Rewards Solutions Spotlight: Rethinking Your Incentive Strategy as the Market Turns

Published: May 2020

 

The Spotlight is a regular Q&A feature that showcases our people, their expertise and trending topics that are on top of our clients’ minds directly from the voices of our business leaders.

Laura Wanlass
Partner, Corporate Governance

Linda E. Amuso
Partner, Executive Compensation

Mark Behnke
Partner, Executive Compensation

Richard Harris
Partner, Executive Compensation

Todd Leone
Partner, Executive Compensation

Rethinking Your Incentive Strategy as the Market Turns

Within recent months, we have seen both the largest point increase and the largest point drop in the Dow Jones Industrial Average Index in U.S. history. Results from Aon’s second major COVID-19 pulse survey revealed that 48% of non- essential companies are making some kind of adjustment to their compensation programs. While struggling to balance the constituencies of corporate America, firms are also making real-time decisions to address the immediate needs of their people and business.

We recently had the chance to speak with Laura Wanlass, Linda E. Amuso, Mark Behnke, Richard Harris and Todd Leone, all leaders across our Rewards Solutions executive compensation and corporate governance business, to address the fundamental question: How do we manage compensation in this environment? This Q&A offers insights into what we are hearing from clients, key considerations for your business and principle approaches firms should be taking to effectively sustain their business.


What approach would you recommend for firms that are in a “wait-and-see” period?

The wait-and-see period is generally running through mid-year and varies per sector and location. The main approach we suggest that firms take is to develop a framework and process, be proactive with your constituencies and exhibit leadership. Track changes to your business model and run various scenario analyses to see how it will be affected based on various factors that may impact decisions like financials, governance, legal, regulatory and the CARES Act. Lastly, continue your conversations with the compensation committee and overall board. – Todd Leone

What is the most important message for boards and executive officers to understand right now?

My message to boards and executives is to slow down to speed up — in other words, it’s important to assess the potential actions that your organization is considering through the lens of all of stakeholders. While many ideas are percolating on all levels of management, firms should continue to leverage their current decision making in governance models to ensure they are taking a holistic view and that their ideas are being vetted and integrated in an impactful way. Additionally, communication teams should be prepared to share key updates directly to all employees and stakeholders on what change is occurring and the reason behind it. – Mark Behnke

Given the uncertainty of the economy and drop in share prices, how should companies view their short- and long-term incentive plans?

These are unprecedented times and in response, firms must think differently. To start, look past resetting your goals and towards making adjustments and exceptions. If your overall net performance is down dramatically, rewards and incentive plans will have to change. For long-term incentives, hold off on any drastic measures. Instead, focus on retention in key areas, track the impact of today’s environment on your business and continue to have conversations with boards and compensation committees. – Richard Harris

It’s also crucial to consider the use of equity with depressed prices and deferring annual cash incentives into equity. Companies should be modeling out different scenarios that include the minimum level of incentive, maximum and somewhere in between to fully understand the future impact on equity. – Mark Behnke

Should executives and directors be freezing or taking pay cuts?

Companies will have to evaluate where they are on the impact spectrum. If they are thriving, there may be no need to take action to temporarily reduce executive or director pay. However, if the business’ financial situation is dire, pay cuts may be necessary to conserve cash. To have an impact, actions should be meaningful and considered in the broader context for pay cuts or cash conservation. Oftentimes, executives and directors take cuts but receive equity grants as a replacement, therefore reducing the real or perceived pay reduction. If this is the strategy used, we encourage companies to be mindful of not providing a dollar-for-dollar replacement value given the fact that equity grants may be issued at unusually low prices, therefore delivering value well above the intended target or replacement. In addition, it is time to look at the upcoming grant cycle for the board and employees. If a company uses value-based approaches to size awards and the price is down, the pool requirements will increase, resulting in added pressure. With more rapid plan depletion, we might expect to see companies returning to shareholders earlier for equity plan amendments to replenish the pool. While the question of pay cuts seems simple, we believe the decision cannot be reviewed in a vacuum and should be examined systematically and holistically. – Linda E. Amuso

How has the COVID-19 pandemic impacted corporate governance and how should firms respond?

If there is anything that the COVID-19 pandemic or any economic downturn exacerbates, it’s the level of scrutiny applied to directors and a company’s governance practices. The context of everything you do becomes that much more important, especially from an investor perspective. Unsurprisingly, one of biggest points of criticism is executive compensation. Director pay will also be under tight scrutiny. ISS and Glass Lewis are not giving a free pass this season. To stay proactive, companies should engage with shareholders over the summer to incorporate any feedback they receive into fourth quarter board meetings. Now more than ever, it is critical for companies to be prepared to clearly and adequately justify every decision that they make. – Laura Wanlass

 


Additional Resources

For more insights on compensation trends and our survey products, please write to rewards-solutions@aon.com.

To read more articles on how rewards professionals can respond to the COVID-19 pandemic, please click here.

To download complimentary results of our latest pulse survey on setting the stage for a return to work and the new normal, please click here.

COVID-19 Disclaimer: This document has been provided as an informational resource for Aon clients and business partners. It is intended to provide general guidance on potential exposures, and is not intended to provide medical advice or address medical concerns or specific risk circumstances. Due to the dynamic nature of infectious diseases, Aon cannot be held liable for the guidance provided. We strongly encourage visitors to seek additional safety, medical and epidemiologic information from credible sources such as the Centers for Disease Control and Prevention and World Health Organization. As regards insurance coverage questions, whether coverage applies or a policy will respond to any risk or circumstance is subject to the specific terms and conditions of the insurance policies and contracts at issue and underwriter determinations.

General Disclaimer: The information contained in this article and the statements expressed herein are of a general nature and not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without the appropriate professional advice after a thorough examination of the particular situation.

 


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