April 7, 2022
Covid-19’s Long-Term Effects on Executive Compensation
The last two years were rocky in the executive compensation world as compensation committees tried to design the right incentives during a pandemic. And in 2021, ISS put out its updated FAQ for pandemic-related pay adjustments, and suggested that pay programs should go “back to normal.” With the pandemic (slowly) fading out, Pay Governance looked at how it has changed the compensation world. Below is an excerpt of the 2021 compensation practices that they expect will have persisted from 2020:
– Wider performance curves. Many companies widened their performance curves to minimize the chance of a zero or maximum payout given the uncertainty in setting performance targets. This uncertainty persisted at the beginning of 2021, and a widening of the performance curve allowed companies to retain the basic structure of existing plans but with far less pay/performance leverage.
– Semi-annual short-term incentive performance periods. Companies in industries facing the greatest level of uncertainty continued or adopted a “1st half/2nd half short-term incentive plan whereby 6-month goals are set at the beginning and the middle of the performance year to allow for a “resetting” of targets at mid-year based on more current financial outlook.
– Inclusion of qualitative metrics. After unprecedented levels of discretionary adjustments applied in 2020, some companies added or increased the weighting of qualitative metrics to allow the Compensation Committee to exercise discretion within predefined guardrails (e.g., +/- 20%).
– Above target annual incentive plan payouts. Given the limited visibility at the beginning of 2021 amid the continued impact of COVID-19 (e.g., supply chain pressures, “The Great Resignation,” etc.) and 2020 annual incentive plan payouts, the majority of which were below target or zero, many companies may have established relatively conservative financial targets for their 2021 annual incentive plans. Early indications are that above target (or maximum) annual incentive payouts are being reported by companies that were more resilient than forecasted and capitalized on better-than-expected market opportunities in 2021.
– Emily Sacks-Wilner