More than six months have passed since the COVID-19 pandemic began. In February, American businesses were hit hard by shutdowns, shifting demand, operational disruptions, and significant new challenges for employee health and safety. Many S&P Composite 1500 companies responded with changes to their compensation programs for executives and employees. Initial pay actions in March, April and May focused on conserving cash, mainly through salary cuts. Over the summer, companies adapted, and pay actions began to focus on annual and long-term incentive plans.

Public filings in September and October offered the first detailed look at how U.S. public companies adjusted their executive compensation plans in response to COVID-19. Public companies with fiscal year ends (FYEs) on or near June 30 recently filed their proxy statements, which included robust discussions of the impact of COVID-19 on 2020 executive compensation decisions and plans for 2021. Of the S&P Composite 1500 companies – which Compensation Advisory Partners (CAP) has been closely tracking – 65 companies with FYEs between May 30 and July 3 filed their annual proxy statements by October 7. Of the 65 companies, 28 – or 43 percent – announced changes to their outstanding and go-forward incentive plans because of COVID-19. Approximately 60 percent of the 28 companies had responded at the start of the pandemic with immediate human capital actions, including temporary reductions to executive base salaries, and adverse broad-based employee actions.

It is too early to say whether actions taken by the June FYE companies are indicative of trends we will see when most companies file their proxy statements in the spring of 2021. From an industry-sector standpoint, the June FYE companies show significant representation from Information Technology (28%), Industrials (15%), and Consumer Staples (15%). While not a completely representative sample, this group of companies still provides an interesting early look at executive compensation responses to COVID-19 beyond annual pay reductions.

The majority of the 28 companies that reported COVID-19-related pay actions adjusted both their annual and long-term incentive plans. About 85 percent of the companies made changes to their annual incentive plans, and 75 percent made changes to long-term incentives. Twenty-two of the companies took more than one incentive action.

Annual Only(n=7)25%Both(n=17)61%Long-term Only(n=4)14%Annual and Long-Term Incentive Actions in Response to COVID-19 (n=28)Number of Incentive Actions per Company2261

Annual Incentives

Of the 28 companies, 24 made changes to their outstanding and/or go-forward annual incentive plans. The most common changes were modifying the performance period, exercising discretion to determine award amounts, revising the payout scale, delaying goal-setting and adding or changing performance metrics.

973111423642139665211Revised Outstanding PlanRevised Go-Forward PlanDeferred PayoutReset GoalsCanceled PlanAdded / Changed Metric(s)Delayed Goal-SettingRevised Payout ScaleAdjusted Performance PeriodAnnual Incentive Plan Changes in Response to COVID-19

Prevalent annual incentive actions are discussed below.

Adjusted Performance Period

Several June FYE companies adjusted the performance period for an outstanding plan. For these companies, COVID-19 only impacted fourth-quarter results, so most of their 2020 fiscal years were business as usual. In go-forward plans, shorter performance periods are intended to focus executives and employees on immediate priorities, and to recognize that goal-setting will be difficult because of COVID-19.

Action

# of Companies

Outstanding Plan

Shortened the performance period to exclude the pandemic.

9

Go-Forward Plan

Bifurcated annual performance periods.

2

Set quarterly goals.

2

Use of Discretion

Eight companies applied discretion to outstanding incentive awards. The disclosed rationale for the use of upward discretion was to recognize the extraordinary efforts of executives and employees who contributed to companies’ COVID-19 responses, and to recognize performance before COVID-19 hit.

Action

# of Companies

Outstanding Plan

Applied discretion to increase annual incentive funding and awards.

7

Used downward discretion to reflect the negative impact of COVID-19.

1

Revised Payout Scale

Revisions to payout scales for outstanding awards were made primarily to prorate awards in conjunction with adjusted performance periods, as discussed in “Adjusted Performance Period.” Payout scales were revised in go-forward plans for a number of reasons: to widen the performance curve to reflect the difficulty with goal-setting, to reduce maximum payouts for cost containment, and to implement a payout floor and increase the award maximums to incentivize superior performance.

Action

# of Companies

Outstanding Plan

Revised payout scales in conjunction with shortening performance periods to remove the impact of COVID-19. The payouts were prorated based on how much the performance periods were shortened.

3

Go-Forward Plan

Widened performance curves.

1

Reduced maximum annual incentive award to be 150 percent of target, down from 200 percent of target.

1

Added a payout floor, increased maximum payout, and adjusted corporate and business unit award multipliers.

1

Delayed Goal-Setting

Six companies delayed goal-setting for go-forward plans. The rationale is to allow time for more information to predict financial performance.

Action

# of Companies

Go-Forward Plan

Delayed goal-setting in conjunction with breaking performance periods into smaller units.

3

Delayed goal-setting to have more accurate information for forecasting.

