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BOARD MEMO 2021

Compensation disclosure at the top of proxy season agenda

Maj Vaseghi

Maj
Vaseghi

Partner, Silicon Valley

Lori
Goodman

Partner, New York

The impact and ongoing uncertainty surrounding COVID-19 has caused compensation committees to revisit their companies’ short- and long-term incentive award programs. 

Some are considering options including adjusting quantitative metrics (and potentially moving to a targeted range for financial metrics rather than a single number), increasing the weighting of qualitative goals for performance-based awards, and utilizing relative rather than absolute performance indicators (e.g., relative total stockholder return) that reward progress compared to a company’s peer group or industry (thereby dampening the impact of the pandemic). However, any committee thinking of implementing more qualitative measures or discretion for performance-based awards should exercise caution; the proxy advisory firms may take an unfavorable view if they see them as disproportionate to prevailing peer group trends or presenting a pay-for-performance misalignment. While some proxy firms have indicated they may be more forgiving in the circumstances, companies anticipating changes to their incentive award programs should work closely with their compensation consultants. 

Alongside this, companies should think carefully about how to explain executive compensation decisions in their proxy statement’s compensation discussion and analysis (CD&A) disclosure in the context of the compensation committee’s overall philosophy in response to COVID-19. This is particularly important for committees that have exercised discretion, revised performance metrics or otherwise altered compensation in a way that could be viewed as disproportionate or resulting in an ex-post facto windfall to executives. Compensation committees that have not already done so should develop a process and framework for reviewing the appropriateness of any changes in determining 2020 annual incentive payouts. This process and framework will allow companies to explain the rationale behind the compensation committee’s decisions in the CD&A. For example, the CD&A may discuss whether the committee reviewed the company’s performance relative to its peers, its ability to meet cost-cutting measures or liquidity objectives, or its ability to stage a recovery or prepare for one when approving compensation changes.

More generally, companies that have implemented workforce-related cuts, broad-based salary reductions or other similar events affecting their workforce in response to COVID-19 are likely to see increased scrutiny of their executive compensation decisions and should develop a strategy to thoughtfully reflect this in their CD&A. Although a company’s CD&A technically is required to discuss only named executive officer compensation, we recommend addressing general COVID-19-related workforce events this season in order to provide greater context for any compensation-related decisions made with respect to the named executive officers, demonstrate alignment with the company’s overall compensation strategy, and, if applicable, highlight cost-cutting measures in the wake of the pandemic.

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