It is now well understood that COVID-19 brought a range of impacts to different market sectors and individual companies. What lessons are available for compensation committees for severe, negative impacts and for unanticipated increases in demand?
A recent Semler Brossy
article looks at companies on each end of the spectrum, struggling and thriving, and highlights the following actions:
Actions for Struggling Companies. Many of the following strategies have been widely discussed and the Center’s
survey on compensation changes found similar use of these actions.
- Wider performance ranges for threshold and maximum performance levels but flatter payout curves, as well as caps to mitigate windfall risks.
- Partial-year performance periods for the annual incentive with changes to the payout opportunity (i.e., lower target or maximum payout opportunity).
- Changes to incentive metrics, focusing on recovery, strategic targets, and “controllable” metrics such as liquidity.
- Informed judgement or discretionary authority based on a scorecard of metrics (including objective goals, but with any payout assessed discretionarily).
- Performance metrics relative to a peer group (most commonly in equity incentives).
- Shift to time-based equity vehicles and away from performance-based shares.
Actions for Thriving Companies. The Center
has highlighted risks that outperforming companies may face in the wake of the pandemic. The following actions seem well designed to mitigate some of the concern going forward, especially in cases where compensation committees may need to set 2021 targets lower than 2020 results.
- Set a steep drop off for below target performance while also making maximum payout levels more challenging to reach.
- Disclose a multi-year lens in goal setting, considering what is fair progress from 2019, or for 2020 and 2021 combined.
- Incorporate the macro environment. For example, establish different sets of performance goals by having one set of goals if the broader economy goes down by 5%, and a lower range of goals if it goes down by 10%. The payout opportunity should be adjusted as well.
Compensation committees will be addressing pandemic impacts into 2021 with little prior experience for such a crisis. Flexibility will be paramount – but shareholders will also look for clear rationale and disclosure on what changes are made.
