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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 over 450 companies annually, are a team of nearly 75 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

Pay Governance understands that times remain uncertain. Our domain expertise remains executive compensation consulting. Therefore, each week we will continue to provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

Incentive Design Tailored to Companies Subject to Economic Cyclicality and/or Commodity Exposure


The title of this Viewpoint references two issues that can wreak havoc on company incentive plans. What does “wreak havoc” mean in this context? It means incentive results or payouts that fluctuate significantly, or as many company executives and directors have told us, “Our payouts reflect compensation extremes. We are subject to the ‘boom or bust’ of the cycle.”

This situation can have a profound impact on employee morale and a company’s ability to attract and retain talent. Establishing incentive plan performance goals that reflect an appropriate level of rigor is a daunting task. Are annual business plans or longer-term forecasts developed at or near the peak of the economic or commodity cycle or at the lower trough? The impact of this timing can result in performance goals that are either overly challenging (and, in some cases, unachievable) or quite the opposite, lacking rigor and just plain too easy in hindsight.

The impact of this timing is especially pronounced when establishing goals for performance-based equity incentives, whose measurement period is most often 3 years in length. An unanticipated sharp drop-off in economic activity or a steep decline in commodity prices at any time during the 3-year cycle can negatively impact (or eliminate) payouts under these plans, resulting in a “hole” in compensation in the year of payout. This situation does not bode well for either retaining highly skilled and mobile employees or attracting necessary skill sets. So, what can be done in anticipation of these situations, which arguably are based on events or activities that fall outside of management’s control?

While nearly all companies are subject to the whims of economic activity and — to some degree — commodity prices, others are impacted on a much more significant level. To illustrate this point and establish the basis for our analysis, we examined two separate groups of companies that reside mainly in the industrial and energy sectors.

  • “Less cyclical” company group— 66 companies with median 5-year beta 1 of 0.93 that provide a baseline of contemporary incentive design among less cyclical companies.
  • “Cyclical” company group— 66 companies with median 5-year beta of 1.72 (companies with high betas and within cyclical industries) that were selected to identify the practices used by highly cyclical companies.

When analyzing incentive practices of the “less cyclical” versus the “cyclical” companies, we found several differences in incentive practice and design. When coupled with our own experience of addressing cyclicality, the approaches discussed below provide a variety of methods to soften the compensation extremes brought on by cyclicality without jeopardizing the alignment of executive pay and company performance.

Annual Incentive Plan

Performance Metric Considerations

Cyclical companies tend to use more metrics than less cyclical companies to measure performance under their annual incentive plan. Based on our research and consulting experience, cyclical companies are more likely to use four, five, or even more performance metrics than less cyclical companies. Consistent with the theme of mitigating compensation extremes in the pay system, the use of a greater number of metrics reduces the focus on one or two metrics and therefore reduces the likelihood of a zero or maximum bonus payout. In addition, the use of non-financial measures — such as operational, safety, and environmental metrics — is more common among cyclical companies. These metrics are often assigned to a “strategic” category of metrics (applicable to all executives) or within an individual performance category (applicable to individual executives). The weighting assigned to the non-financial metrics is often higher among cyclical companies than in less cyclical companies. The rationale for using more performance metrics and non-financial performance metrics in general includes the following:

Performance Range Considerations

Cyclical companies typically use wider performance ranges to accommodate swings in commodity prices and economic volatility, thus reducing the frequency of maximum or zero payouts. For example, a cyclical company might use a performance range for an earnings-based metric that establishes threshold performance at 60% to 70% of targeted performance and maximum performance at 130% to 140% of targeted performance. In contrast, less cyclical companies are more likely to use a “traditional” performance range for earnings-based metrics with threshold performance set at 80% of targeted performance and maximum performance set at 120% of targeted performance. Thus, management must outperform the target goal to a greater degree to merit a maximum payout, while greater forgiveness is provided on the downside if target results are not achieved.

The rationale for using wider performance ranges includes the following:

Performance Measurement Considerations

Truly cyclical companies understand the uncertainties related to economic and commodity price assumptions that drive annual and long-term business plans. These business plans most often serve as the basis for establishing incentive performance goals. Further, the COVID pandemic and its subsequent recovery created an unusual whipsaw in the business environment in 2020 and 2021, prompting some companies to experiment with new incentive design approaches. For some companies, these methodologies have become a standard component of ongoing practice.

