The Advisors' Blog

As this FW Cook memo explains, sometimes there are good reasons for boards to approve special awards. But the fact remains: Investors don’t like them. The memo points out that some companies are able to recover quickly from investor concerns associated with these awards, while others suffer fallout for years. Here’s an excerpt:

The difference tends to come down to a combination of factors: underlying company performance, the quality of engagement with key shareholders, demonstrated responsiveness to the concerns raised, as well as the overall design and disclosure of the award itself. There is no single formula that guarantees a smooth recovery, and boards that approach the aftermath as a routine engagement exercise sometimes find it is anything but.

The memo walks through factors that tend to contribute to a quick recovery. Not surprisingly, a lot of it comes down to thinking ahead. Here’s an excerpt:

Boards that navigate this well also tend to think ahead — specifically, about what the story looks like if circumstances don’t resolve cleanly. When the board does not yet have a viable successor in place, a retention grant has a straightforward logic at the time of grant. The board needed time, and the award bought it. That story is easier to tell if a transition happens eighteen months later. It gets harder if two or three proxy seasons pass, the CEO is still in place, succession is still unresolved, and shareholders are left wondering what the award actually accomplished beyond extending the status quo. The question worth asking in advance is not whether the rationale works today — it usually does — but how it ages if the underlying situation moves slowly or not at all.

Related to that is a consideration that often gets underestimated: what the grant closes off. No board grants a special award knowing exactly what the next two or three years will bring. Business circumstances shift, and some of those shifts — an acquisition, an unexpected performance shortfall, a leadership change — may call for compensation responses that are themselves outside the ordinary. When that happens, a board that has recently granted a special award faces a harder conversation. Shareholders have limited appetite for repeated departures from normal practice, even when each one is justified on its own. The cost of a special award is not only the grant itself — it is the flexibility it may take away from the board later, when a more consequential decision requires shareholder patience.

– Liz Dunshee