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We are in a time of significant change in executive compensation. Some of that change is part of important long-term trends, some of it is short-term adaptation to an unusually high-risk environment, and some of it is just talk and ideas. It is our job as executive compensation practitioners to do our best to know the difference.
For example, there were conversations in the corporate governance community in the Fall of 2020 about the viability of stock options as a good incentive vehicle to adopt or expand in these uncertain times. This idea certainly has some merit in that options do not require long-term goal setting and typically have a 10-year life, so they can function through multiple business cycles. However, as of this writing, there has been no resurgence of option use, and no signs of one.
There has also been an article or two suggesting that restricted stock is a good solution in these uncertain times — perhaps with long vesting or holding requirements. Again, this may be a good idea, but so far there are no signs of significant expansion of restricted stock usage in place of performance plans.
These are ideas, not trends.
There is always a temptation to report an idea one hears as an emerging trend, especially if heard more than once and even more so if the idea has logic and merit. It is important that we as executive compensation professionals discuss ideas as ideas, trends as trends, one-time practices as such, and facts as facts.
This is particularly important now as the exec comp landscape is changing rapidly. As trusted advisors and valued sources of information to boards and senior management, practitioners have to be careful not to inadvertently start or feed practices that may not be the best in the long run. While board members make decisions based on the merits of a particular pay practice, they can also be swayed by data on what other companies are doing. And they can be swayed by the thoughts and opinions of their advisors. Executive pay professionals can actually influence the direction of market practices, especially during times of rapid change, where hard data won’t be available for months or longer. Yes, it’s a free market for executive talent, but consultants really do influence that market, at least in the short-term, and have an obligation to do so responsibly.
On that note, some companies have discussed or planned to make larger long-term incentive plan (LTIP) grants in 2021 to partially make up for LTIP performance cycles that were badly hurt, or zeroed-out by the events of 2020. This appears to be more than an idea, and is likely to be a one-time practice by at least some companies. But this is not a trend, meaning that it shouldn’t lead to a sustained increase in LTIP grant levels in future years.
It is very important that these one-time larger grants are one-time events, and do not lead to a permanent increase in competitive market LTIP levels. If a company increases its 2021 grant by 25% for example, to compensate for prior LTIP cycles hurt by the pandemic, then it’s important to record it as such and make sure that grants return to “normal” levels in subsequent years. How these supplemental grants are disclosed and recorded in proxy statements and compensation surveys remains to be seen, but executive compensation professionals should be vigilant in distinguishing them from ongoing annual grants. This may be difficult to do since the supplemental LTIP grants may be made as an increase to the normal annual grants, using the same vehicles and grant timing.
Knowing and discussing the difference between ideas, trends and one-time practices is not a trivial exercise. Executive compensation has seen massive trends rapidly sweep the corporate landscape over the last four decades:
- Mega-grants in the 1980s, which became common practice.
- Golden parachutes and gross ups in the 1980s.
- The stock option explosion of the 1990s.
- The stock option implosion of the 2000s, when options were rapidly replaced with full value shares and performance plans.
- The sudden prevalence of relative TSR plans in the 2000s and 2010s.
At least some portion of these and other trends were fueled by boards and management teams following what other companies are doing. There is safety in numbers and wisdom in having a competitive compensation program, but following the herd does not always yield the optimal solution.
As new practices, ideas and trends emerge in these turbulent times, compensation professionals should do their best to keep one eye on the competitive market, but also focus on what is best for their company and business situation.