The use of partial year performance goals provides an alternative to establishing annual goals when the business outlook for the full year is uncertain. This typically involves the implementation of two shortened performance periods, or “First Half” and “Second Half” goals, to mitigate the uncertainty of setting full-year goals while still maintaining a single annual payout. For example, a calendar year-end company would measure performance for the period from January 1 st through June 30 th and then measure performance for the period from July 1 st through December 31st.

This allows the Compensation Committee to evaluate more current information about the company’s prospects when establishing goals for the upcoming 6-month period. While performance is evaluated at the end of the first 6-month period and then independently at the end of the second 6-month period, payouts are almost always made after the end of the year, consistent with annual incentive plans based on full-year goal setting.

Performance Goal Setting Considerations

An alternative approach is the use of a “target performance range.” Under this method, a company establishes a range around the target performance goal reflecting insights regarding expected commodity price volatility or economic performance. The following example illustrates this approach for a company that uses Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as a performance metric, which is highly sensitive to a commodity price. The company believes that the commodity price could fluctuate between 90% and 110% of the price assumption selected for the annual business plan that is used to establish the target EBITDA performance goal. Assuming the use of a wider performance range (60% to 140% of target for threshold and maximum performance) the target range would be illustrated as follows:

This example illustrates a modestly increasing slope to differentiate payouts between the low target range and the high target range (i.e., incremental changes in performance impact incentive payouts). Alternatively, some companies use a “flat” target range where the payout is 100% of target regardless of where performance falls within the range.

Among companies who utilize either the partial year performance goals or the target range approaches illustrated above, we see little to no negative feedback from proxy advisor firms.

Long-Term Incentive Plan

Long-Term Incentive Vehicle Considerations – Number, Type, and Mix

Our analysis of the cyclical versus less cyclical company data suggests some differences in terms of the number and type of long-term incentive (LTI) vehicles used to deliver equity compensation. Cyclical companies more frequently use two LTI vehicles with greater use of time-based restricted stock and less use of stock options as illustrated below.

Further, since cyclical companies are less likely to use stock options, they tend to deliver a larger portion of LTI through time-based restricted stock. However, we observed no discernable difference in the mix of value assigned to LTI vehicles when analyzing the use of two LTI vehicles, the most prevalent approach. This value was generally assigned 60% to performance awards and 40% to restricted stock among both the cyclical and less cyclical companies.

The rationale for greater use of restricted stock includes the following:

LTI Performance Metric Considerations

Given the challenges that cyclicality brings to annual incentive goal setting, establishing multi-year performance goals for LTI awards can be an even more daunting exercise. For this reason, cyclical companies are more likely to use relative metrics, most often Total Shareholder Return (TSR), than absolute internal financial metrics, as illustrated in the table below.

The use of relative TSR:

LTI Performance Measurement Considerations

Long-term performance plans often deliver the majority of the total LTI opportunity for senior executives. These programs typically measure performance over a single 3-year period. As noted above, given the volatility and uncertainty associated with operating in cyclical or commodity-sensitive industries, it is often challenging to set 3-year financial goals. Therefore, as an alternative to setting single 3-year performance goals, some cyclical companies establish 1-year performance goals at the start of each calendar year of the 3-year performance period and also set a 3-year cumulative “wrap-around” goal. For those companies that use relative TSR as a metric, a similar approach can be used: three separate 1-year measurement periods and a single 3-year TSR measurement period (as illustrated below). Awards under this approach are determined using an average of results for the four measurement periods and are settled at the end of year 3 in order to maintain the retention value of the LTI.

When analyzing companies with this design, we find that both proxy advisors and some investors scrutinize the plan as being “short term” in nature. However, as long as there is no evident pay for performance misalignment, this design in and of itself does not seem to lead to an “Against” Say on Pay (SOP) vote recommendation or a low SOP vote result. As always, we recommend a fulsome disclosure of the reasons why such an approach is beneficial to the company and its shareholders.


Economic or commodity-induced cyclicality can impact incentive arrangements in a meaningful way. Contemporary market data can provide meaningful insights to companies and their directors on broad industry incentive designs and practices. However, these broadly adopted practices rarely address the problem of compensation extremes inherent in highly cyclical companies. We find the implementation of one or more of the approaches highlighted above begins to mitigate these extreme incentive outcomes. Rarely will the approaches above lead to situations where incentives are paid out at or above target when company performance is below expectations. This situation is more likely due to the establishment of performance goals that fail to reflect growth and execution of business strategies. For companies who have contemplated their unique situation and adopted some of the methodologies above, the result is a highly customized incentive approach that leads to a motivated and engaged executive team.

