This is the first of two articles on the session “Executive Compensation in Unpredictable Times” from week three of WorldatWork’s “Total Resilience Virtual Conference & Exhibition.” The second article will focus on ESG and D&I in exec comp, as well as what might change as a result of COVID-19.
The COVID-19 pandemic has been a unique crisis in that it has had a broad spectrum of influence on business. While many companies are reeling from the financial effects of the pandemic, others, particularly those in the consumer-packaged goods sector, technology and streaming, have flourished because of it.
These wide-ranging, unforeseen outcomes lead to complicated decision-making when it comes to executive compensation. A group of panelists — Kathryn Neel, managing director at Semler Brossy Consulting Group, Steve Harris, president and head of the Atlanta Office at FW Cook Advisors, and Gregg Passin, senior partner and executive solutions leader at Mercer — provided tips for how to navigate the terrain in a session at week three of WorldatWork’s “Total Resilience Virtual Conference & Exhibition” on Wednesday.
To illustrate this point, session attendees were asked how the pandemic has affected their company. Most (50%) said their company had some negative impact, which is requiring managing the business more carefully, while 32% said their business is generally holding steady. However, 12% said it has had a significantly negative impact on their business, which is requiring meaningful action to manage liquidity, while 4% said their business has actually benefitted from the pandemic thus far.
The dicey situation organizations are facing is how to handle annual incentives, especially if the company hasn’t set goals yet. For companies in the session that have already set annual incentive goals, 38% said they have maintained those goals, but anticipate discretionary adjustments while 30% said they are maintaining those goals and programs. 13% said they will reset performance goals once the COVID-19 impact is better understood. For companies that haven’t set goals yet, 5% added a supplemental plan, 11% have made no changes and 6% said they’ve delayed goal setting until there’s a greater line of sight.
Neel said one approach she’s seen from clients in the retail sector is scrapping incentives for the first half of the year and focusing those goals on the second half of the year with hopes of motivating with incentives aligned with the holiday season. Another approach, she said, is companies developing a framework around how they might apply discretion; a scorecard that has objectives or key indicators that would determine whether a bonus is paid out to executives.
Passin said when going about discretionary design, it’s important to also consider the optics.
“As you’re thinking about any action, whether it’s 2020 incentives or setting 2021, design it to make sure there’s an alignment between the executives and the rest of the organization,” he said. “Especially if you’ve taken any workforce actions, either positively or negative — make sure that executives aren’t being advantaged at the expense of the rest of the organization.”
Harris said companies considering discretionary adjustments should begin a structured process to inform conversations with the compensation committee and other board members. The four considerations should be:
- Financial performance — What are the projections you’re seeing in your financial results compared to your original incentive plan goals? Within that, what are your projections for the post-pandemic performance? Results that would exclude impacts of the pandemic, to the degree that you can isolate. How do those two compare?
- Peer comparisons — How are other companies similar to yours performing?
- Qualitative performance — How have you responded to the pandemic? Have you managed the spread of the virus within your own organization? What are you doing in terms of environmental, social and governance (ESG)? What operating improvements are you making and are you structuring the business in a way that will set you up for success after the pandemic?
- Additional considerations — Has your company undergone furloughs and layoffs? What kind of pain has been felt within the organization and what are the implications of that?
“The nature of your incentive program should help drive what you do,” Harris said. “If you have a very granular program and it has not only financial but operating types of metrics that signal to participants what they need to be doing from a behavior standpoint, then [consider] accuracy of goals and how you approach goal setting and maybe the time frame of goal setting.”
Long-Term Incentive Plans
For those companies in the session that have already set their long-term incentive plans (LTIs), 42% said they are maintaining those goals and programs, while 28% said they are maintaining goals but anticipate discretionary adjustments. However, 8% said they reset performance goals once the COVID-19 impact was better understood, including “ring-fencing” 2020 results, lowering thresholds or targets based on new forecasts and changing metrics.
Neel said she’s seeing companies take more of a “let things play out” approach and potentially consider adjustments when it’s closer to the end of the usual three-year performance period. For companies thinking about making changes with new incentive cycles, Neel encouraged transparency with investors.
“Have a dialogue about what changes you’re considering and why. What are the constraints you’re facing as you look to launch your new PSU (performance stock units) award and why might you not feel it’s appropriate to maintain an existing design,” Neel said. “I think investors are going to be understanding and open to dialogue about why change is needed, so I would suggest considering that as part of the process and not doing it too late down the road, as long as it’s explained.”
Neel added that there’s a concern for asymmetry in incentive plans forming as a result of the pandemic. While it’s expected companies that have been negatively impacted will make positive adjustments to their incentive payouts, will companies that have been positively affected make negative adjustments?
Harris added that many companies in the consumer-packaged goods sector that have performed exceedingly well as a result of the pandemic are unlikely to make negative discretion adjustments. The reason for this, he said, is that in order to produce a strong performance, they’ve had to kick their business into overdrive and get creative to meet the consumer demand.
“If you’re an organization that has worked really hard to meet that demand that has allowed strong results,” he said, “then it’s certainly reasonable not to have any negative adjustment.”
About the Author
Brett Christie is the managing editor of Workspan Daily.