CHAPTER 06 Executive Decisions: Compensation Trends In and Outside of Times of Crisis
on executives’ part, given that most of the announced reductions or freezes related solely to base salary and not the more lucrative bonus, incentive plan, equity and pension entitlements that typically constitute the major portion of an executive’s total compensation. In fact, the results of a July 2020 survey by CGLytics of approximately 3,000 U.S. public issuers suggests that cuts to executive pay were, overall, “minimal,” with two-thirds of CEOs’ reductions being only 10% or less of their total compensation for fiscal 2019. 112 Given the widespread use of relative rather than absolute shareholder returns as a metric for performance, many executives will likely remain eligible for payouts at least in-line with historical levels, despite depressed share performance. Boards and compensation committees will need to consider the potential reputational risks and the risks to investor and employee relations that may arise as a result of increased scrutiny at bonus time, particularly at issuers that temporarily laid off employees, consolidated and rationalized worksites and workforces, or suspended or cut dividends. Performance Metrics in a Time of Crisis Given the volatility and uncertainty caused by COVID-19, many issuers may find themselves with executive performance metrics, goals and targets that have become unrealistic and unattainable in the current economic climate. Boards and compensation committees will therefore need to consider how, if at all, existing metrics should be adjusted to take this new reality into account. In doing so, directors should consider the upside and downside implications of any move to more discretionary compensation awards.
Boards and compensation committees will need to consider how, if at all, existing metrics should be adjusted to take this new reality into account.
ADJUSTMENTS TO EXISTING PERFORMANCE METRICS AND
CONSIDERATIONS FOR FUTURE METRICS ISS and Glass Lewis are relatively open to issuers adjusting annual incentives, provided those adjustments are made in accordance with their established guidelines. 113 However, both firms have expressed increased reservations with adjustments to long-term incentives. Moreover, executive compensation advisers and consultants are warning issuers against drastic or overly formalistic mid-year changes to existing goals and targets in the midst of significant uncertainty. 114 Put simply, interim action for the sake of activity may be frowned upon until the COVID-19 dust has settled and issuers have a more holistic view of where they have landed. For boards and compensation committees considering adjustments, ISS and Glass Lewis, as well as executive compensation consulting firms like Semler Brossy and Hugessen Consulting, 115 recommend the following guiding principles: 1 Balance and proportionality. Boards and compensation committees should balance the priorities of management, shareholders and issuers’ broader group of stakeholders, such as employees, business partners and customers, in order to ensure a greater proportionality of outcomes.
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