General questions about this Viewpoint can be directed to Steve Pakela ( or Jim Dickinson (

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Featured Viewpoint

"Everything Should Be On The Table"

It’s been said before in our business lifetimes – in 1987, 1990, 2000, 2001, and 2008 – that “urgent action needs to be taken to address the morale and continued motivation of executives and employees in a time of crisis.” In each case, though with different recovery times, the economic shock and downturn ultimately abated, and most companies and their employees found themselves on solid ground again.

This one feels different. A black swan pandemic suddenly sweeping the globe, a financial market reaction so severe as to be described as “violent,” and a looming recession triggered by strategies necessary to flatten the coronavirus curve have all combined to create a crisis unprecedented in modern times.

Hundreds of thousands of people have contracted COVID-19, and a significant number will die. We are acutely aware of the trillions of dollars evaporating and the worries of employees and retirees. We all know service workers and retailers who, along with millions of people in the energy, manufacturing, and travel industries, may soon be unemployed as businesses of all sizes struggle with lost revenue and liquidity issues. Whether we’re executive compensation consultants, compensation committee members, senior executives, or human resources professionals, we all must consider these larger societal issues and support federal, state, and local government responses as we reexamine rewards program effectiveness and changes in this trying time.

Of course, Pay Governance’s domain expertise is compensation consulting with a particular focus on executives and boards of directors. Concerning executive compensation, two things make this crisis different from those in the past: the timing of events and the rigidity of Say on Pay protocols.

Timing. This crisis has been no September or October surprise like several of the last economic shocks. In those instances, companies with calendar-fiscal years were able to adjust budgets, forecasts, and performance goals to economic uncertainties, and many assessed the optimal use of long-term incentive vehicles to be used in the following year. Indeed, some companies found it necessary to take drastic measures to control compensation expense, conserve shares, and ensure sufficient flexibility for awards in future years, but calendar-year companies generally had more lead time to develop reward strategies for a changed environment. Fast-forward to 2020: most calendar-year companies have been hit with this crisis after goal-based annual and long-term incentives (LTI) were approved and grants were made. Even companies that presented incentive plan targets and objectives for approval in mid-March tended to rely on Board-approved budgets ratified in January. As one CEO told their Compensation Committee on Friday morning, “there’s no chance of our hitting these goals.” Goals were nonetheless approved.

Say on Pay Protocols. Say on Pay wasn't legislated in 2008, let alone the shift toward the homogenized incentive approaches that many companies have implemented to comply with the preferences of shareholder advisory firms and governance reviewers at large institutional shareholders. Goal-based, formulaic, and fully disclosed annual incentive plans and three-year performance share unit / performance cash plans now dominate executive reward systems at most companies. In fact, it’s common for CEOs to have 70% or more of their total direct compensation tied to how well companies perform against pre-set goals that emanate from a budget or strategic plan. If discretion exists, its impact has generally been modest, either by design or in application — perhaps just 10-20% of an executive’s annual incentive award. Some find the use of non-GAAP metrics and exceptions in determining awards to be suspicious. But, the rigor upon which today’s incentive plans were built did not anticipate the extreme volatility of the current crisis.

So, what should be done?

In Pay Governance’s view, everything should be on the table. But as with any well-set table, the dishes need not be handled immediately — with one exception. Every company should assess whether its compensation committee can exercise its business judgment to address current conditions should they continue. Some companies may take comfort in administrative powers that allow the compensation committee to unilaterally assess performance and determine incentive plan results. Others may wish to go further, adding into the meeting minutes or even including in a Compensation Discussion & Analysis (CD&A) disclosure that “the Committee may consider the effect of the global pandemic and other linked economic and environmental pressures that may negatively impact results.” Consider the adage that people work harder during times of crisis, even if circumstances and shared sacrifice make it challenging to fully recognize those efforts through remuneration.

What else should we have on the table? Each company’s circumstances will be different, but all should be cognizant that any executive reward solutions must be considered in the context of the pain being felt by shareholders, employees, customers, and society in general. At its essence, what remains on the table will be determined by how well the executive compensation programs that matured during the 11-year bull market can now endure evolving business priorities, transformed operating environments, reduced confidence in forward goal-setting, volatile stock market performance, and workforce demoralization.

