Compensation Advisory Partners, Equity Methods and Board Prospects partnered together to conduct a pulse survey on the impact of COVID-19 on compensation plans in March 2020. The survey provided insights to participants on how companies treated or planned to treat compensation programs in light of the business interruptions caused by COVID-19. The survey was open between March 25th and April 1st, and as such, results are indicative of early decisions or thinking around compensation-related actions. A total of 160 companies participated and the sample included a balanced mix of companies in terms of size and industry. We plan to conduct a follow-up survey in August to determine the thinking around incentive plans at that time. If you are interested in participating in our follow-up survey, please email us at [email protected].

Summary Highlights

• 20% of respondents that already approved annual incentive plans, indicated that they were not planning to make a COVID-19 related adjustment at the end of the year.
• Similarly, among companies that already approved long-term performance plans, 25% indicated that they were not planning to make a COVID-19 related adjustment at the end of the performance period.
• Of respondents that were still in the process of approving their annual incentive plans, 20% were implementing plan changes and 15% indicated that COVID-19 impact would be addressed at the end of the year.
• Of respondents that were still in the process of approving their long-term incentive plans, 15% were implementing plan changes (such as mix changes, reduction in equity values, considering multiple tranches of awards throughout 2020, etc.) and 25% indicated that COVID-19 impact would be addressed at the end of the performance period.
• 68% of respondents indicated that they are considering at least one future change to incentive plans due to the possible lengthy shock to the economic system.
• At the time of the survey, many companies indicated that they have implemented hiring freezes (~40%) or salary/hourly rate freezes (~25%). Very few companies (less than 10%) have implemented reductions in pay, furlough or layoffs.

Detailed Findings around Annual Incentive Plans

Most respondents (118 of 160) had already approved their annual incentive plans for 2020 at the time of the survey. Almost 80% of the 118 companies did not consider COVID-19 when approving plans; 14% of the 118 companies determined that the best approach was to assess results at the end of the year and determine if retroactive adjustments to performance targets and incentive payouts were warranted; and only 6 of the 118 survey respondents changed their annual incentive plan approach to factor in the effect of COVID-19 on their financial goals, with some of these affirmatively deciding to revisit goals later in the year or quarterly to determine if any adjustments are needed.

Among the companies that did not yet approve annual incentive plans (31 of 160), 65% said that they were still unsure on how COVID-19 will impact the plan. Approximately 20% said that they are planning to make changes to the plan and 15% will make a determination at the end of the year when the impact is clearer.

Detailed Findings around Long-Term Incentive Plans

Approximately half of the companies (86 of 160) had already granted their long-term incentive awards. Over 85% did not consider COVID-19 implications when granting awards and the other 15% of companies changed the program to address potential impacts, for example: added provisions to exclude impact of the virus, lowered performance targets, or approved wider ranges around target goals.

62 surveyed companies have not granted long-term incentive awards yet. 40% of companies were not planning on making any changes to the methodology used to determine size of equity grants due to the stock price declines that occurred in March; 20% of companies had cash-based awards and did not need to make changes; 15% of companies made modifications to their approach to long-term incentive awards; and 25% of companies were still considering alternatives and what actions to take.

Future Incentive Plan Changes

108 companies indicated that they are considering at least one change to incentive plans due to the possible lengthy shock to the economic system; top three changes considered included:

• Adjusting metrics to emphasize new priorities in the business (e.g., free cash flow) – 22% of responses
• Widening threshold, target, and stretch goal levels to smooth payouts – 17% of responses
• Increasing the reliance on relative performance metrics – 13% of responses