Lessons Learned: What will be the most critical governance issues companies must address post-pandemic?

As the COVID-19 pandemic continues to cause business and economic uncertainty into the foreseeable future, corporate boards and senior management teams face unprecedented challenges. Through that lens, board compensation committees need to make prudent executive pay decisions regarding annual and long-term incentive (LTI) plan payouts and design changes. Committee decisions on incentive programs must reflect company and industry-specific issues arising from the pandemic. As such, it is important to consider a company’s specific facts and circumstances before landing on any one solution.

Most companies have adopted a “wait and see” approach on their 2020 annual incentive program and have not revised goals for the second half of the year. We expect that committees will evaluate discretionary adjustments to formula-based annual incentive payouts as a year-end decision. That will require the committee to exercise judgment that may take many forms. Some companies may find it challenging to neutralize the COVID-19 impacts due to second-order effects. Instead, a committee may approve annual incentive payout levels that reward for efforts against new/revised business priorities. Other companies may consider a total bonus pool that is affordable given the need to manage liquidity and the desire to emphasize an “all in it together” message.

Many committees are in discussions about potential modifications of outstanding performance-based equity awards tied to multi-year goals, with specific attention given to the accounting and disclosure implications of any such adjustments. We expect that many companies may ultimately decide to leave existing equity award cycles in place. Looking forward, committees are beginning to think in earnest about how their LTI program design may need to change for 2021 and beyond. Structuring LTI programs to focus on shareholder alignment will continue to be paramount. With that said, some 2021 LTI awards will be designed to address executive retention concerns, especially when executives have outstanding equity awards that are unlikely to pay out and therefore pose a low “buyout price” by a competitor. In those situations, the need to address practical issues may outweigh the external optics.

Each company and industry faces different pressures and recovery scenarios. A compensation committee will have to make executive pay decisions in the context of other business decisions, such as capital expenditures, workforce disruptions and employee welfare, and post COVID business strategy implementation. Ultimately, a committee may balance competing interests in making pay decisions that incentivize and retain critical executive talent during the remainder of the pandemic.