Use of discretion has been mentioned as a possible mechanism for dealing with equity awards granted earlier this year before Covid-19 became a pandemic but it’s not the simplest thing to do, especially for boards concerned about catching any flack from proxy advisors and investors. A recent Pay Governance memo provides a framework for compensation committees that are considering use of discretion.
Use of discretion, if used at all by compensation committees, is usually done when making downward adjustments in pay. Now with equity awards negatively impacted by ongoing uncertainty resulting from Covid-19, some compensation committees are thinking about what they can do to get the intended results from recent equity grants.
For compensation committees thinking about potentially using discretion, it’s not too early to start preparing. The memo high-lights several key considerations, including:
– Affordability: considerations regarding company cash flow, including whether other forms of payout delivery should be considered to manage expense
– Participation: which group of the employee population should be considered for discretion and should any groups be excluded
– Performance: discretionary assessment of company performance should be grounded in the company’s preparation for and ability to return to normal operations post-Covid-19 (the memo includes criteria examples relating to financial/operations, shareholder, employee, customer and community)
– Award amounts: if plans miss threshold, expectations will be that discretionary payouts will be well below target
– Payout delivery: company stock discretionary awards can help strengthen retention, demonstrate commitment and align with shareholders
– Exclusions: consider any positive financial outcomes that might be excluded to ensure there aren’t any unintended windfalls
When compensation committees do use discretion, careful planning and thoughtful deliberation will prove helpful for drafting eventual proxy statement disclosures. Use of discretion will require a solid rationale that will need to be explained along with how this aligns with interests of shareholders – something to keep in mind before making discretionary adjustments.
Survey data seems to be coming out pretty regularly now as companies continue thinking about what to do with executive and director pay as uncertainty about the effects of Covid-19 continues. For another look, Semler Brossy recently published a report looking at how companies and boards are responding to the crisis when thinking about executive comp. The continued uncertainty makes it all the more important for compensation committees to carefully deliberate any potential actions they might take relating to executive compensation.
The most recent report is based on data gathered from over 100 companies representing a broad set of industries and highlights current actions taken and those in consideration for late 2020 and 2021. The report says so far, there is no universal response, many companies are delaying action until there is more clarity and companies that have taken action, are doing so out of necessity. Here’s some of the findings, check out the report to see more detail:
– Most respondents have already set goals for 2020 bonuses and of those, 63% expect to use discretion to adjust payouts
– 40% are considering resetting performance goals part way through the year once the effect of Covid-19 is better understood
– Most respondents have already made 2020 equity grants and don’t anticipate making any in-flight changes at this stage
The report also includes data on the impact of Covid-19 on the broader employee population, timelines for pay reductions and employee populations impacted by pay reductions.
I’ve blogged about results from a couple of Pearl Meyer surveys about the impact of the Covid-19 pandemic on executive compensation. With their most recent report, Pearl Meyer takes a look at the impact of Covid-19 has had on director pay and it says they’re seeing trends in director pay not seen since the 2008-09 financial crisis. Here’s an excerpt:
– While the impact of COVID-19 on director pay is just beginning to emerge, it appears that most companies are poised to stay the course – with 38% freezing director pay prior to the pandemic and 17% moving ahead with proposed pay increases
– 20% of respondents have either rescinded a planned director pay increase or temporarily reduced director compensation
– In terms of the duration of director pay adjustments that have been made in response to Covid-19, 40% don’t know how long the adjustments will last
– About one-half of respondents have no plans to change their annual director equity grant value or methodology
Not long ago, I blogged about starting the conversation with the board on integrating ESG into executive compensation plans. As much as investors might be calling for companies to do that, this blog from Alexa Kierzkowski and Dan Ryterband of F.W. Cook in Corporate Board Member says “proceed with caution.”
As most of us know, moving too quickly to try and integrate anything can backfire. Here’s some of what Kierzkowski and Ryterband had to say for those considering integrating ESG with comp plans:
How ESG is embraced in a compensation plan creates the potential for unintended consequences.
ESG goal setting is challenging and missed goalposts are potentially more problematic. For example, failing to meet a carbon emissions target or a diversity goal is not as easily explained in proxy statements as missing a profit target.
There’s also the possibility that efforts to incorporate ESG-related metrics in bonus opportunities will be interpreted as signifying how much, exactly, a specific concern matters to a company. Also, inclusion of some ESG metrics may raise questions about the exclusion of others.
One of the challenges for management and the board when trying to incorporate ESG-related metrics in bonus opportunities will be to vet investors’ and other stakeholders’ priorities against their strategic vision for the company. Applying resources to maximize your ESG scores and improve on the metrics investors may believe are most important may not actually deliver on the organization’s value proposition.
What’s the takeaway? Proceed cautiously and think about whether incorporating ESG-related metrics in compensation plans is the only or best way to measure ESG-related effort/progress.
