In 2020, the pandemic and economic uncertainty forced companies to not only consider alternate plans but also act to implement changes pertaining to compensation and benefits.
As 2020 winds down and planning continues for 2021 and beyond, there are several items worth taking into consideration:
- Revisit Clawbacks and Special Definitions – There has been a lot of attention on the issues of clawbacks and terminations for cause to cover misconduct beyond financial matters. These are designed to assist a company in its ability to recoup executive compensation in the event of reputational harm to the company or adverse publicity. This is not just for public companies but private companies are also reviewing these matters and should be viewing clawback policies as good corporate governance practices. This would also be a good time to implement clawback policies if grounds exist for a for cause termination.
- Change in Control and Severance Agreements – Our firm has received several inquiries about these agreements this year since many companies are facing difficult restructuring decisions. Plus, many financial buyers and competitors are pursuing acquisitions of undervalued companies. In either case, companies should review their operations for change in control and severance or implement new arrangements.
- 2020 Performance Awards – The pandemic has affected the ability to effectively set performance goals and determine payouts for long-term and annual incentive compensation programs. When determining 2020 incentive award payments, it may be necessary to exercise discretion to adjust performance metrics that were set earlier this year. This applies if results were even better than expected.
- When making these determinations, companies may want to confirm that incentive compensation plan documents provide for discretion to make adjustments.
- Modify financial performance targets in outstanding performance-based long-term incentive awards – Many companies created long-term incentive plans with multi-year goals with financial performance targets that are no longer realistically achievable, as they were established during pre-pandemic times. There are several options for redesigning these plans:
- Companies should consider adjusting reasonable financial performance targets to preserve the retention and motivation characteristics these incentives are designed to obtain.
- For those who may not be able to do so, consider adding more subjective factors (non-financial targets) into the mix.
- Grant time-vesting stock awards rather than performance-based awards – More recently, the trend is to grant performance-based awards because they motivate executives to achieve targets. However, it may be appropriate to consider time-based vesting awards instead of or in addition to performance-based vesting.
- Grant awards tied to the recovery with more upside – The flip side is to consider granting a performance share or other performance related equity with higher-than-traditional performance risk and leverage tied to recovery.
- Provide retention awards – Companies are always concerned about losing valuable and high performing employees and may be even more exposed during this current situation. As such, consider granting executives with special retention awards that have multiple vesting cycles.
- Create employment agreements – If there is not already an existing employment agreement for a particular higher performing executive in place, consider an employment agreement as a true indicator of your company’s commitment. The agreement can also contain special signing bonuses or retention awards, paid at the time of execution.
- 2021 Incentive compensation – Making predictions for 2021 and beyond amid the pandemic can be challenging. It may be helpful to confirm that incentive compensation programs provide for discretion to adjust performance metrics and determine payouts. Companies may include a lower maximum payout but also lower the eligibility threshold for receiving a performance award.
After all, real pay delivery should align with performance over time. The reality for an executive is that shareholder-value creation remains the primary performance test. It may be difficult to maintain the same levels of pay delivery than we have experienced in 2020.
Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting.
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