The Advisors' Blog

– Lynn Jokela

FW Cook recently issued its annual “Top 250 Report” and this year, given the economic environment, the report looks at the evolution of long-term incentive design over the last 5 years, lessons from the top 250 relating to incentive plan design features to mitigate challenges with goal setting and administering incentives, and stock ownership guidelines.  With annual comp season around the corner for many and the current environment making goal setting challenging, here’s an excerpt discussing potential goal-setting strategies:

– For companies experiencing increased difficulty setting financial goals (as a result of COVID-19 or otherwise), one strategy would be to set wider performance ranges, and another would be to establish a target range (instead of a singular goal). The former allows for greater variability in outcome that still leads to a payout, while a target range provides a modest downside and upside buffer, such that any outcome within the range is deemed at-target achievement. It is important that the ranges in both cases are set symmetrically, such that threshold performance levels become easier while maximum performance levels become proportionally more difficult. Though proxy advisors and investors generally would prefer to see more narrow target ranges, investor outreach and sufficient proxy narrative disclosure providing a clear rationale for the wide goal posts could alleviate the risks of scrutiny and a negative result for Say-On-Pay.

The report includes a hypothetical example of programs that either widen the goal range or establish a target range and it shows this graphically.