February 17, 2021
2020 Banner Year? Considerations for Setting 2021 Incentive Goals
– Lynn Jokela
In a recent Directors & Boards article, Blair Jones and Greg Arnold of Semler Brossy discuss incentive goal setting amid the pandemic. Uncertainty about the pandemic’s duration and its effect on company performance has made 2021 goal setting all the more challenging. To help compensation committees set 2021 incentive plan goals, the article provides several considerations for companies whether they’re in hard-hit or well-performing sectors. For companies that had a banner year in 2020, the article suggests the following as possible considerations to help reduce risk of a disconnect between incentive payouts and shareholder expectations:
– Change the leverage curve: while targets may be lower than 2020 performance, if these are missed, the payouts decline quickly and for maximum payout levels, those should be much harder to reach
– Use a multi-year lens: consider what is fair progress from 2019, or for 2020 and 2021 combined
– Set different performance curves based on macro environment: boards could establish one set of performance goals if the broader economy declines by 5% and a lower range of goals if it goes down by 10%, and the payout opportunity could be adjusted as well