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.
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:
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.
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.
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:
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:
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.
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.
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:
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:
Companies continue to discuss several strategies for existing and future long-term incentive plans, including:
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.
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:
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:
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:
– 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.
– Historical differences in prices used for director equity awards versus management equity grants during years of stock price volatility.
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: