Executive compensation will be a major topic on board agendas in 2021, primarily due to disruptions caused by the Covid-19 pandemic. The Conference Board, Semler Brossy and ESGAUGE have created a database that tracks changes made to executive compensation plans as a direct result of the Covid-19 pandemic that may provide useful insight for boards in the near future.
Since the pandemic began, the database has reported that “just 177 Russell 3000 Index companies announced structural changes to existing and/or future incentive compensation plans for executives—including annual incentives, long-term incentives or, in some cases, both.” While those 177 companies only account for 6 percent of the Russell 3000, they do provide some insight into how corporate boards are reacting to disruptions caused by the pandemic. In a statement, Matteo Tonello, Managing Director of ESG Research at The Conference Board said, “Corporations can benefit from accessing fresh information on how peers are redesigning compensation plans.”
The key findings reported from the database include:
• Most companies adjusted their annual incentive plans. “The most common change to annual incentive plans was to reduce the target or maximum payout opportunity, and some companies announced their decision to cancel or suspend annual bonuses altogether. Some companies have added new goals, modified performance periods, or shifted from cash to equity. Only a very small number have reset goals,” the report states.
• Most long-term incentives remained unchanged. “A smaller group of companies announced changes to their LTI plans, which may reflect the fact that proxy advisory firms have taken a position against such changes,” the report states.
Each corporate board will of course need to use its own discretion to determine what adjustments, if any, should be made to its compensation plan. There are no one-size-fits-all solutions because every company has been affected by the pandemic differently.
However, every corporate board should at least determine just how well their current plan has stood up under the disruptions caused by the pandemic. Do the awards or bonuses in the plan meet the standard of “pay for performance” in a fair and equitable manner that will hold up under scrutiny from shareholders and proxy advisory firms?
Now might be a good opportunity to test a range of different performance goals and payout levels to determine what compensation for top executives would have looked like in comparison to the current plan. This could be good preparation for the 2021 compensation plan which will also have to account for tremendous uncertainty and volatility.
Compensation plans will likely receive higher scrutiny this year because so many workers have lost jobs, many companies have lost revenues and shareholders want to make sure that executives aren’t enriching themselves while others are hurting during a crisis. Directors should be aware that their actions on compensation carry weight and can lead to negative say-on-pay votes, no-votes on the re-election of compensation committee members or activist investors launching a proxy fight. There can be consequences for not acting responsibly on compensation during this particular crisis that has led to the deaths of more than 250,000 people.
The database provided by the Conference Board and its partners, which will be updated periodically, may be helpful to boards that are interested in knowing what their peers are doing on this matter. The low number of companies that have made changes to their compensation plans suggests most boards are satisfied with how their plans have performed during this crisis. We’ll find out if they were right in 2021.