COVID Comp! – What’s Happening?

With our partner Kieran O’Reilly, at Flintlock Consulting.

The re-opening of the economy and a return to “abnormal” has naturally caused employers to think about strategic goals and executive incentives. Here’s a summary of what we have seen along with our thoughts and comments:
  • Some US CEOs have seen cash pay cut by 50% to 100% and in some cases, replaced with equity or options to focus on recovery or new goals.
  • The WSJ reported that 48 S&P 500 companies made equity-related awards in March that had a 20% or more, a higher value than awards one year earlier.
  • Some companies followed a normal award cycle in Feb/Mar 2020 and some with award dates later in that period resisted increasing equity unit awards in response to lower stock prices.
  • Out of favor stock options perceived as not performance-focused, were awarded by some companies to take advantage of lower stock prices.
  • ISS opined that individual employer facts and circumstances should determine the appropriateness of board discretion in incentive plans and encouraged boards to provide full disclosure of their rationale.
  • Glass Lewis say that rolling back merit increases or above-target bonus payouts, with a proportional impact on shareholders and executives are more likely to be supported. Mitigating COVID-19 impact on pay by adjusting hurdles, larger bonuses, increased dilution, or through changes to vesting periods will cause shareholder concern and likely face adverse say-on-pay recommendations.
  • An AON survey in April of companies ranging from fewer than 250 employees to over 50,000 in essential and non-essential businesses, noted that:
    • 22% were canceling and 17% deferring or postponing salary increases
    • 18% (93% of which were in essential businesses) provided mostly additional flat amounts to those in high-risk roles,
    • 58% reported executives taking voluntary base pay reductions.
    • 23% planed benefit changes and 14% retirement changes.
What We Say:
  • The above information should be understood and referred to in detail at the source before drawing conclusions or acting upon it,
  • With survival at stake it is helpful to know what others are doing; during a confusing and disturbing time that knowledge will increase confidence but limiting action to only this data and not reflecting individual organizational challenges will not assist,
  • Remember too that current surveys reflect the unique actions and decisions that others are taking to ensure their own individual recovery,
  • Recognize that competitor organizations have changed and may no longer resemble the size or business that they once were,
  • Compensation plans that strictly adhere to “competitor” practice that aim primarily to retain executive staff may relax that priority in the short term,
  • It is too early to make changes to annual incentive programs unless a company is in a significantly impacted industry,
  • Sharing the pain with executives through fixed or incentive pay reductions should be considered as contributing to engagement and employment brand as much as to cash conservation,
  • Traditionally popular in deflated markets, stock options may again return to favor but with limits and caps in cash-poor organizations,
  • The simplicity of relative TSR may also attract more adopters during the transition,
  • In summary, most observers and we agree, suggest proceeding with caution until the business’ precise path to recovery is clear. Quarterly results will be a litmus test and likely signal full-year expectations.
  • Those more exposed organizations forced to make immediate changes, should do so in a logical and reasonable fashion and be ready to fully disclose their rationale.
Survival and resurgence demand an approach that should minimize following others. If an alternative perspective (with likely lower advisory fees) would be of assistance email us here.

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