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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with nearly 400 companies annually, are a team of nearly 60 professionals in 13 U.S. locations with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Compensation in Volatile Times

Pay Governance understands that this time of considerable uncertainty and volatility can be challenging for everyone, especially as we settle into new work arrangements and routines. Still, our domain expertise is executive compensation consulting. Therefore, each week we will provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

Key Issues Facing Companies That Exceed Financial Expectations

We have written several Viewpoints on COVID-19’s effect on executive compensation programs at severely harmed companies and the potential actions that could be considered to mitigate some of its impact. In this Viewpoint, we review companies that have exceeded initial expectations during the pandemic and the unique executive compensation challenges they may face.


A number of companies were labeled “essential services” by the Federal Government and were not required to shut down during the government-mandated lockdowns at the onset of the pandemic. In many cases, the demand for these essential businesses’ products and services soared and will likely remain in high demand for the foreseeable future, as consumer preferences and behaviors have changed across a wide range of activities including home improvements, at-home fitness, prepared meals, and ecommerce.

Many of these companies have had to overcome significant challenges in keeping employees safe, ramping up operations to meet increased demand, addressing supply chain issues, and mitigating higher costs. In some cases, entire manufacturing facilities were repurposed to address demands in other parts of the business or to develop new products to meet business and consumer needs. Leadership, change management, and communication skills have been at a premium; successful management teams have been able to navigate these challenges and outperform pre-established incentive plan targets.

Questions facing these companies remain, however, as compensation committees must determine if payouts under existing plans should be calculated using formulae established before the pandemic or if adjustments (up or down) are warranted. In addition, compensation committees must review and approve incentive plan targets for 2021 annual incentives and performance share awards and must also evaluate if the long-term incentive plan mix (i.e., the portion of long-term incentives allocated to stock options, performance shares/units, and time-vested restricted stock/units) remains appropriate.


Based on preliminary SEC filings for S&P 1500 companies with a fiscal year ending from April 30th through August 31st, companies that experienced growth in revenue were less likely to have reduced base salaries, altered existing annual or long-term incentive plans, or modified the design of FY 2021 annual or long-term incentive plans. Our research also showed these companies had a median annual incentive payout of 117% of target and a median performance share/unit payout of 118% of target. Shareholders appear to have overwhelmingly approved of the executive compensation programs at these companies—as evidenced by strong support for Say on Pay at recent annual shareholder meetings. While the sample size is relatively small (102 companies’ proxies were reviewed as of November 13, 2020), the actions and payout information for companies that exceeded expectations contrast sharply with companies that experienced a ≥10% reduction in revenues: base salary reductions were far more common, and median annual incentive and performance share/unit payouts were 44% and 49% of target, respectively. While not unexpected, we view this contrast as further evidence that compensation committees are highly attuned to shareholder expectations and adherence to pay-for-performance philosophies.

Companies with fiscal years ending between August 31st through December 31st are likely to be more affected by the pandemic, as they will have operated in the COVID-19 environment for six to nine months. As a result, some companies that have experienced better-than-expected performance during the pandemic may exceed incentive plan targets by an even wider margin than earlier fiscal year end companies, potentially resulting in incentive plan payouts closer to maximum.

Key Issues at Companies that Exceed Expectations

Compensation Committees may want to discuss a range of issues at companies that exceeded pre-established performance expectations, including:

  • Are the performance results and corresponding payouts aligned?
  • What was the impact on key stakeholders?
  • Should all employees share in the company’s success, or should above-target payouts flow to just those individuals or business units that directly contributed to the company’s success?
  • Are 2020 results sustainable? What are the potential implications of setting 2021 performance targets below 2020 actual results?

Are the Performance Results and Corresponding Payouts Aligned?

As previously noted, some compensation committees have not chosen to adjust incentive plan payouts where performance has exceeded expectations, and it is highly likely the use of discretion to reduce incentive payouts would be perceived by plan participants as unfair and potentially disruptive to participant productivity. As also noted, the impact of the pandemic is likely to be greater on certain companies based on their fiscal yearend, and compensation committees may want to confirm formulaic payouts properly align with company results.

Most companies’ pre-established incentive plan financial targets were in line with investor guidance and represented a reasonable degree of stretch based on all-known variables at the time the goals were approved by the compensation committee. Companies also set a performance range around target performance with threshold performance representing the minimum level of performance required to earn a partial incentive payout and maximum performance reflecting outstanding performance.

Some companies used a narrow performance range between threshold, target and maximum performance, where small changes in performance can have a significant impact on incentive plan payouts. Other companies used relatively wide performance ranges, which serve to mitigate the effect of over- or under-target performance on payouts. When reviewing if payouts are aligned with results, compensation committees may want to consider the performance range to determine if the level of outperformance supports a payout that is well above target.

