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WORKSPAN
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Surveying the Executive Incentive Plan Landscape


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The United States executive compensation and governance system has bent mightily since the start of the pandemic. But it hasn’t broken.

That’s how Don Delves, managing director and executive compensation practice leader at Willis Towers Watson, summarized the state of executive compensation in a recent Willis Towers Watson webcast.

(A replay of the webcast is available here. Visitors will be asked to register, and will then receive an email with a link to access the reply.)

Becky Huddleston, a Chicago-based senior director at Willis Towers Watson, was among the consultants joining Delves to survey the comp landscape as part of the April 22 online event. She focused on the coronavirus pandemic’s sizable effect on companies’ approach to annual incentive plans for their organizations’ leaders. 

“At the onset of the pandemic, it quickly became clear that the impact the pandemic would have on most companies’ businesses was going to be significant, and the annual incentive plans that were approved at the start of the year, prior to the pandemic, would also be greatly impacted.”

The past 16 months of COVID-19 have “certainly pushed companies and comp committees to think outside the box and exercise judgment and discretion at a fairly unprecedented rate,” she said. “Based on what we’ve seen so far, comp committees — founded in strong governance practices and principles, really rose to the occasion to ensure outcomes that were fair, measured and commensurate with holistic performance.”

For example, while some organizations made significant plan modifications, many essentially stayed the same, said Huddleston.

Overall, 2020 incentive plan payouts were down compared to 2019, with more than 40% of CEOs receiving payouts of less than 90% of target, compared to 29% the year before.

Roughly 30% of companies modified 2020 annual incentives. Most of these companies did so at the end of the year, according to data culled from Willis Towers Watson’s analysis of compensation for 1,500 S&P CEOs.

For instance, 20% exercised discretion to adjust the annual incentive payout as 2020 drew to a close, versus just 7% doing the same at the end of 2019 (14% exercised positive discretion; 6% exercised negative discretion). Just 8% of these organizations modified their annual incentive plans “in-flight” by revising metrics (3%), revising performance targets (3%) and/or bifurcating the performance period (2%).

Fewer than 10% modified their 2020 long-term incentive plan (LTIP) awards, with most companies choosing to “let their LTIP play out as intended.” Just 3% modified plans in-flight, either revising metrics or targets.

Looking at 2021, 17% of companies made changes to the design of annual incentive plans for this year. Among them, 11% revised or added metrics. Six percent of those organizations added an environment, social and corporate governance (ESG) metric, most commonly focusing on inclusion and diversity, environment and health and safety.

These figures didn’t particularly surprise Huddleston.

“This generally does align with what I would have predicted,” she said. “There was too much uncertainty in 2020 for companies to feel confident modifying plans in-flight, and instead wanted to wait and see how the year played out, so they could consider the situation holistically — factors around the business, key accomplishments, management’s responsibility to manage through the pandemic and the impact on all stakeholders, [such as] shareholders, employees, customers and communities.”

With proxy season underway, Huddleston looks forward to seeing how these preliminary findings preliminary on 2021 incentive plan designs continue to take shape.

“And, beyond 2021, I’ll be interested to see how these design trends evolve,” she said. “There are some trends that are here to stay and will intensify, such as [the focus on] ESG [metrics]. But others might be more fleeting, such as de-risking the LTI program once the environment returns to a more steady state.”

Incentives comprise a meaningful part of overall executive compensation. And, in the midst of proxy season, shareholders and proxy advisors are reacting to actions like those Huddleston described as part of how companies are approaching exec comp during the pandemic and beyond.

Willis Towers Watson recently looked back at the 10 years since the signing of The Dodd-Frank Wall Street Reform and Consumer Protection Act ensured that shareholders can share input on executive pay packages.

In its analysis of a decade’s worth of say-on-pay (SOP) data, the Willis Towers Watson team’s review found 56 SOP failures among Russell 3000 companies last year — the highest number of SOP failures since 2015.

Brian Myers, an Arlington, Va.-based director at Willis Towers Watson, and Henry Mbom, a senior associate in Willis Towers Watson’s New York office, assessed what they’ve seen so far during the 2021 proxy season.

While noting that “it’s too early to determine definitive trends,” Mbom expects proxy advisor scrutiny to increase in the days ahead.

Indeed, with CEO compensation on the way up despite a still-shaky business climate, some shareholders are less than pleased with this development, and shareholders at organizations such as Starbucks and Walgreens have already expressed their disapproval of proposed CEO pay packages.

Myers pointed out that early observations point to compensation adjustments being made “that provide for better alignment between pay and performance … leading to less rigid application of COVID-related scrutiny from proxy advisors, particularly if the adjustments carry across all pay components.”

About the Author

Mark McGraw Bio Image

Mark McGraw is the managing editor of Workspan.