discussion among companies thus far for introduction of ESG (environmental, social, and governance) metrics if not already incorporated into existing incentive plans. However, ESG momentum should accelerate once business and operations begin to normalize.

Long-Term Incentives:

  • Companies continue to take a cautious approach to assessing any adjustment to existing long-term plans.
  • Several strategies have been considered for 2020 long-term incentives, including:

             – Delaying goal-setting until summer 2020 or when there is more clarity regarding financial outlook.

             – Replacing PSUs with performance cash with a discount to reflect lower “currency” risk

            – Replacing PSUs with RSUs, with grant values reduced to reflect lower risk of time-based equity.

            – Reducing threshold payout opportunities to ensure downside protection, with some companies leaving maximum opportunities unchanged and others reducing maximum payouts to preserve the symmetry of the plan.

Director Compensation:

  • Cuts in director cash retainers have generally occurred contemporaneously with executive management salary cuts.
  • Many companies are choosing not to make changes in how the calibrate director equity awards, recognizing:

             – Historical differences in prices used for director equity awards versus management equity grants during years of stock price volatility.

Compensation Disclosure Considerations:

  • Proxy advisors have voiced a strong desire for contemporaneous disclosures (i.e. 8-K) of any changes to incentive plans and targets, especially in instances where annual goals are lowered or are shifted towards more strategic/non-financial goals.
  • However, in many instances, companies have chosen not to release compensation changes in the form of 8-Ks, but rather through media press releases.

Observations for the week of April 17, 2020

We continue to see executive salary reductions (more than 350 companies) and director cash retainer cuts (more than 175 companies) most prominently in severely affected industries (e.g., retail, REITs, travel, leisure, etc.), although companies in less-affected sectors have also taken salary actions, often to demonstrate empathy with affected communities, employees, and customers. Further, this past week, companies have taken time to contemplate and evaluate several actions in response to macroeconomic uncertainty:

  • Continuing a “wait-and-see approach” toward incentive plan adjustments or goal setting for the current year for both annual and long-term plans.
  • For companies that have reduced salaries, there appears to be a split practice for determining the basis of annual bonus awards, with companies considering one of three bases: (i) pre-reduction base salaries, (ii) post-reduction base salaries, or (iii) total salaries earned for 2020. Caution should be exercised in using pre-reduction salaries as the basis for bonus awards in order to avoid the problematic pay practice of payouts appearing to be significantly above “target” if performance criteria are even partially achieved. Regardless, governing plan documents need to be reviewed to assess potential stipulations.
  • Exercising board discretion for FY2020 bonus plan payouts to account for the COVID-19 impact, recognizing the challenge that applying positive discretion for executives in this current environment will likely be viewed negatively by shareholders and other stakeholders. Further, companies continue to adopt or contemplate adding pandemics to approved lists of incentive metric adjustments.
  • Remixing 2020 equity grants to decrease the proportion of performance shares in exchange for a higher proportion of time-based equity awards, such as restricted stock units or options. In executing such a shift, companies are evaluating how much of a discount should be applied to adjust for a re-weighting toward “lower risk” vehicles. However, many companies are considering the shift from performance- to time-based equity to be temporary, with performance share usage likely returning to prior levels once there is more clarity in the market.

Observations for the week of April 10, 2020

Salaries:

  • Executive salary cuts continue to occur most prominently in severely affected industries (e.g., retail, REITs, travel, leisure, etc.), although some companies in less-affected sectors have taken salary actions.
  • In order to avoid furloughs and/or employee layoffs, some companies have begun to consider broad-based salary cuts. These cuts may be uniform across all employees or tiered towards higher earners.

Annual Bonuses:

  • Most companies are continuing to take a “wait-and-see approach” toward incentive plan adjustments for the current year.
  • This week, proxy advisors voiced a strong desire for contemporaneous disclosures (i.e. 8-K) of any changes to incentive plans and targets, especially in instances where annual goals are lowered or are shifted towards more strategic/non-financial goals. Proxy advisors will expect any such disclosures to include justification for the changes made.
  • More heavily impacted companies have considered adjusting individual performance goals to focus on business recovery and improvement initiatives, with overall payouts limited to below-target/threshold. Existing financial goals, however, would not be changed (and would likely result in significantly lower/no payouts).

Long-Term Incentives:

  • Companies continue to take a measured approach to assessing any adjustment to existing long-term plans.
  • Proxy advisors have warned against changing LTI plans that are in-process, indicating that re-setting performance goals could be met with severe criticism.
  • While many companies currently use three, 1-year performance periods in their long-term plans, proxy advisors may be critical of companies that truncate future performance periods without a compelling rationale.

