Reevaluating Short and Long-term Incentive Plans During a Crisis
For the past two months, boards and management teams have been working overtime to react quickly and grasp the impact of the Corona Virus. For the most part, organizations, such as yours, have undoubtedly been focused on immediate business concerns such as employee safety and financial viability. Up to this point, any compensation-related actions for the companies severely impacted have been primarily focused on cost reductions. But, compensation committees are likely getting ready to begin if they haven’t already. They are beginning to evaluate their current executive compensation plans to determine whether or not they align with the present circumstances we find ourselves in today.
The scope of this review is on performance-based incentives best characterized as “in-cycle,” such as annual cash incentives or bonus plans that you have for 2020 or any long-term incentives with predetermined financial targets, which may be outstanding. While most have likely distributed 2020 awards, to the extent that a company hasn’t, there has been a lot of work on how companies should think about new equity grants. Furthermore, things like time-based awards are covered extensively in various other sources. The thrust of this article is squarely focused upon performance-based incentive compensation.
With the understanding that the state of business around the world post-Covid-19 (optimism mine) is a fluid environment and real-time, it is from this perspective that we evaluate the topic. Looking at the current changes in the market, we can see that most companies have yet to disclose any changes. Those that have (roughly 9%) indicate their focus has been on reducing executive compensation (base salaries). Companies that take charge of instituting changes first are inevitably the ones (in many cases) that are most severely and most negatively impacted. These companies are finding their priorities are centered around reacting to contain their costs and their cash.
At face value, Pearl Meyer submitted data with their disclosed reductions (as of May 1, 2020), which is representative of percentages of reductions at the C.E.O. level, Non-employed Officer, and Non-employed Director cash retainers, indicates an interesting level of reduction. The data clearly shows that a significant percentage of cuts affect the C.E.O., Officer, and Director levels. Interestingly enough, the level of reduction in these instances is not substantial enough to cover the cash and cost containment that companies are going to need to put into effect. In addition to the cash savings, these are an indication to shareholders, employees, and the market in general that leaders of these companies are interested in sharing the pain of the impact. It is a prime example of a public relations strategy wrapped up in a financial plan, both serving the interest of the company at any length. Since the pandemic conditions appear fluid, it may prove that reduction percentages (which are typically correlated to specific dollar values) may quickly reverse if the response to the pandemic proves to be more aggressive than it needs to be. But what about the annual and long-term incentives? These have been mostly unaffected since their scope is a bit wider; however, time will tell how these programs have been affected (as we approach the end of the year).