Compensation Planning in the Wake of the COVID-19 Pandemic

Preliminary Thoughts

Our position as the most prominent advisor in the technology and life sciences sectors gives us deep real-time insight into market practices and trends. Combined with our expertise on the policies and guidelines of major institutional shareholders and their advisors, we are in a position to help companies better understand and evaluate what compensation strategies, and their associated risks, may be advisable to address issues they are facing with their executive and broader cash and equity compensation programs.

While many of these issues – and possible responses – are evolving in real time, we have already seen companies consider and, in some cases, implement a number of practices in response to specific issues. How companies address issues will depend in large part on the nature of each company’s business and operations, and how those are likely to be affected by the impact of the pandemic on the economy. Context will be critical and the appropriate course of action for each company will necessarily vary. For now, adopting a “wait-and-see” approach may be the most prudent response for some companies.

We note, also, that many of the alternatives outlined below involve the exercise of some level of discretion, which can have material regulatory consequences, raise concerns with institutional shareholders and their advisors, and trigger legal and accounting implications. However, this may be a year in which we see significantly more discretion exercised than normal. We have found in these situations that it may be beneficial for companies to consider the principles they will apply to such exercises of discretion. For example, will discretion be applied consistently for executives and employees? Will payments be limited to target levels where discretion is being applied? Will there be an agreed range for performance beyond which adjustments will not be made? What percentage of incremental profits (where applicable) is it fair to deliver to employees versus shareholders?

A company’s potential course of action may be impacted by many factors, such as public or private company status, prior investor feedback and/or Say-on-Pay support levels, the need to balance its risk tolerance with its retention objectives, ownership structure, financial and total shareholder return (“TSR”) performance (actual and projected), existing cash balance/constraints, compensation program design, and equity plan funding and pressure on future dilution levels.

As always, we recommend that companies engage directly with their legal and accounting advisors in connection with implementing any chosen strategy, as there may be complex and/or unforeseen consequences.

Finally, the discussion that follows is quite lengthy, but we wanted to share with all of you, our clients, what we are seeing considered and implemented. Feel free to skim for sections most relevant to you. We have organized the discussion by program type (e.g., STI, LTI, etc.) and by approval timing (e.g., pre- or post-pandemic) to make it easier to find topics of interest.