A couple of weeks ago, I blogged about Pearl Meyer’s quick poll on the impact of COVID-19 and executive compensation plans. The firm also recently published results from a poll on executive base salary planning and includes responses from over 380 participants. Here’s an excerpt:
– About half of poll respondents said 2020 pay actions have already been made and for the other half, 45% have 2020 pay actions that are usually made in April or May and the other 55% later in the year
– For companies that usually set pay in April or May, 25% said they plan to freeze executive base salaries but more than 70% haven’t decided what to do yet
– For companies that make executive pay decisions later in the year, over 60% said it’s too early to tell what they will do and another 24% are considering base salary freezes for 2020
I recently blogged about changes to executive pay at several companies as a result of the fall-out from Covid-19. Here’s a recent report about the Covid-19 impact on executive and director pay at Russell 3000 companies from Semler Brossy. The 20-page report goes into some detail about the pay actions…data looks at magnitude of salary reductions and median CEO and NEO salary reduction by sector.
Over half of the pay reductions have come from the consumer discretionary and industrial sectors. The report says 63% of companies that reduced CEO pay also reduced director pay.
The report then lists companies in the Russell 3000 that have made executive and/or director pay cuts and includes company specific actions…
Not long ago, I blogged about increased workloads for compensation committees. As issues related to the Covid-19 pandemic continue, a recent KPMG memo says investors are looking for compensation committees to increase oversight of human capital management issues. With health and safety issues top of mind, the memo says it’s increasingly important for compensation committees to ensure compensation incentives align not only with long-term value creation but also with workplace safety and corporate culture. Here’s some of the what the memo says about broadening compensation committee oversight:
– Consider expanding the committee’s focus to include human capital management in addition to traditional compensation matters
– Review the committee title and charter against current oversight activities and consider whether any changes are needed
– Consider whether to incorporate nonfinancial or sustainability metrics into executive compensation plans
– View shareholder proposals on compensation issues as a bellwether
– Be mindful of changes to proxy advisors’ assessments of executive compensation policies
– Help ensure long-term incentives are aligned with sustainable long-term value creation
– Expect greater scrutiny of director pay
– Leverage disclosures and shareholder engagement to tell the company’s story about compensation
We have posted the transcript for our recent webcast: “The Top Compensation Consultants Speak.”
Here’s another webcast to check out: Deloitte is hosting a webcast this Thursday, April 16th – “Executive Reward and COVID-19 – A Changing Picture“. Deloitte’s Stephen Cahill, Mike Kesner and Caroline Zegers will discuss:
– Latest market data in terms of approach to COVID-19 related board and senior management pay cuts in the UK, as well as early insights from the 2020 AGM season
– Evolving investor and proxy views around pay decisions in the current environment
– Consideration of the global perspective, including insights from Deloitte’s experts in the US and Continental Europe
Over the last few weeks, we’ve received many law firm memos and other materials about a variety of compensation-related issues resulting from the Covid-19 pandemic. To help bring some order to those references, we’ve set up a new “Covid-19 Issues” practice area here on CompensationStandards.com. We’re hoping this helps you find the resources you need.
Yesterday, ISS issued updated guidance about how it will apply its proxy voting policies this year in light of the challenges companies face. Most of the guidance clarifies existing policies and says that it will review situations on a case-by-case basis – meaning a company’s disclosure is key. Here’s an announcement from ISS listing the policies impacted by the updated guidance – which includes annual meeting considerations, dividends, share buybacks and others. ISS compensation policies that are impacted include:
Boards are encouraged to provide contemporaneous disclosure to shareholders of their rationales for making changes to performance metrics, goals or targets used in short-term compensation plans in response to the drop in the markets and a possible recession.
For long-term compensation plans, ISS’s benchmark voting policies generally aren’t supportive of changes to midstream or in-flight awards since they cover multi-year periods. Accordingly, ISS will look at any such in-flight changes made to long-term awards on a case-by-case basis to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes.
Going forward, it is also possible that some boards may consider altering the structures of their long-term plans to take the new economic environment into consideration. ISS will assess such structural changes under its existing benchmark policy frameworks.
Option repricing – If boards undertake repricing actions without asking shareholders to approve or ratify their actions in a timely fashion, the directors’ actions will remain subject to scrutiny under the U.S. benchmark policy board accountability provisions (and equivalents in other market policies where relevant). If boards seek shareholder approval/ratification of repricing actions at 2020 meetings, ISS will apply its existing case-by-case policy approach for the relevant market. Under this policy for the U.S. market, for example, ISS will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price. Among other factors, ISS will also examine whether (1) the design is shareholder value neutral (a value-for-value exchange), (2) surrendered options are not added back to the plan reserve, (3) replacement awards do not vest immediately, and (4) executive officers and directors are excluded. ISS will consider this approach to continue to be appropriate during the circumstances of the COVID-19 pandemic.
Changes to directors and senior management – for boards needing to fill vacancies or add critical expertise to address pandemic-related concerns, ISS will apply case-by-case considerations and assess any explanation provided by the company and the same case-by-case considerations will be applied when the board needs to fill senior executive roles on an interim basis.
The announcement says that ISS will update its guidance and provide new information as needed throughout the remainder of the 2020 annual meeting season as additional issues and impacts from the pandemic develop.