Compensation in Volatile Times

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