Director Compensation:

  • Cuts in director cash retainers continue to in severely impacted industries as well as more broadly as boards seek to show solidarity with management.
  • For calendar-year companies, some boards have discussed calibrating director equity retainers using the same share price used for executive equity grants in the first quarter of the year in order to address sensitivities surrounding the number of shares received during a sudden and rapid stock price decline.

Other Considerations:

  • Companies continue to express caution on retention awards or large increases in pay at this point, understanding that sensitivity to affected shareholders and other stakeholders is critical.

Observations for the week of April 3, 2020

Salaries:

  • Executive salary cuts and director retainer cuts are much more commonplace across all industries. Highest concentration of salary reductions are in the retail, hospitality, airline, equity REIT, and oil & gas related industries that have experienced the greatest impact from the crisis.
  • There are far fewer executive salary and director retainer reductions at less-impacted companies, although some are considering actions to demonstrate empathy with affected stakeholders.

Annual Bonuses:

  • Disclosures on adjustments and plan changes to current year annual incentive plans have been very limited, continuing the general “wait-and-see” approach among most companies (and calendar/fiscal year companies in particular).

Long-Term Incentives:

  • A very limited number of companies are considering or have conducted option repricing; for those that pursue repricing, we expect the designs of any option exchanges to adhere to good compensation governance principles to help ensure shareholder approval.
  • Companies are deferring discussion of changes to existing share-based long-term incentive plans until there is greater visibility to future performance and prospects.

Other Considerations:

  • Some companies are freezing 401(k) matching contributions despite no employee furloughs, highlighting the difficult choices that are facing organizations.
  • We have seen an increase in companies including share requests for 2020 proxies. In many of these cases, companies fast-forwarded the timeline of future share requests to 2020 given generally strong performance in 2019.
  • Although recent literature highlights the increased use of ESG (Environmental, Social, and Governance) metrics for incentive plans, proxy advisors may have a negative perception of any actions that re-weight incentive goals to de-emphasize financial/operational performance in exchange for a higher weighting on ESG.

Observations for the week of March 27, 2020

Salaries:

  • For heavily impacted industries, we have seen an increase in the prevalence of executive salary reductions, along with some instances of reductions in director retainers. "Everything Should Be On The Table".
  • Some non-calendar fiscal year companies are considering salary freezes for senior executives, but continued merit increases for the broader employee population (in less impacted companies).

Annual Bonuses:

  • Most calendar fiscal year companies are taking a “wait-and-see” approach and are not making bonus plan design/goal changes due to uncertainty in the market – for now. Further, there is a desire to avoid multiple plan resets in 2020, and companies want to ensure there is greater visibility to probable performance before re-setting plans or adopting partial-year incentive plans.
  • For companies that haven’t started new plans, we have seen some consideration of adopting plans that have partial-year performance periods. We also expect to see wider-than-typical performance zones that contemplate greater uncertainty.
  • Some companies are considering setting maximum bonus payout levels at target given staffing reductions and COVID-19’s adverse effect on shareholders and key stakeholders, regardless of company performance.

Long-Term Incentives:

  • As of now, it is still too early to determine if there will be any changes to director equity awards that are typically granted in April, May, and June. Based on the share price declines, however, there may be consideration to calibrating grants using a historical average price rather than a spot price.
  • At this point, companies are largely keeping outstanding performance share cycles intact as it may be premature to consider adjusting goals or using discretion (we note that the resetting of long-term performance goals has often been viewed as a highly problematic pay practice by proxy advisors).
  • There have been some initial discussions about the implementation of a total shareholder return “governor” cap at target in companies that have experienced meaningfully negative absolute total shareholder return.

Other Considerations:

  • Companies are expressing caution on consideration of retention awards to senior management at this point.

Observations for the week of March 20, 2020

Salaries:

  • Selected companies (hardest hit industries) are implementing temporary salary cuts to senior executives to signal solidarity with employees.
  • Cuts may last 3 months with potential for reauthorization, or for the rest of the year.

Annual Bonuses:

  • For plans about to be implemented, shifting from annual to two 6-month plan periods, re-evaluating goals in anticipation of lower earnings for the second period.
  • Considering introduction of relative metrics given difficulty of setting goals.
  • Common expectation for the need to exercise discretion at year-end.

Long-Term Incentives:

  • Broadening basis of stock grants to 30-, 60-, or 180- day price averages to determine shares based on value-denominated grants.
  • Balancing consideration of number of shares granted in 2019 and shares calculated at lower price in 2020.
  • Deferring upcoming PSU grants and delay setting goals to lessen uncertainty.
  • Consider capping gains at set percent of target value.
  • Exercise Committee discretion.

Compensation in Volatile Times