Coronavirus and Compensation: What should companies do now?

• Author: Borneman, John
• Position: COMPENSATION MATTERS

The sudden acceleration of the COVID-19 pandemic, with substantial economic damage to many industries, has companies scrambling to respond. The priorities, obviously, are to protect employees' health, first and foremost, and to manage the risk to the business. But after taking those steps, some companies will ask, "How do we appropriately motivate and reward employees now?"

For companies near the beginning of their fiscal year, their incentive goals have likely become impossible to reach already. Performance-based equity grants may be hopelessly unearnable. As for companies preparing to set goals for the upcoming fiscal year, they face enormous uncertainty, making it difficult to work with the regular incentive plan cycles. How should companies respond to this unprecedented situation?

There are considerations for companies and boards to consider moving forward.

Principles

As a starting point, companies should establish clear guidelines for changes to incentive plans in light of the pandemic. These should include:

* If you have already made grants and set your plans for the year, do nothing right now, other than agree that you will look at this issue over the coming weeks and months. Make sure to communicate this intent to your employees. Today there simply is not enough information on the depth and length of the economic impact for your company, so any decisions made now would likely need to be unwound.

* Expect liberal use of judgment and adjustments at year-end or a "reset" for the year, but likely not one that protects current incentives completely. This is a difficult environment where shareholders are losing money and employees are losing jobs, so compensation cannot be business-as-usual. Most companies in most industries should plan for lower than normal outcomes for the year, including the possibility of no incentive pay.

* Balance compensation decisions for executives with the experiences of the broader employee population. Executives may need to lead by example, taking reduced pay across multiple dimensions to help mitigate the impact on employees least able to weather the storm, and share in the pain felt by the organizations they lead.

* Maintain strong governance. For senior leaders in particular, shareholders will want a meaningful relationship between pay and performance. Use caution before leaning in on retention, and be careful about windfalls for limited populations if there is a stronger than expected recovery. Shareholder...