3

Added/Changed Metrics

Several June FYE companies changed performance metrics for their annual incentive plans to move away from financial measures. The shift to operational measures illustrates that companies are opting to focus executives and employees on drivers of financial performance, which may provide clearer line of sight or may be easier to forecast in unpredictable times. Similarly, the shift to strategic and individual metrics may allow for more discretion in payout determination and recognizes the importance of non-financial goals at this time.

Action

# of Companies

Outstanding Plan

Changed metrics for outstanding awards to focus on near-term priorities, and company health and well-being.

1

Go-Forward Plan

Adjusted annual performance metrics, including shifting to operational, strategic, and individual performance.

4

Long-Term Incentives

Of the 28 companies, 21 made changes to their outstanding and/or go-forward long-term incentive plans. All but four of the companies that adjusted long-term incentives also adjusted annual incentive plans. The most common changes were modifying the performance period, revising the payout scale, changing the long-term incentive vehicle mix, changing metrics for performance awards, and delaying goal-setting.

76W55105512111055Delayed Goal-SettingChanged Performance MetricsChanged LTI Vehicles Revised Payout ScaleAdjusted Performance PeriodRevised Outstanding PlanRevised Go-Forward PlanLong-Term Incentive (LTI) Plan Changes in Response to COVID-19

Modified the Performance Period

As with annual incentive plans, modifying the performance period was the most prevalent long-term incentive plan change. CAP predicts goal-setting will remain as a key challenge for incentive plan design for 2021 and beyond. The COVID-19 pandemic hurt many companies and helped others (e.g., consumer staples), resulting in highly unusual results for 2020. To address future uncertainty during goal-setting, breaking performance periods into smaller periods may become more common until economic conditions stabilize.

Action

# of Companies

Outstanding Plan

Modified the performance period for outstanding awards, including omitting the quarter negatively impacted by COVID-19. With that change, some companies also prorated the award amounts commensurately.

7

Go-Forward Plan

Divided the award period into shorter periods for purposes of goal-setting and award calculation.

3

Shortened the three-year performance period to two years.

1

Changed the goal-setting approach to include a cumulative goal.

1

Revised the Payout Scale

Revisions to past payout opportunities and maximums were made to prorate awards in conjunction with shortened performance periods, or to cap the payout and conserve cash.

Action

# of Companies

Outstanding Plan

Decreased the payout scale for outstanding awards in conjunction with omitting quarters negatively impacted by COVID-19. Prorated the awards commensurately (e.g., if performance were measured over 11 quarters instead of 12, the award would be prorated by 11/12).

4

Revised award payouts to the maximum based on performance in quarters not negatively impacted by COVID-19.

1

Capped the maximum payout at target.

1

Go-Forward Plan

Awarded grants at target regardless of performance.

1

Increased maximum payout.

1

Changed Long-Term Incentive Vehicles

Ten companies adjusted the long-term incentive mix for upcoming awards. The most common change was to add time-vested vehicles or to increase the percentage of time-vested vehicles overall to increase retention and recognize the difficulties of goal-setting during the pandemic.

Action

# of Companies

Go-Forward Plan

Added time-vesting vehicles or increased the percentage of time-vested vehicles in the overall mix.

6

Added stock options to the 2021 fiscal year grant.

2

Eliminated stock options.

2

Not granting equity.

2

Note: Two companies took multiple actions.

Changed Performance Plan Metrics

Given the impact of COVID-19 on U.S. companies, changing performance measures to reflect new business realities has not been a surprising development. Five companies with June FYEs adjusted their long-term performance measures. CAP expects to see more changes in performance measures in go-forward performance plans as companies file proxy statements.

Action

# of Companies

Go-Forward Plan

Adopted relative performance measures, which mitigate the risk of goals being missed because of market events beyond management’s control.

2

Added strategic metrics to focus management on COVID-related priorities.

2

Eliminated a more complicated return measure to focus on revenue and profitability.

1

Delayed Goal-Setting

Five companies delayed goal-setting for future awards. Delaying annual grants or choosing to set targets in the second quarter could provide companies with flexibility to set more accurate and realistic performance goals.

Action

# of Companies

Go-Forward Plan

Made annual grants but delaying goal-setting under the grants until there is more predictability surrounding COVID-19 and its impact.

3

Delayed making annual grants.

2

Special Awards

Four companies with June FYEs provided special awards to executives. FedEx and Nike made special awards to replace annual and long-term incentive awards that were not paid because of COVID-19. Tapestry and Herman Miller provided special grants to incentivize executive performance. CAP expects to see more special awards in the future.

Company

Revenue ($M)

Position

Grant Date

Award Value ($000s)

Award Type*

Vesting

FedEx Corporation

$71,490

CEO

06/15/2020

$14,160

SOs

Ratable 4-year

COO

$3,981

NIKE, Inc.

