The Advisors' Blog

– Liz Dunshee

This FW Cook blog analyzes FYE compensation decisions that have been recently disclosed by S&P 1500 companies whose fiscal years ended in April – June of this year. Here are some takeaways:

– For annual bonus plans, 13 companies (22%) exercised positive discretion to increase the formulaic bonus outcome – the average payout increased from 16% of target to 80% of target and the most common approach was to pro-rate performance based on outcomes up to the onset of the pandemic

– For annual bonus plans, 12 companies (20%) delivered zero payout and didn’t exercise positive discretion – that included 2 companies that exercised negative discretion to decrease the formulaic bonus outcome to zero

– For annual bonus plans, about half of the companies that didn’t exercise discretion had a non-financial component or some other means by which to award a payout even when the financial component didn’t fund

– For long-term incentive plans, 6 companies exercised positive discretion to measure performance up to the onset of the pandemic (e.g. calculate performance using 11 of 12 quarters)

– For long-term incentive plans, only 2 companies disclosed modifications to in-cycle performance awards

– Approximately 25% of companies prospectively disclosed they were making changes to fiscal 2021 annual bonus and/or long-term incentive plans in light of pandemic challenges

The blog notes that calendar year companies may not gain much ground by pro-rating annual incentives as some of these “early filers” have done – but it may be reasonable to explore that approach for long-term incentive plans (i.e., use data for 8 or 9 of 12 total quarters). Here’s an excerpt:

We believe this approach to pro-rate the payout is an important signal to investors of the trade-offs that are necessary to deliver fair incentive plan outcomes to management participants who have faced huge challenges outside of their control, while recognizing that many shareholders are facing negative returns and rank-and-file employees have also made sacrifices (e.g., furloughs and layoffs).

Calendar year companies that decide to exercise positive discretion to increase the formulaic bonus outcome will need to articulate a more holistic rationale for the higher payout that is tailored to their individual facts and circumstances. Common themes we have observed in working with our clients include post-pandemic absolute financial performance, relative performance versus key industry peers, the shareholder experience, and the execution on the operational and supply chain challenges that arose from the pandemic, including safeguarding the health and safety of employees, suppliers and customers.

Due to accounting and disclosure consequences, the blog cautions compensation committees to consider a broad range of options before proceeding with any changes to in-cycle awards, such as changes to metrics, goals, the measurement period, or revisions to adjustments. Check out our “Covid-19″ Practice Area for lots of memos on pandemic-related pay adjustments. And mark your calendars now for our February 25th webcast, “Your CD&A: A Deep Dive on Pandemic Disclosures,” for tips on how to tell your pay story in your proxy statement.