What are the most pressing risks for companies that exceeded financial performance expectations in 2021? A
recent article from Pay Governance highlights the potential pitfalls for both 2020 payouts and setting 2021 goals.
Companies labeled “essential” or selling products that aligned well with the new normal may have seen increased demand and been less likely to cut salaries. However, they also experienced corresponding cost increases to protect employees or modify operations. Successful navigation of these challenges generally produced outperformance.
The article provides a useful set of questions for compensation committees to review and possibly address in the 2021 proxy statement:
- Are the performance results and corresponding payouts aligned?
- Some companies may have set narrow bands around target performance for threshold and maximum payouts. In the case of outperformance, it’s worth examining shareholders’ experience when deciding to award maximum payouts. Does an apparently small level of outperformance warrant a near maximum payout?
- The compensation committee should review company performance relative to peers as well as how management anticipated and addressed increased production, personal protection equipment, and other unplanned costs.
- What was the impact on key stakeholders?
- Do payouts appear incongruous with employee experiences (health and safety, job security)?
- Did the company increase its market share and produce high levels of customer satisfaction?
- Consider the use of a resilience scorecard when making both 2020 and 2021 decisions.
- Is it appropriate to award just those individuals or business units that directly contributed to the company’s success, or is it better to spread the benefits as broadly as possible?
- Rewarding individuals or specific divisions may be appropriate where the results are not likely to continue into 2021 (for example, did 2020 produce an unexpected increase in demand for large, but infrequently purchased items)?
- Otherwise, more broad-based awards could provide motivation and goodwill.
- Are 2020 results sustainable? What are the potential implications of setting 2021 performance targets below 2020 actual results?
- Companies with a strong ecommerce market may well see 2020 as “just the beginning”, but for companies where 2020 was “one-of-kind” (hopefully so), communicating why 2021 goals are set below 2020 actual results should be a top consideration.
Outperformance should be rewarded but considerations for the wider COVID-19 impacts will reduce conflicts with shareholders and risks of reputational damage headed into the 2021 proxy season.
