The Advisors' Blog

Although large company stocks performed pretty well during the first quarter of this year, the impact of the bumpy market might be affecting executives’ decisions on whether to find greener pastures – and boards’ decisions on how far to go to retain them. In a recent memo, Semler Brossy points out that retention awards are increasing:

Tighter and more competitive candidate pools have led to higher executive pay. Meanwhile, poor market conditions have eroded much of the equity hold companies rely on to retain their existing talent. We analyzed S&P 500 companies from 2019 to 2021 and found that retention awards are increasing, notably since the start of COVID. Additionally, current board concerns over retention could mean the practice increases in 2023 and beyond.

The Semler Brossy team acknowledges that special retention awards come with a high risk of investor criticism – but says that risk can be worth it if the awards are done right. The memo shares three important considerations – here are a few excerpts from each section:

1. Is now the right time? It is essential for boards to step back and ask what makes this particular time or situation unique, and how special awards might make a real difference. Do investors find the criticality of the individual executive’s role apparent and worthy of a special award? Have the company’s communications supported this narrative to help investors understand the unique situation?

2. Does the existing compensation program have enough holding power to retain the executive(s)? Sometimes, a poor performance year makes a management team question whether the plan works. We advise clients to review performance/payouts over a multiyear period before fearing the worst. . . . Often, making potential opportunities more transparent and rallying executives around achieving these goals is enough to strengthen their commitment.

3. How will the company structure the special award (i.e., performance and vesting)? A special award’s structure will often dictate its external reception. Investors and proxy advisors evaluate four design features in special awards: magnitude, performance requirements, vesting and forfeiture provisions. The memo includes a chart that shows guardrails for these design features, and commentary from S&P 500 analysis.

At the end of the day, the frequency with which the company makes these types of awards is one of the most important considerations. It’s difficult to call something a “special award” if you’re doing it regularly, which the Semler Brossy folks also point out:

Boards should also exhaust all regular compensation actions and consider the internal and external operating environment before undertaking a special award. Lastly, special awards should be kept isolated, making them truly “special” rather than a perpetual practice.

– Liz Dunshee