This session was sponsored by Pay Governance, and featured Jon Weinstein, managing partner. David Shaw, Directors & Boards’ publishing director, hosted.
Compensation during recovery from COVID-19 will be under great scrutiny, whether it’s from actions by executives and directors to reduce their own pay, short-term and long-term incentive considerations, or the recalibration of metrics for near-term incentives. This scrutiny will come from both internal and external sources as proxy advisers provide direction and boards take a second look at compensation models.
A major reason complicating compensation strategies in the face of this crisis, compared to nearly any other in history is “timing,” says Jon Weinstein, managing partner for Pay Governance. “If we think about several crises before this, they often occurred in September or October. And the timing was such that calendar-year companies had a few months to think about how they might approach pay for the following year.
“But this year, the pandemic and subsequent high levels of unemployment and stock market depreciation occurred in March, right after companies had established incentive plans for the year, right after they had made their equity grants for the year. So there was no time to react.”
This will certainly be a difficult time for boards. Weinstein says executives have had an opportunity to demonstrate empathy toward the larger stakeholder base that he refers to as “unprecedented.”
There are more than 550 companies that have reduced executive C-suite salaries. Most have called these reductions “indefinite.” Weinstein believes that while the move may have been made to free up some cash in the corporation, in some instances it was done as an awareness of the environment or to signal, “We are asking employees to tighten their belts or are removing pay or jobs from this company and everybody must contribute to that.”
But CEOs and other taking a pay cut should be mindful of looking for pay in arrears. While the reductions show a sensitivity to the situation, a look to be made whole later will “undermine the intention of the action to a certain degree.”
As corporate performance expectations and compensation metrics are adjusted, boards will have to be aware that proxy advisers have released strong direction on how to be sure shareholders are up to speed on what’s happening at the company.
“Both ISS and Glass Lewis have encouraged companies to issue contemporaneous disclosure with any executive compensation program changes instead of waiting until next year’s annual report or proxy statement,” Weinstein says. He says companies usually disclose midyear adjustments in the next year’s proxy. ISS and Glass Lewis want boards to file an 8K or a press release outlining any changes.
And while ISS largely sticks with their established measures and expectations for performance and compensation, Glass Lewis has put compensation committees on notice that they will be held to the same standard as any other year. Weinstein says, “[Glass Lewis] basically said, ‘Look, we think we’re going to see a lot of fishy business.’”
While keeping proxy advisers, shareholders and the broader community of stakeholders satisfied, compensation committees are still the stewards of talent and most managers are going above and beyond to help their companies survive the current crises. It’s important to keep those executives motivated to stick with the firm during what could be an extended period of recovery.
“This has been a traumatic experience and many of them have had to work under conditions that they never imagined,” Weinstein says. “I think that management and boards will be very supportive of certain efforts to recognize employees for their service.
“I think we will see — because the proxy advisers have basically demanded it — a record number of midyear disclosures on compensation. Companies know that if they’re taking actions, which they feel are very important in terms of talent preservation and motivation, they these could be perceived negatively by the proxy advisers,” he says, but boards will still file the disclosures in hopes of a better relationship in the following proxy season.
Making predictions on how compensation will shake out after the economy reopens and recovers, is largely impossible as this point, Weinstein says. “But that being said, in terms of some things, I think, we are going to see discretion and business judgment having an unprecedented impact on incentive plan outcomes this year.”