The Advisors' Blog

– Lynn Jokela

I’ve blogged before about the impact of Covid-19 and potential use of discretion in making adjustments to executive compensation.  A recent Semler Brossy memo says now is when the board and compensation committees should begin preparing for potential discretionary compensation adjustments at year end.  No doubt use of discretion can invite criticism so early planning can be a big help.

The memo provides a framework for tracking the impact from Covid-19 and setting a foundation for any future pay adjustments.  Here’s an excerpt about how to begin:

Boards won’t know the full impact of the pandemic on their company’s business results for some time yet. But they can identify metrics where the company is likely to be most vulnerable and see how their performance compares with previous years and with competitors’. At the early stages, it is important to be fairly exhaustive in the exercise, exploring first-, second-, and possibly third-order impacts.

Discretionary adjustments aren’t without scrutiny and the memo says boards will want to take care in setting consistent and transparent expectations in light of the current environment with an eye to concerns of all stakeholders – investors, employees, customers and the community at large.

Preparation ahead of time will result in a thoughtful CD&A, grounded in a clear rationale, which in turn will make investors less likely to disagree with the committee’s judgment. Employees and the public will be more likely to see exceptions as logical and justified.