The Advisors' Blog

– Lynn Jokela

We’ve blogged before about CII urging companies to reduce complexity of their incentive plans.  One positive outcome from simplifying incentive programs is that it also simplifies drafting the CD&A disclosure and helps increase investor’s understanding of the program.  A recent Meridian memo says that due to uncertainty resulting from Covid-19, for companies making changes to 2021 long-term incentive awards, one common adjustment is to simplify things by granting more time-vested restricted stock.  Using time-vested restricted stock may not be the right move for everyone but the memo discusses some of the benefits and considerations, here’s an excerpt:

The rationale for this predicted shift to increased use of time-vested restricted stock is not hard to understand. In this environment, restricted stock provides two key advantages over performance-based LTI:

– More certain retention value for executives in an uncertain environment; and

– No requirement to set realistic multi-year performance goals, a well-nigh impossible task for some companies right now.

Every company should carefully evaluate the design of their own program and its alignment with their unique business and talent strategies. Executive teams may reasonably question whether complex long-term incentive programs actually drive any meaningful change in behavior or performance.

However, no change to the executive compensation happens in a vacuum. As discussed in the memo, CII calls for more time-vested restricted stock.  CII also calls for longer vesting periods – which can help further align executives with shareholders on a truly long-term basis and can potentially help better bridge periods of temporary uncertainty. Another crucial piece of the equation is the size of the opportunity. If companies reduce the inherent “risk” of CEO compensation by reducing or eliminating performance-based awards, they should also consider whether the size of the current pay opportunity should be adjusted accordingly.