The Advisors' Blog

– Lynn Jokela

Use of discretion has been mentioned as a possible mechanism for dealing with equity awards granted earlier this year before Covid-19 became a pandemic but it’s not the simplest thing to do, especially for boards concerned about catching any flack from proxy advisors and investors.  A recent Pay Governance memo provides a framework for compensation committees that are considering use of discretion.

Use of discretion, if used at all by compensation committees, is usually done when making downward adjustments in pay.  Now with equity awards negatively impacted by ongoing uncertainty resulting from Covid-19, some compensation committees are thinking about what they can do to get the intended results from recent equity grants.

For compensation committees thinking about potentially using discretion, it’s not too early to start preparing.  The memo high-lights several key considerations, including:

– Affordability: considerations regarding company cash flow, including whether other forms of payout delivery should be considered to manage expense

– Participation: which group of the employee population should be considered for discretion and should any groups be excluded

– Performance: discretionary assessment of company performance should be grounded in the company’s preparation for and ability to return to normal operations post-Covid-19 (the memo includes criteria examples relating to financial/operations, shareholder, employee, customer and community)

– Award amounts: if plans miss threshold, expectations will be that discretionary payouts will be well below target

– Payout delivery: company stock discretionary awards can help strengthen retention, demonstrate commitment and align with shareholders

– Exclusions: consider any positive financial outcomes that might be excluded to ensure there aren’t any unintended windfalls

When compensation committees do use discretion, careful planning and thoughtful deliberation will prove helpful for drafting eventual proxy statement disclosures.  Use of discretion will require a solid rationale that will need to be explained along with how this aligns with interests of shareholders – something to keep in mind before making discretionary adjustments.