Setting Up Compensation Plans When the Stock Price Is Depressed: Retaining your best talent may require adjusting for market volatility.

• Author: O'Toole, Kris

CEO succession planning has become increasingly critical given the current volatility within the talent market. It helps businesses and boards prepare for potential and imminent transitions, ensuring continuous and effective company leadership, particularly during challenging times. However, navigating the process can be complicated. Here are some questions boards should consider throughout the succession planning process.

Many companies are facing significant challenges developing and implementing compensation programs for 2023 owing to market volatility and continued macroeconomic uncertainty. Decreased valuations put pressure on dilution and equity grant strategies, and calendar-year-end companies are considering modifications to annual incentive designs to recognize uncertainty around the macro environment, interest rates and inflation.

Dilution levels for 2023 will likely be up 1% to 3% over pre-dislocation levels (i.e., 2021). In general, companies will begin to focus more on managing the share pool in addition to burn rate and stock-based compensation expense. Many newly public companies will need to manage burn rate within the evergreen provision (i.e., automatic share pool refresh). For dollar-value budgets, current valuations put pressure on share dilution. Companies can try to reduce their dollar-value budgets by pulling various levers, including:

* Reducing headcount.

* Reducing equity participation.

* Differentiating more based on performance.

* Lowering new-hire guidelines.

These levers are the common starting place for most companies. However, harder-hit companies can also consider other levers, such as lowering grant guidelines, moving to shorter vesting programs (with proportionately reduced grant values) or shifting to share-based guidelines.

For annual incentive designs, companies should consider whether widening performance ranges and/or increasing the prominence of operational, strategic or individual performance measures can help mitigate some of the uncertainty around goal setting. Compensation committees may also need to exercise more discretion than in a typical year to ensure that payouts align with performance and appropriately acknowledge external factors outside the company's control.

Organizations facing these challenges should focus on identifying, rewarding and locking in the next generation of leaders, differentiating "renters" (individuals focused solely on pay) from "owners" (those who are...