Vice Chairman, Executive Pay & Governance
This Week in Leadership (July 19 - July 25)
What the Delta variant means for office returns. Solving the labor shortage with returnships. Plus, tips for how to be a great board director.
Every company has been impacted by the coronavirus outbreak—but not all of them have been impacted equally. Retail and automotive are devastated, but grocery and movie-streaming firms are posting record numbers. All of which leaves board compensation committees in perhaps the toughest spot they’ve ever been in.
The questions are many: Should boards take a different approach to granting equity in the near future? Should they consider repricing recent stock options grants that are underwater because of the pandemic? How should performance be judged relative to the environment when it comes to awarding bonuses? Each lacks any formulaic answer, creating a host of landmines, says Charles Elson, chairman of corporate governance at the University of Delaware. “This is not a crisis of any CEO’s doing,” says Elson. “There will be much more discretionary review than normal.”
Such decisions won’t be made in a vacuum. As always, investors, governance watchdogs, proxy advisors, the media, and others will be closely watching compensation committees to make sure their actions are aligned with shareholder interests. The scrutiny will come from both sides, wanting to ensure that no one receives a windfall for simply having the good fortune of being part of an essential organization—or loses everything through no fault of their own.
Irv Becker, vice chairman of executive pay and governance with Korn Ferry, says boards should use the current environment to evaluate their entire compensation philosophy, making sure it is aligned with not only business conditions but also the competitive peer group. He says, for example, that boards of companies with bad executive retention in industries short on talent may want to be more aggressive to protect the team. “Companies where executive pay is in the 75th percentile may elect to take different action than those where it is in the 25th percentile,” says Becker.
Compensation committees that do make changes to incentive plans have essentially two options: abandoning or adjusting the previous plan. Under the first option, all previous performance targets are rendered meaningless in light of the pandemic, with new goals drawn up for the second half of the year that take into account its continued influence. With the second option, compensation committees can attempt to adjust metrics based on the outbreak’s impact—less revenue, more expenses—to get a true picture of operational performance. “This option may be more subjective and must be used carefully,” Becker says. “Institutional shareholders get concerned when more discretion is applied.”
Indeed, David Yermack, chairman of the finance department of NYU’s Stern School of Business, opposes the idea of repricing stock options or otherwise resetting pay in light of the crisis. “We live in an uncertain world,” Yermack says bluntly, noting that investors can’t reprice their shares. He says if boards want to insulate executives from movements in the overall stock market, they can use a benchmark rate of return, such as rewarding performance in excess of the S&P 500. “That would remove any need for repricing discussions in bad times,” he says.
That said, compensation committees need the flexibility to account for situations that arise out of management’s control and to measure them against expectations of performance, Becker says. Put another way, while performance may appear terrible, it could very well be the case that the management team went to incredible lengths to keep the employee population safe and the company afloat. “The outcome of any adjustments has to take into account the unique facts and circumstances of each company,” says Becker.
Or, more simply, when it comes to potential incentive plan changes resulting from the coronavirus, compensation committees can’t take out all the negatives and leave in all the positives.