2 A holistic approach. Boards and compensation committees should take a holistic approach to compensation arrangements, putting a greater emphasis on long-term incentives. Doing so will ideally reduce the need to adjust incentives on a short-term (e.g., annual) basis. 3 Transparency and communication. Boards and compensation committees should increase communication and transparency at every level. This can be accomplished by maintaining an ongoing dialogue between the board and management regarding executive performance and providing robust and, if possible, contemporaneous public disclosure of the rationale for any adjustments to performance metrics, goals or targets. 4 Alignment of awards and results. There are various ways in which issuers can ensure that executive incentive awards are aligned with results. These include recalibrating the definition of “good performance” and adjusting performance metrics to take into account shifting priorities due to COVID-19, separating annual incentive plans for the second half of the year or for the fourth quarter, and/or even allowing the board to have discretion in making such awards. 5 Consider long-term effects. In adjusting or setting performance metrics for short-term awards, boards and compensation committees should consider the longer-term perceptions and expectations any adjustments could create among executives for the future. EQUITY-BASED AWARDS AND THE POTENTIAL FOR WINDFALLS Many executives’ recently granted equity-based compensation awards may undergo fluctuations in value that, prior to COVID-19, could not have been reasonably expected (although far from all issuers have experienced stock price declines in the COVID-19 era, and some issuers’ businesses have benefited significantly).
Boards and compensation committees should take a
holistic approach to compensation arrangements, putting a greater emphasis on long- term incentives.
The shifting of stock options to underwater status may have ramifications for long-term retention or, at least, morale of executives and other key employees.
Perhaps as expected, consultants and proxy advisory firms have warned against making any changes to formulaic approaches to equity awards. For example, both ISS and Glass Lewis are firmly opposed to issuers repricing, replacing, exchanging or regranting underwater options unless timely shareholder approval is obtained. 116
90
Governance Insights 2020
Powered by FlippingBook