Compensation in Volatile Times

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