When the calendar flipped to January 2020, a strong sense of optimism filled the air as Americans were excited to kick off the new decade, or rather, the much anticipated “roaring ’20s.” The U.S. economy was booming and unemployment rates were at all-time lows. Companies across Corporate America were preparing for what could have been their strongest financial performances yet. Then, within a matter of a few short weeks, things took a drastic turn for the worst. The COVID-19 disease spread rapidly across the globe, impacting all facets of the world, including Corporate America. As a result, U.S. states enforced statewide shelter-in-place orders, businesses shut down, Americans filed for unemployment in mass numbers and companies rapidly adjusted all parts of their businesses.
As several months have passed since the start of the COVID-19 pandemic, Corporate America is still adjusting to the “new normal.” In particular, the governance practices of companies have come into the spotlight. While investors are well aware and understanding of the conditions that the current environment presents, they are also playing close attention to how companies have handled the crisis thus far and how they will continue to address it.
The COVID-19 pandemic can be classified as a “Black Swan” event in that it appeared unexpectedly and has led to systemic consequences. During times of uncertainty, the manner in which companies respond may be viewed as a reflection of their governance practices. Therefore, it is critical that boards and executive management teams address the pandemic in a well-thought-out and efficient manner. This segment highlights several areas of governance that have been impacted by the COVID-19 pandemic and how companies should approach them moving forward.
The COVID-19 pandemic has impacted every aspect of business, as it seems that each department across organizations was affected in some form or another. Of course, certain industries were harder hit than others. At the onset of the crisis, the airline and hospitality industries faced severe economic damage that left companies scrambling for ways to protect their employees, including the distribution of hardship bonuses or creation of corporate relief funds. As the crisis continued to unfold, other sectors such as retail, oil, food/restaurant and many more began to face economic hardship.
Despite the differences in circumstances across industries, the one common action that companies have taken to conserve cash is to make adjustments to executive pay, most notably executive salaries. According to Equilar data, among all U.S. public companies, 608* made some form of adjustment to executive salary, including reduction or elimination, deferral to a later date, exchange for equity or forgoing a raise. While many criticized the cuts as a public relations tactic, others praised the actions taken by these companies as a means to “share in the pain” faced by rank-and-file employees. Across Corporate America, there appears to be a general consensus that executives should take some level of salary cut to not only assist their employees, but also to avoid any potential reputational damage or backlash in the future.
Of course, the core interest around executive pay has been largely focused on actions taken to executive salaries through the course of the pandemic. However, the manner in which companies address executive equity and incentive plans will come to the forefront in the coming months. The majority of executive pay packages come in the form of equity, particularly for chief executive officers (CEOs). According to the 2020 Equilar CEO Pay Trends report, executive salaries make up just 10.5% of the median CEO pay packages across the largest U.S. public companies by revenue. Conversely, stock awards make up 53.6%, which is why public interest is expected to swirl around how companies address payouts to these awards or how they might adjust performance-based compensation.
Thus far, there have not been many common trends identified with respect to modifying performance-based compensation, as we’re currently in a “wait and see” phase. However, several companies have elected to defer or forgo annual bonuses for executives, and this is expected to continue in the coming months. In general, companies are moving away from performance-based awards and toward time-based awards until the dust settles and the landscape becomes a bit clearer.
For those companies making changes to performance-based plans, many have also elected to adjust metrics associated with executive long-term incentive plans. For instance, Equilar data indicates that more and more companies are moving to relative total shareholder return (rTSR) as a performance metric. This is particularly the case for companies that anticipate difficulty in setting any sort of operational or financial goals during the pandemic.
Regardless of any actions taken by companies, the key to effectively addressing these plans is the use of appropriate discretion and clear communication to investors. “Companies will most likely not be changing payouts for 2019 performance, but they should instead get ahead of the messaging,” said Shelly Carlin, Executive Vice President of the Center On Executive Compensation, during a recent Equilar webinar. “There is a need to pair the communication of 2019 compensation with the changing goalposts of 2020 compensation.”
As near-term strategy is adjusted to navigate through the remainder of the year, companies must be mindful that the previous criteria for performance plans may no longer be effective and relevant in this changing environment.
Overall, the impact of COVID-19 on executive compensation and incentives will likely paint an unprecedented picture. We’ll likely see an introduction of one-time design decisions, such as shorter performance periods. While a majority of these changes will be viewed as temporary to address the uncertainty in 2021, many may result in a permanent shift in the already complex executive compensation landscape.
Companies are moving away from performance-based awards and toward time-based awards until the dust settles and the landscape becomes a bit clearer.
With the COVID-19 pandemic causing disruption across the table, it is critical that boards and executive management teams protect the most valuable asset of their organizations—their employees. The shifting landscape in the current environment has forced companies to adapt to this new normal that has changed the way employees operate.
More than ever, corporate culture will play a pivotal role in the success of an organization. For instance, companies such as Facebook and Google have announced that their employees may work remotely through the remainder of 2020. Twitter went so far as to announce that employees may work remotely permanently. With many companies moving to remote workstations, it becomes more difficult to engage with employees on a personal level, and thus keeping morale high proves to be a challenge.
Therefore, boards must ensure that human capital management practices are revisited and implemented effectively across their organizations. This entails a number of initiatives, including tightening communication between managers and employees, setting clear goals and boundaries in a remote environment, ensuring employees have the tools and technology to be successful in a remote environment, laying the groundwork for crisis management, identifying the many risks associated with the disruptions in operations and much more.
Most importantly, companies must protect the health of their employees. For those companies that do elect to return to the office before the COVID-19 disease is completely contained, all necessary measures must be in place to ensure employees are protected. Among the many requirements, corporate leaders must ensure all workstations are sanitized adequately and regularly, temperature checks are in place and employees have the ability to distance themselves from others.
While there will be a learning curve to these changes, boards must prioritize the processes behind them. To optimize corporate performance, these practices should be implemented and closely monitored over the course of the coming months. There is no doubt that investors, customers, the public and several other key stakeholders will pay close attention to how companies respond during this crisis. It’s not out of the question that another crisis, whether that be a second or third wave of COVID-19 or another national emergency, is faced in the near future. Thus, it is essential that companies be proactive and address these issues head-on to avoid any legal or compliance ramifications. Sound governance policies will prove to be a key differentiator during this crisis.
Amit Batish is Editor-in-Chief of C-Suite and Manager of Content and Communications at Equilar.