The compensation committee may also want to review how the company performed relative to peers in terms of financial performance and total shareholder return as well as how management anticipated and addressed increased production, personal protection equipment, and other unplanned costs. These additional data points may provide useful context for the company’s outperformance and help the compensation committee support its incentive payout decisions.

Impact on Other Key Stakeholders

In an earlier Viewpoint, we described a “resilience scorecard” that compensation committees could use to fully evaluate a company’s performance and potentially support the exercise of discretion to increase (or decrease) incentive payouts at severely harmed companies. [1] The resilience scorecard is intended to be tailored to each company’s unique situation and might include an evaluation of how well the company and management (i) safeguarded employees’ health, (ii) increased market share, (iii) maintained high levels of customer satisfaction, (iv) increased or maintained employment levels, (vi) strengthened the balance sheet/improved liquidity, and (vii) positioned the company for future success.

Compensation committees may consider using a resilience scorecard based on some or all of the above criteria to fully evaluate company performance and confirm that the formulaic payouts fairly reflect company performance and its impact on all key stakeholders.

Should all Employees Share in the Company’s Success?

Many annual incentive plans are based on a combination of corporate, business unit, and individual performance; these plans generally allow the company to differentiate payouts between high- and low-performing business units and individuals. Other annual incentive plans may be based on overall corporate results, with all participants earning the same percentage of their target bonus based on the corporate performance score. Some companies have discretionary plans, which include several performance metrics; however, a participant’s incentive payout is at the complete discretion of the compensation committee or management.

In cases where the company’s outstanding 2020 financial results are not considered sustainable or are attributable to a small group of employees/business unit(s), the compensation committee and management may believe above-target incentives could be put to better use by selectively rewarding key talent with higher individual incentive awards and investing the remaining incentive dollars in expanding the company’s products and services or strengthening its balance sheet. These companies may want to consider using downward discretion (if allowed for in the plan) to reduce payouts for some plan participants. While we would expect these situations to be relatively rare, such companies will need to clearly articulate the rationale for their decision to plan participants and how it may benefit them in the long run.

Are 2020 Results Sustainable? What are the Potential Implications of Setting 2021 Performance Targets Below 2020 Actual Results?

Generally, shareholders and proxy advisory firms expect companies to establish performance goals that exceed the prior year’s actual results and will call out companies whose performance metrics do not appear challenging. In some cases, companies that far exceeded 2020 expectations may be able to sustain and exceed the high-performance bar in 2021 and beyond. In those cases, it is unlikely the 2021 performance targets will be viewed as problematic by shareholders and the proxy advisory firms. However, that may not make it any easier on management and the compensation committee in establishing next year’s financial targets given the level of economic uncertainty and the fact that the company is in unchartered waters in terms of sustaining such high levels of output while maintaining employee safety. (See our recent Viewpoint on Establishing Meaningful and Rigorous Financial Goals [2] )

On the flip side, some companies may have had a “one-of-a-kind” year in 2020 that is not considered sustainable. These management teams and compensation committees may have an equally difficult time establishing 2021 performance targets given the economic uncertainty and will have the added burden of explaining to investors why incentive plan targets are below prior year results. The good news is recent FAQs issued by Institutional Shareholder Services indicate they expect that some companies will report financial targets below prior year actual results; they have strongly recommended that the Compensation Discussion and Analysis (CD&A) fully disclose the rationale for the lower financial targets. [3]


Executive compensation continues to be intensely scrutinized; given the societal effects of the pandemic, companies that have exceeded expectations and are paying above-target/near-maximum incentives may face heightened attention by some shareholders, proxy advisors, media outlets, government officials, and employees. Compensation Committees should consider examining the company’s performance holistically and disclosing the full range of considerations that support above-target incentive plan payouts in the CD&A. These companies will also need to carefully calibrate 2021 annual and long-term incentive plan targets, which may incorporate relatively wider performance goal ranges, to avoid over-promising and under-delivering or vice versa which may call the validity of incentive plan targets into question.

General questions about this Viewpoint can be directed to Mike Kesner at, Sandra Pace at or John Sinkular at


[1] John D. England and Mike Kesner. “Considering Resilience When Assessing FY2020 Incentive Plan Performance.” Pay Governance. September 9, 2020.
[2] Mike Kesner and John Ellerman. “Establishing Meaningful and Rigorous Financial Goals.” Pay Governance. July 23, 2020.
[3] “U.S. Compensation Policies and the COVID-19 Pandemic October 15, 2020.” Institutional Shareholder Services.

