COVID Comp! – What’s Happening?

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

• 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.

• 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.