Compensation consultants are urging comp committee members to add another discussion item to their agendas for the summer meeting: What happens if the annual incentive plan pays out at the end of the year?
Unemployment in the US has reached levels not seen since the Great Depression, which observers say underscores the disconnect between corporate performance and potential outcomes for individual workers. As a result, if annual incentive plans hit 2020 targets and ultimately pay out for executives, directors should anticipate that they may see pushback from workforces as well as some investors, experts say.
Plans with relative metrics are a prime contender for contention, say comp experts.
“Let’s assume that TSR was negative for the year but was less negative than the peer group,” says Peter Lupo, senior managing director and head of the Atlantic region for compensation consulting firm Pearl Meyer. Pointing to companies that use TSR as an annual incentive plan metric, he says “There’ll be a payout.”
“That’s always been true, but for this particular period, if the stock market suffers for an entire year, there will be lots of examples of executives’ being paid for negative TSR,” he adds. “That’s the nature of relative performance.”
Lupo says that institutional shareholders and proxy advisory firms will understand this. But, he says, “I’m not sure if the retail investor or the employee would feel sympathetic to an executive getting paid when the company lost a lot of value.”
Lupo says he believes compensation committees are taking a more holistic view of the downturn compared to the Great Recession.
“I’m seeing a lot of healthy conversations about compensation committees saying, ‘What is the impact on our stakeholders if we have a big round of layoffs?’ And I think that’s a very healthy view that companies are taking right now,” he says. “‘How does this impact the shareholders, the employees, our reputation, and our culture?’ We didn’t see those conversations happening in ’08 or ’09.”