The top human resources issue at the beginning of 2020 was the ability of employers to find and attract outside talent within a tight labor market. Unemployment was creeping below 4% and the stock market was regularly experiencing record highs. So, just how would we find and attract the talent we need?
Keeping said talent was also an issue but because most retention programs were strong and effective, this was mostly a secondary concern. It was within that context that companies went about the annual process of tabulating the bonus payouts earned last year, establishing annual and long-term goals for awards this year and distributing 2020 long-term performance grants.
That was before the full economic impact of COVID-19 came into focus. Now, we are facing a labor market where the United States’ unemployment rate is expected to exceed 20% in June, stock prices have plummeted below 2019 levels by double digits, and extended stay-in-place rules and modifications have forever changed the way business is conducted globally.
Recent stock price and employment declines rival those of 1929, and key measures of corporate performance are expected to hit historic lows. This pandemic-induced recession/depression presents unexpected performance hurdles for Corporate America. Retaining executive and high-performing incumbent talent within key positions will be especially challenging for shareholders and their boards in this volatile environment.
To fully grasp the challenges and HR realities of today’s pandemic-economy, you must examine how the pending recession/depression has dismantled many important talent retention programs.
1. Goal-based incentive plans are unlikely to yield bonus payouts in 2021.
- Many annual and long-term incentive (LTI) plans with overlapping three to five-year performance cycles are likely to fall short of threshold and performance goals.
- Most unvested stock option awards are now underwater — and many of them are underwater significantly.
2. Organizations that routinely award value target-based stock awards (e.g., restricted stock, restricted stock units or performance stock awards) will need to significantly increase the number of shares awarded in 2021, which could unexpectedly tap the limits of plan reserves.
3. Reduced stock prices of organizations with executive share ownership requirements will eventually force many incumbent executives and outside directors to diminish their liquidity (already depleted by market declines) to hold and purchase additional shares.
4. Advancement opportunities for top performers have dried up as positions within the career ladder are frozen or eliminated altogether.
Talent Market Shakeup
This will affect the post-COVID-19 market for top talent in two important ways. First, you will likely lose a few of your top performers to opportunities at other companies as the entire range of compensation-based retention vehicles weaken and individual anxiety levels increase. Second, the weakening of compensation-based retention programs will make it easier and cheaper than ever to attract top caliber talent away from competitors and round out your executive team.
Let’s examine the impact COVID-19 has made on retention programs point-by-point from a retention and attraction perspective starting with performance-based incentives.
One of the characteristics of a strong formula-based incentive plan is that participants are able to track their potential payouts based on performance outcomes to date. Most structured performance incentive formulas that span or include 2020 have thresholds that are well above now likely performance outcomes. Award payouts in early 2021 will most likely be zero. In the case of stock options, most outstanding grants are either underwater or just slightly in the money.
Several companies may contemplate resetting their incentive plans but the negative optics of these adjustments will likely outweigh the benefits of metric formula modifications. That is good news for outside shareholders who have a fresh demand for cost containment and for companies that are aggressively hiring outside talent. However, that is bad news if you are a plan participant or if HR’s focus is on retaining your best employees — the glue holding you and them in the seat has been mostly dissolved with this pandemic. The opportunity cost of forgoing significant future incentive payouts has been washed away.
Over the last decade, most organizations have found that the number of shares required for stock-based awards has been shrinking as the share price has risen. In this post-pandemic era, however, more shares will be needed to meet the award value targets that are typically based on market-determined prices at or near the date of grant. That is a big change. Companies that were close to exhausting LTI plan share reserves may have to ask shareholders for additional plan shares sooner than expected or may have to reduce to employee award values.
Reduced share prices have also impacted share ownership requirements for executives and outside directors. Most of these ownership requirements are expressed as a value target, often as a multiple of annual income. Over the past decade, share ownership requirements have only been an afterthought for tenured executives and directors, as share prices were generally increasing at a pace exceeding salary and board fee rate increases. Executives and outside directors were able to sell-off vested and vesting shares in excess of shrinking share ownership requirements to meet occasional household liquidity needs. Now that share prices have fallen and the need for cash has increased for many, this once reliable source of liquidity has dried up. As LTI awards vest, shares that are not sold to meet tax obligations must be held to once again build up and meet ownership requirements.
Beyond incentive compensation and cash liquidity, the other significant retention vehicle in the corporate toolkit is career advancement — but that’s also been shaken by COVID-19. It’s still early in this pandemic, but many companies are implementing hiring freezes and staffing reductions to economize on reserves as they plan and prepare for the post-pandemic business environment. The unintended consequence of hiring freezes or layoffs is that they stymie the internal career opportunities available for ambitious high-performing talent. For your ambitious talent, it might seem easier to advance to the next level by moving to a hungry competitor than to stay put. So, how will you keep these ambitious high performers interested and challenged while your company is in this pandemic-induced transition?
Tips for Retaining Talent
There are a few things for employers to consider to hold their top talent in place and to make their organization a desirable employer in the eyes of others.
First and foremost, employers should reevaluate and identify top-performing individuals and high-impact positions and formally recognize the exceptional contributions these stars make during this initial year of the COVID-19 pandemic with modest spot awards. Consider targeted, one-off, long-term retention bonuses to select individuals holding key positions within the ranks of middle and upper management.
Where you may have talent gaps, develop a strategy to backfill your bench of high-impact positions with top-performing talent. This can be accomplished through opportunistic internal promotions and with external sourcing. If possible, avoid downsizing in small but regular periodic increments. Instead, make any necessary workforce adjustments quickly and all at once. Morale suffers greatly when employees expect waves of layoffs, and productivity will decline along with it. And, when downsizing, make sure you are actively communicating with your high-performing talent — both with words and with action.
An unexpected gesture or recognition in times of adversity can go a very long way to building lasting loyalty in these turbulent times.
About the Author
David Nygard is a senior executive compensation consultant at Nygard Partners LLC.