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Featured Viewpoint

ISS Policy Change - S&P 500 Companies No Longer Receive Preliminary Drafts of Proxy Advisory Reports During 2021 Proxy Season


In July 2020, the Securities and Exchange Commission (SEC) adopted new rules regarding the solicitation and delivery of proxy voting advice by the proxy voting advice businesses. [1] These new rules, which are extensive and far reaching, will become effective during the 2022 proxy season. Effective December 1, 2021, proxy advisory firm Institutional Shareholder Services (ISS) and other proxy advisors will be required to grant free access to filing companies for review and feedback recommendations at the same time when the voting advice and accompanying materials are sent out to investors.

The proxy advisory firms will also be required to provide, in a timely manner, the registrant companies’ written responses to their investor clients before they vote on proxies—assuming there is a timely response to the advice by registrant companies. The intent of the proposed new rules by the SEC is to increase the transparency of the proxy voting advice. For reference, please see our Viewpoint on the subject. [2]

ISS Policy Change – 2021 Proxy Season

Within the past two weeks, ISS has sent a direct communiqué to all companies in the Standard & Poor’s 500 (S&P 500): ISS will no longer provide draft copies of their research reports to S&P 500 companies prior to issuing their final reports to their subscribers. This policy will apply to companies with annual meetings occurring after January 1, 2021; it is important to note that the new SEC rules referenced above will not become effective for most public companies until the 2022 proxy season.

ISS cites the following rationale in support of their decision to not provide S&P 500 companies with advance draft copies of their proxy advice reports:

  • ISS believes that its recent investment in additional resources in data collection, checks and quality controls, and other research activities has eliminated the need for filing companies to provide feedback regarding the accuracy of ISS reports;
  • ISS has found the preliminary review process has too frequently resulted in companies lobbying ISS to change its recommendations instead of identifying data inaccuracies;
  • Having filing companies review initial report drafts takes time that ISS believes would be better devoted to investor clients in their decision-making process about ISS voting recommendations;
  • Many institutional investor clients have objected to ISS’s decision to offer draft previews to issuers, claiming that they do not want companies engaging in the research process, gaining early access to ISS research and recommendations, and lobbying about research and recommendations before final reports are released to ISS clients; and
  • Eliminating the proxies of draft reports will result in earlier research delivery times, allowing ISS clients more time to consider ISS research in their decision-making and voting actions.

In conclusion, please note this change by ISS only applies to the 2021 proxy season and to S&P 500 companies, with the new SEC regulations taking effect with the 2022 proxy season requiring the very process ISS is eliminating for 2021.

General questions about this Viewpoint can be directed to John Ellerman at or Szu Hui Ho at


[1] “Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice (RIN: 3235-AM50).” The U.S. Securities and Exchange Commission. June 2020.
[2] Lane Ringlee and John Ellerman. “Recent SEC Actions - Clawbacks and Proxy Advisory Firm Regulations.” Pay Governance. August 12, 2020.

Featured Viewpoint

Evolving Compensation Responses to the Global Pandemic - Severely Harmed Companies

In this Viewpoint, we focus on companies that have faced severe impairments due to the pandemic and are grappling with highly volatile stock prices resulting in substantial incentive plan design challenges. This continues our series of pay actions taken or considered among companies impacted by the pandemic.


  • For many of the companies severely harmed by the global pandemic, immediate cost-cutting measures were necessary to protect the business including furloughs, layoffs, suspended 401(k) matching contributions, and base salary reductions for most/all of the workforce.
  • Many of these companies approved their fiscal 2020 annual and long-term incentive (LTI) plans and prior LTI performance awards (i.e., 2018-2020 and 2019-2021 cycles) without any consideration for a global pandemic. These incentives often represent ≥50% of an executive’s annual compensation (≥70% in the case of the CEO), and it is highly likely the performance-contingent incentives are tracking to a zero payout and time-vested restricted stock units (RSUs) have greatly diminished in value.
  • The reduced value of realizable compensation directionally aligns with companies’ pay-for-performance (P4P) philosophies; however, the reductions are largely based on an unprecedented shutdown of the global economy due to health concerns and a reshaping of how many companies will “do business” now and into the future.
  • Severely harmed companies are assessing the near- and long-term implications of the downturn on all stakeholders and determining if changes to annual and long-term incentive programs are appropriate to balance the company’s talent goals with its P4P philosophy.

Base Salary Reductions

Based on Securities and Exchange Commission filings and other public disclosures, ~600 companies implemented temporary base salary reductions or deferrals as of mid-2020—many of whom were severely harmed by the pandemic. Many companies stated or implied the reductions were for an undefined period and would be reevaluated during the year while others set specific end dates for the reductions. Executive base salary reductions ranged from 10-100%, while salaried employees’ base salary reductions typically ranged from 10-25%. Nearly 300 companies also disclosed that the Boards of Directors reduced their cash retainers from 25-100% to demonstrate their alignment with the salaried workforce in reducing expenses and cash outflows during these unprecedented times.

