Meridian Compensation Partners’ year-end study reveals that in spite of much talk about potential changes to incentive compensation in response to the COVID-19 crisis, a majority of companies made no changes in 2020 to annual or long-term incentives due to the impact of COVID, and 2021 design changes are anticipated to be modest. The likelihood of executive pay changes appears to vary significantly by the industry, and whether COVID has had a particularly lasting effect on those businesses.
Meridian’s unique year-end cross-industry study of 280 client companies reveals that a majority of companies did not alter their annual or long-term incentive (LTI) arrangements mid-year in 2020, preserving their original pay and performance relationship. However, nearly half of companies expect increased discretion in the final annual incentive determination. Furthermore, most companies are implementing only modest changes to incentive designs for 2021, if any.
Five Key Takeaways
The survey revealed a number of interesting insights on incentive compensation trends – below are five key takeaways:
■ Only one in four companies (24%) made mid-year changes to their annual incentive. However, nearly half of companies (46%) expect greater use of discretion in final funding of 2020 incentives. Of the companies considering the use of discretion, all are projecting payouts that are near or below target after discretion is applied.
■ 2020 annual incentive funding will likely average near target when viewed across all companies – 32% of companies anticipate near threshold (or zero) funding and 24% project funding significantly above target. Funding will vary widely depending on the unique company circumstances, especially how COVID may have impacted the specific industry.
■ A majority of companies are considering modest changes to their 2021 annual incentive in response to continued business uncertainty – The most common changes under consideration are flattening of the performance slope (61%) or adding/increasing the use of non-financial metrics (42%).
■ Very few companies (7%) have made changes to outstanding performance share awards – While some additional companies may make adjustments to outstanding performance share cycles in the future, it is likely to remain a minority practice.
■ Nearly 80% of companies anticipate no material changes to LTI design for 2021 – Among those making changes, the most common action is a greater use of time-vested equity or the introduction of new metrics.
The survey tapped into Meridian’s extensive client network to better understand COVID’s impact on 2020 incentive actions and anticipated 2021 incentive designs. Meridian gathered information from Meridian consultants representing 280 U.S. and Canadian client relationships over the last two weeks of December, in order to capture actions from year-end meetings and to understand key trends as we head into 2021.
* * * * *
This report is a publication of Meridian Compensation Partners, LLC, provides general information for reference purposes only, and should not be construed as legal or accounting advice or a legal or accounting opinion on any specific fact or circumstances. The information provided herein should be reviewed with appropriate advisors concerning your own situation and issues.
Corporate Governance Consulting