Without being prescriptive, here are some initial considerations that Pay Governance Viewpoints, blog posts, and other communications will address in greater detail in the coming weeks.

1. The Exercise of Discretion. Certainly, any quantification of the global pandemic’s effect should be compared to the financial and non-financial goals established before anyone knew COVID-19 would become the subject of daily headlines. Such an approach will be somewhat more feasible for non-calendar-year companies that found themselves well into their fiscal years before the pandemic occurred. Some compensation committees may wish to consider their management’s 2020 actions to ensure business continuity and long-term sustainability in evaluating performance in a holistic manner. Committees would also be well-advised to consider human resources program changes and any employee actions taken in 2020 when deciding management pay. Acknowledging the effects on employees, customers, and those less fortunate in our communities has rarely been more important.

2. Addressing Mid-Stream Incentive Plans. Tax deductibility rules underlying 162(m) required goals to be set within 90 days of a plan cycle’s inception, but these rules no longer apply. Below are a variety of options for addressing in-process incentive plans, all of which have been used for years by companies in volatile and commodity-based industries:

  • Consider shifting plan weightings away from financial goals and toward non-financial or operational goals that tie to business continuity, sustainability, efficiency, and customer focus.
  • Consider changing individual performance objectives established at the beginning of the year. For companies that already devote a portion of annual incentives to individual objectives, there could be consideration given to amending the original personal performance indicators to include new initiatives and responsibilities that management is undertaking in light of the dramatically changed operating environment.
  • Consider implementing a July – December incentive plan in lieu of, or in addition to, the plan approved at the beginning of the year; resetting current goals may be challenging given the lack of certainty in the current market. In times of crisis, each week may provide greater visibility, so revisiting goals later in the year may be a reasonable approach.

3. Reassessing Equity Grants. Given the current environment, historical equity grant practices may need to be reexamined. What made sense in a bull market may no longer be appropriate today:

  • Consider deciding on a reasonable grant calibration price. When calibrating equity awards, it is sometimes forgotten that stock price is an assumption in any valuation model. For some companies that have not yet made this year’s equity awards, the current stock price may not be feasible for calibrating grants if there are insufficient plan reserves or if the awards would create a higher-than-desirable burn rate. Further, the substantially greater number of shares needed to deliver targeted values today could produce unintended windfalls that may not fully align with the experience of many shareholders. Thus, it could be reasonable to calibrate using an averaging period (10 days, 30 days, 60 days, 90 days, etc.).
  • For companies that traditionally grant equity in the second quarter, consider splitting grants between the second and fourth quarters of 2020. We were all taught about dollar-cost averaging as a prudent method for investing. Granting awards at two different times can help guard against peaks and troughs in a volatile time.
  • Consider whether you are in the rare situation in which it might be viable to move some or all of 2021’s grants into the third or fourth quarter of 2020, with clear communication to participants and in the CD&A that (1) such a strategy was not delivering additional incremental pay over the two-year period and that (2) no LTI awards will be made in the following year. This may be appropriate for companies facing the most serious concerns about employee morale and motivation.

4. Re-think Long-Term Performance Periods. During the Great Recession of 2008, it was difficult for most companies to set viable long-term goals. The concern was as much about overpayment as it was about underpayment based on the goals that would be set three years in advance. Many companies adopted a performance LTI design to change the award basis to the outcomes of three periods in which goals were annually set, measured, and averaged for an initial financial score. In this model, a three-year relative total shareholder return modifier was often used to increase or decrease the averaged financial score within a range, adding a longer-term performance condition to the award. We also saw variations on this theme as some companies adopted two-year performance cycles. As in the last recovery, shorter performance periods may be a temporary solution, with companies reverting to full three-year plans as the environment becomes more predictable.

5. Dealing with Out-of-The-Money Share Awards. While nearly every company has been affected by the crisis, companies in certain industries have lost more than 75% of their value; energy companies have seen a multi-year bear market deteriorate further, and travel and retail companies are experiencing unprecedented challenges. Some potential actions for these organizations include the following:

  • Consider asking executives to surrender stock options that are deeply underwater; this might allow the company to manage dilution levels and provide additional flexibility to make share grants going forward.
  • Consider whether there are LTI award cycles that should be discarded. In these cases, awards could be canceled and new grants made to ensure that the rewards system supports the new objectives that the current environment demands. Given the potential backlash from some shareholders, however, “canceling and replacing” must be approached with care, investor outreach, and balance between employee motivation and the stockholder experience.

