May 6, 2020
Thinking of Reducing Director Equity Awards?
– Lynn Jokela
Recently, I blogged about a survey of Russell 3000 companies and the impact Covid-19 has had on executive and director pay. When making changes to director pay, cash retainer cuts seem to be the most common. For those wondering what companies do when reducing director equity awards, this Pay Governance memo takes a look at some of the considerations. Here’s an excerpt:
While the magnitude of stock price declines varies by industry and company, a very likely possibility for many companies – due to director awards being made at the time of election or re-election to the board at annual shareholder meetings – is that the stock prices used to determine non-employee director equity awards will be 20% to 50% lower, if not more, as compared to the stock prices used to determine executive equity awards made earlier this year.
Simply due to timing of awards, using the current stock price would result in significantly more shares to non-employee directors: this would put directors in a much different economic position than company executives and other equity award participants. In some cases, director award share limits may be exceeded, or an unusually large amount of the director share reserve may be used. Additionally, companies may have external implications in possible shareholder and proxy advisor reactions.
Companies may approach this issue several ways, depending on their facts and circumstances. For companies that have already approved a reduction to their cash retainer, they may consider a similar reduction to their stock retainer. Another simple and effective approach that companies may consider is determining the share grants by using the same stock price that was used to determine executive awards earlier in the year. This will harmonize the executive and non-employee director grants and ensure that the circumstances and timing of COVID-19 do not create significant differences between cadres of grant recipients driven solely by the timing of the award.
Importantly, any reduction to the director compensation program should be clearly disclosed in next year’s proxy statement.