Do Responsible Special Awards Have to Be an Oxymoron? For boards, special awards can be a vital way to retain high-level talent in a competitive marketplace.

• Author: Jones, Blair

When it comes to retaining executive management, boards face multiple hurdles: an active talent market, volatile stock prices, mixed financial performance and go-forward economic uncertainty. As a result, boards have a growing interest in special equity awards to fend off recruiters and partially compensate executives for target pay that was not fully realized. Are special awards a good solution?

Tighter and more competitive candidate pools have led to higher executive pay. Meanwhile, poor market conditions have eroded much of the equity hold companies rely on to retain their existing talent. We analyzed S&P 500 companies from 2019 to 2021 and found that retention awards are increasing, notably since the start of COVID. Additionally, current board concerns over retention could mean the practice increases over the rest of 2023 and beyond.

Many clients ask if the retentive benefit of these special awards outweighs the potential criticism from investors and proxy advisors. Our experience suggests that effectively structured special awards can help retain talent under the right circumstances. Yet, they are not a panacea--and other recognition and rewards can often prove more meaningful. In determining whether a special equity award is the right decision, we encourage boards to consider the following questions.

Why is the company considering a special award? Is now the right time? The rationale for special awards takes many forms. With a compelling narrative, these awards can make a difference. Boards may look to special awards to promote "stickiness," maintain key managers through a strategic shift or leadership transition, recognize strong individual potential or defend against a strong talent market. Understanding the "why" behind the award can test the urgency of a special award, inform the award's design or uncover whether another avenue can achieve the same goal.

It is essential for boards to step back and ask what makes this particular time or situation unique, and how special awards might make a real difference. Do investors find the criticality of the individual executive's role apparent and worthy of a special award? Have the company's communications supported this narrative to help investors understand the unique situation?

Also, the company's recent performance and historical say-on-pay outcomes cannot be ignored. Investors have little patience for awards that look like forgiveness or increased pay without additional impact...