Compensation Planning in the Wake of the COVID-19 Pandemic
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To our clients and friends:
We are going through what may turn out to be one of the most significant health and economic events of our lifetime – the global COVID-19 pandemic. As we adjust to the new realities of everyday life, Compensia remains committed to supporting the broader community.
We recognize that for many of our clients this may be a busy time on the compensation calendar, as bonuses are determined and next year’s incentive compensation plans and equity budgets are implemented. We continue to operate at full capacity and stand ready to meet your needs in this new and evolving environment. In the weeks ahead, we will use our website as a means for sharing pertinent information on the latest compensation developments related to the COVID-19 outbreak and our experiences helping companies address their executive and equity compensation programs in this rapidly evolving environment.
As your trusted advisor, we want to assure you that we remain committed to serving your needs in every way possible. Should you need any assistance, or simply want to know how others are responding to the challenges that lie ahead, do not hesitate to reach out to your engagement manager. Most importantly, please stay safe in the days ahead.
The Compensia Team
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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.
Short-Term Incentive (“STI”) Plan Issues
The onset of the pandemic has coincided with the approval of current year STI plans for many companies. Some public companies have already established the performance measures and related target levels for their STI plans and are now faced with metrics that may no longer be attainable. Still other companies are preparing to go through that process shortly. Here are some of the actions that companies have taken or are considering in view of the uncertainty in the marketplace.
Plan Already Approved Pre-Pandemic
Companies have implemented or are considering one or more of the following alternatives:
Plan Still Pending Approval
Where the design of the STI plan is still being reviewed by the Compensation Committee, companies are considering the following alternatives:
Long-Term Incentive (“LTI”) Plan Issues
Many public companies grant performance-based LTI awards, which present their own set of complexities in the current environment.
Awards Granted Pre-Pandemic
Companies have implemented or are considering one or more of the following alternatives:
Awards Still Pending Approval
Where the LTI awards have yet to be granted by the Compensation Committee, companies are considering the following alternatives:
Broader Equity Award Considerations
With many companies experiencing sharp declines in their stock price, funding targeted grant values for annual equity awards may be challenging. Many companies are finding that they need to grant more shares than they anticipated to deliver intended LTI values to employees. Some companies may not have sufficient shares available in their equity plans to grant planned values. Others may run the risk of exhausting their pool sooner than anticipated, or otherwise face an annual equity “spend” (burn rate) that is outside market norms or investor preferences.
Awards Granted Pre-Pandemic
Where companies have already made their annual equity award grants for the year, some have decided to take no action to address the decline in the intended target value, taking the position that the awards are long-term in nature and their ultimate realizable value will align with shareholder interests. Other companies continue to monitor the situation with the potential for targeted retention awards at a later time to high performers or to address value shortfalls.
Awards Still to be Granted
Companies that have yet to grant their annual “refresh” awards are considering a range of alternatives, including:
Cash Conservation and Liquidity Considerations
Another area that companies may consider in go-forward compensation planning is their near- and medium-term cash position and compensation actions to help conserve cash. Some items to consider include the following:
Final Thoughts
We believe Compensation Committees should closely monitor developments in these areas on an ongoing basis, so as to retain and properly motivate executives and key employees and ensure appropriate shareholder alignment. If you have any questions on the topics covered in this Thoughtful Pay Alert or would like assistance assessing your specific situation, please contact your Compensia engagement manager.