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Will this be a V-shaped downturn and recovery as it was in 1987, or are we truly experiencing a crisis unforeseen in modern times? No one knows, but all elements of society must do what they can to persevere.

As it relates to executive reward solutions, companies must ensure that compensation committees have the authority to use their business judgment, if they so choose, regarding the global pandemic and its repercussions. For the time being, everything else should be placed on the table — not to be immediately implemented but to be thoughtfully and deliberately considered over the following weeks and months. As solutions are evaluated, companies struggling for business continuity and long-term sustainability must be mindful of the current pain felt by their shareholders, employees, customers, and communities.

Pay Governance will return to these and other potential executive compensation strategies in subsequent Viewpoints, blog posts, and other communications. We will provide weekly updates on our website.

Featured Viewpoint

Executive and Board Compensation Reductions in Response to the COVID-19 Pandemic

Our Observations as of March 31, 2020

The societal and economic impact of COVID-19 continues to unfold, as discussed in our March 23rd Viewpoint, " Everything Should Be On The Table ." As such, there are a myriad of compensation issues companies and compensation committees will be discussing and considering in the coming days and weeks.

Pay Governance’s research of corporate public filings, earnings transcripts and news releases from a cross-section of publicly traded companies indicates that some of the first compensation-related initiatives taken by companies are focused on executive and board member pay reductions. For reasons of cash preservation, the importance of demonstrating a shared sacrifice with employees (e.g., those that have been furloughed, had compensation reduced through budget cuts and/or reduced work schedules) and affected communities, or anticipatory action in advance of seeking federal assistance, executive salaries and director compensation are being frozen, reduced or, in limited cases, deferred.

While not an exhaustive list, we have observed the following as it relates to executive and board compensation reductions:

  • Reductions in executive salaries at 105 companies were spread across a variety of industries, with the highest concentration in the retail, hospitality, airline, equity REIT and oil & gas-related industries (see Graphic 1).
  • Cuts in board member compensation have already occurred at approximately 50 companies and have been generally focused on reductions or suspensions of board cash retainers.
  • Actions related to annual incentives/bonuses and long-term incentives have been very limited to date, although we expect this to change over the next several months.

As shown in Graphic 2, the degree to which executive salaries and board cash retainers have been reduced varies, ranging from -10% to -100%. Additionally, for executives other than the CEO, one in four companies reducing pay are using a range of decreases (e.g., -10% to -20%) as opposed to a fixed percentage. This approach seems to be particularly prevalent in companies that have applied salary actions to larger numbers of executives (i.e., not just NEOs) and often reflects reductions that are tiered by executive level (e.g., -30% for EVPs, -20% for SVPs). The majority of companies reducing pay thus far have stated or implied that these executive salary and/or board compensation actions were indefinite and would be reevaluated throughout the year.

As the charts show, the vast majority of executive and board of director pay cuts have been concentrated in those industries immediately impacted by “social distancing” and travel restrictions. As the COVID-19 pandemic continues its economic ripple across the globe, other sectors may contemplate similar actions to contain costs, manage cash flows and, perhaps most notably, recognize the economic pain being felt by employees, communities and key stakeholders.

Committees contemplating similar actions should be mindful of some key considerations including the following before taking action:

  • Take into account a combination of critical factors such as the cash needs of the company, the degree of broad-based employee impact at the company, industry dynamics and market practices to determine the appropriate amount of salary reductions.
  • Set a formal check-in date (e.g., Q3 Board Meeting) to determine if the reduced salaries should continue or the prior salary should be reinstated.
  • Evaluate whether any other elements of pay and benefits (e.g., annual incentive/bonus opportunity, long-term incentives, cash severance formula, pension contributions, etc.) may be impacted by a reduced salary and structure a policy addressing how other programs will be affected.

Graphic 1

(1) Reflects industries with prevalence greater than 1% from sample of 105 companies.

Graphic 2

(2) Specific to Board Compensation statistics, 70% disclosed reduction to cash compensation and 30% did not specify.


General questions about this Viewpoint can be directed to Joshua Bright at or Chris Brindisi at

Pay Governance will return to these and other potential executive compensation strategies in subsequent Viewpoints, blog posts, and other communications. We will provide weekly updates on our website:


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