For those companies that committed to reducing executive base salaries for an undefined period, to date a few have announced the partial or full restoration of base salaries to pre-pandemic levels due to improved business performance. For those companies that continue to have a significant number of furloughed employees and/or expect additional layoffs, it may be difficult to fully or partially reinstate base salary levels for top executives without attracting criticism of leadership as being “tone-deaf.” At some point, however, the compensation committees and leadership teams at these companies must weigh the risk of de-motivating or losing key talent needed to execute the path to recovery if these base salary reductions are extended too long.

Current-Year Annual Incentive

Severely harmed companies are forecasting payouts ranging from 0-50% of target based on pre-established financial goals approved before the pandemic. Many of these companies are taking a “wait and see” approach whether to exercise discretion at year end due to the ongoing uncertainty created by the pandemic and to fully assess the impact of the company’s performance on all of its stakeholders ( i.e., shareholders, employees, communities served, suppliers). As discussed in Pay Governance’s recent Viewpoint, “ Considering Resilience When Assessing FY 2020 Incentive Plan Performance ,” we believe the compensation committee and management should determine how best to apply discretion by assessing and documenting the actions that management has taken to help the company survive and emerge from the pandemic.

Based on publicly available information, some severely harmed companies have already implemented changes to the 2020 annual incentive plan that are intended to strike the right balance between rewarding and motivating employees while recognizing the experience of all stakeholders. These companies have taken various approaches that best fit their situation: setting revised annual goals, splitting the year into multiple measurement periods, adding new incentive plan metrics based on the achievement of critical financial and strategic measures (e.g., reduce expenses, improve balance sheet, open facilities safely, etc.), and more. Most companies applying these approaches are striving to maintain directional P4P alignment through below target incentive payouts and lower than expected financial results, which balances the severe financial impact to the company with the criticality of maximizing results through year end. In many cases, shareholders appear to have supported these changes based on the Say on Pay voting results reported so far. The chart below summarizes the most common approaches and rationale for each approach.

Outstanding LTI Performance Share / Cash Awards

Severely harmed companies are also reviewing the status of outstanding LTI awards and evaluating potential approaches for performance shares / cash LTI plans (LTIPs), which, in many cases, are currently forecasted for low or no payments. We expect many companies to take a “wait and see” approach and decide the most appropriate action for outstanding performance awards at cycle end.

Modifying performance shares / cash LTIPs for the pandemic can be far more complex than adjusting the 2020 annual incentive plan. In addition to the LTI mix, plan design can have a significant impact on the types of adjustments that might be appropriate. For example, the company may be using a relative metric, in which case no adjustments may be needed as the use of a relative measure—in theory—adjusts for exogenous factors. Other companies use three 1-year performance periods, and only the 2020 portion of the award may be adversely impacted. Another plan design feature may measure the final year of the 3-year cycle to determine performance—in which case the plan ending in 2020 is likely to pay zero—whereas it may be too early to evaluate how performance cycles ending in 2021 and 2022 will be affected. The timing of when the cycle ends may also be a factor (e.g., March 31 compared to December 31).

Summarized below are three approaches companies may consider when determining if outstanding performance share / cash cycles should be adjusted after evaluating if other pay elements (unvested RSUs, next year’s regular LTI awards) will be sufficient to achieve talent needs. In our experience, many companies are focused on the first approach (adjust for the pandemic) for the 2018-20 cycle; they will wait until the end of the 2019-2021 and 2020-2022 performance cycles to allow for a real-time assessment of performance (e.g., resilience in response to the pandemic, full 3-year financial and total shareholder return results, impact to shareholders, etc.) in determining if adjustments for the pandemic will be made and, if so, the appropriate amount. Similar to adjustments to annual incentives, shareholders appear to have supported well-reasoned changes based on the reported Say on Pay votes.


In considering potential changes to outstanding incentive awards, it is critical to take a holistic perspective and review the accounting, legal, and proxy disclosure implications with the company’s legal and accounting teams. Shareholder engagement—either prior to or after the changes are made—may also be necessary to understand and respond to shareholder concerns. Shareholder engagement is particularly critical during a year of lower financial results and volatile, generally lower, stock prices. Each company’s situation is unique, and how to best balance the company’s talent objectives, align executive pay with other company actions (dividend and stock buyback policies, base salary reductions, annual and long-term incentive plan treatment, special awards, and changes to /next year’s incentive plans), manage external optics (including the societal impact of the pandemic, company performance on all of its stakeholders, and likely reactions of key investors and proxy advisory firms) must be decided on a case-by-case basis.

General questions about this Viewpoint can be directed to Mike Kesner at, Sandra Pace at or John Sinkular at


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