vice chairman, executive pay & governance
This Week in Leadership
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Business is down 20% across the board. Expansion plans are on indefinite hold. Hiring is frozen. Growth isn’t an afterthought—it’s not a thought at all. At least not right now, and maybe not for another one or two years.
As the prognosis for a full financial recovery from COVID-19 gets worse, CEOs have had to shift their thinking to long-term goals and planning. It’s not an easy transition for a cohort of typically high achievers who often measure success in sales, earnings, and growth quarter by quarter. Combine that with the demands of anxious shareholders, and rewards tend to focus on the shorter term with few changes in long-term plans.
Until now. Hoping to strike a balance between short-term needs and long-term goals, boards are realizing their current long-term metrics won’t work in these times. “Companies are considering adjustments to long-term incentives to enhance retention, focus, and reassurance during a period of business uncertainty,” says Irv Becker, vice chairman of executive pay and governance at Korn Ferry. Becker says potential adjustments could include wider performance target ranges, annual instead of cumulative goals, and incorporating strategic or purpose targets into rewards.
Of course, adjustments to long-term incentives, which account for upwards of 50% of a CEO’s compensation, are not easy to contemplate. While there’s comfort in not racing to meet quarterly targets, experts say focusing too much on the long term may give leadership a pass on near-term performance. After all, the business environment is so uncertain—and the possibility that it could take a turn for the worse so very real—that long-term survival for many organizations isn’t at all assured.
Moreover, the more discretion boards use, the more scrutiny they receive. “Boards don’t like using discretion, but right now there are some companies with overlapping performance-based long-term incentive plans that could all get zeroed out,” says Becker. He notes, for example, that long-term incentive plans usually run over three years, so plans that cover from 2018 through 2022 could be drastically altered by the pandemic.
Up until recently, long-term incentive plan changes weren’t often on the boardroom table. The focus was on short-term rewards. A Korn Ferry survey from early this summer showed that the biggest compensation changes undertaken by organizations were in the use of discretion regarding short-term pay, with more than 50% of the organizations surveyed planning to give managers more say in determining performance metrics for bonus and incentive payouts this year.
But leaders went from thinking the financial impact of COVID-19 would last for only one or two quarters to now thinking it could last for one or two years. In a series of earnings calls during the second quarter—where the initial hope was to hear optimistic prognostications of the remainder of 2020—corporate leaders talked far gloomier, telling employees to hunker down and other stakeholders to view the world through a much longer lens. It was a realization, experts say, that many businesses need a whole new shift in strategy, structure, and staffing. “Leaders have not made all the changes they need to make yet,” says Debra Nunes, a Korn Ferry senior client partner.
The prolonged uncertainty over COVID-19 and business is unlike anything leaders have had to deal with in recent history. It took 18 months for the economy to recover from the 2008 recession and six years before the unemployment rate reached pre-recession levels, for instance. By contrast, some estimates now project the economy won’t fully recover from COVID-19 for at least a decade, and even then it may not ever reach pre-pandemic growth levels.
So far, most organizations are staying the course in terms of letting long-term incentive programs play out, meaning paying well in good times and not as well in tougher times. But the deeper the grim financial reality of COVID-19 sinks in, the more boards are realizing that traditional metrics for setting long-term compensation based on sales, growth, and earnings are becoming obsolete. Don Lowman, global leader of Korn Ferry’s Rewards and Benefits practice, says compensation committees want to keep all options open to properly account for situations both within and out of management’s control and to measure them against expectations of performance. “Some boards want to retain the flexibility and adjust pay actions accordingly,” says Lowman.