The Advisors' Blog

– Lynn Jokela

We’ve blogged before about potential use of discretion by compensation committees this year when determining incentive plan payouts and a recent Pay Governance memo says 77% of companies have considered using discretion at the end of the 2020 performance year.  To help companies prepare for anticipated heightened investor scrutiny of incentive pay decisions, the memo urges compensation committees to conduct a rigorous assessment of performance prior to applying discretion, which can help make it easier to communicate any use of discretion to shareholders.

In terms of how to conduct this rigorous assessment of performance, the memo walks through a common example and summarizes several sample assessment criteria in what it calls a “resilience scorecard.”  A scorecard may not be for everyone but it’s one way to put some structure around upcoming compensation decisions and as noted in the memo, it can go a long way in providing a strong rationale behind discretionary awards.

The scorecard is intended for use by compensation committees when finalizing incentive awards for 2020 and it breaks the assessment criteria into different categories relating to financial/operations, employees, customers/community and governance/shareholder matters. By way of example, the scorecard applies a discretionary score weighting to each category and can help committees explain decisions to shareholders in the CD&A  – it provides more of a quantitative approach and shows considerations that were factored into final incentive awards.  It’s worth checking out – especially in a year when investors and proxy advisors have their antennas up.