$37,337

CEO

06/01/2020

$6,750

Cash

Immediate

Other NEOs

$2,533 (avg.)

Tapestry, Inc.

$4,961

All NEOs

08/17/2020

$200 – $500

PSUs

Cliff 2-year

Herman Miller

$2,487

Leadership, including NEOs

07/14/2020

Not disclosed

Premium SOs

Ratable 3-year

* SOs are stock options; PSUs are performance share units.

Looking Ahead

CAP expects companies to make increasingly more changes to their executive compensation programs to address the impact of COVID-19, market volatility and the challenges of credible long-term forecasting.

Annual Incentive Plans

  • Use of informed or structured discretion to determine payouts.
  • New or increased weighting on operational, strategic, and individual performance metrics. These may be incorporated as environmental, social and governance (ESG) metrics, which provide a more holistic view of business performance and consider different stakeholders.
  • Use of wider performance scales around target goals, which may lead to less volatility in payouts.
  • Delay of goal-setting to improve accuracy.
  • Use of shorter performance periods to address goal-setting difficulties.

Long-Term Incentive Plans

  • Increased use of time-based restricted stock/units for retention. CAP still expects at least 50% of long-term incentives to be performance-based, given the long-standing expectations of proxy advisors and major investors.
    • Companies may exclude the chief executive officer or named executive officers from the shift to time-based equity.
  • Use of relative performance measures (primarily total shareholder return), or an increase in the weight of relative measures.
  • Delay of goal-setting to improve accuracy.
  • Use of shorter periods for performance-based long-term incentives to lower the risk of the overall incentive program.

Bertha Masuda and Bonnie Schindler discussing the use of ESG metrics in private companies.

CAP partners Bertha Masuda and Susan Schroeder discuss essential components to building robust long term and short term incentive plans as well as what companies overlook when developing incentive plans for their employees

Stock price growth? Meeting the business plan? Beating external expectations? Long-term stability? Companies must consider success across multiple fronts, and boards of directors play a role in defining success by working with management to set the strategic plan and by overseeing how the company progresses toward the achievement of the plan.

Incentive plans are foundational to motivating the senior management team to achieve the goals of a company’s strategic plan. Determining how to best measure and reward performance against these goals is key to designing effective incentive compensation programs that ensure proper alignment of pay outcomes with various degrees of suc- cess against the plan.

To determine how board members measure performance and incorporate it in their company’s incentive compensation plans, Corporate Board Member and Compensation Advisory Partners partnered to survey more than 250 public company directors. In this report, we present our findings and share our perspective on these key issues.

Download the PDF to read the full report.

Short-term, cash incentives continue to dominate the incentive-pay landscape at nonprofit/government organizations according to salary and compensation survey research released in May 2018 by WorldatWork in partnership with Vivient Consulting.

“U.S. nonprofit organizations continue to make significant use of short-term cash incentives to motivate and reward employees. Long-term incentive (LTI) use is still a little-used compensation element, but prevalence increased modestly in 2017 and may signal an emerging trend,” said Bonnie Schindler, partner and co-founder of Vivient Consulting.

Additional Key Findings from the WorldatWork-Vivient Survey

Nonprofit/Government Compensation Survey Results:

  • Nonprofit and government organizations favor simplicity by offering a limited number of STI plans. Of the respondents, more than 75% reported having three or fewer STI plans in place.
  • By far, the most common type of STI plan at nonprofit and government organizations continues to be an annual incentive plan (AIP). However, prevalence of AIPs dropped to 77% in 2017 from 86% in 2015

The compensation survey Incentive Pay Practices: Nonprofit/Government was conducted in December 2017 among WorldatWork members. The salary and pay survey is the third edition for nonprofit/government entities with the last report data released in 2015.

Short-term, cash incentives continue to dominate the incentive-pay landscape at private companies according to salary and compensation survey research released in May 2018 by WorldatWork in partnership with Vivient Consulting.

“Spending on short-term incentives (STIs) increased modestly at private companies from 2015 to 2017, which reflects the tight labor market and competition for talent,” said Bonnie Schindler, partner and co-founder of Vivient Consulting.

Additional Key Findings from the WorldatWork-Vivient Survey

Private Company Compensation Survey Results:

  • Spending on STIs increased to 6% of operating profit at median, from 5% in prior years.
  • The prevalence of exempt, salaried employees and nonexempt (salaried or hourly) employees included in annual incentive plans increased in 2017. The biggest jump occurred for nonexempt employees. Approximately two-thirds of nonexempt employees are eligible for annual incentives, up from half in 2015.
  • The majority of respondents consider their annual incentive plans to be only moderately effective, with plan communication, the level of discretion, goal setting and the risk-reward trade-off noted as areas for improvement.

The compensation survey Incentive Pay Practices: Privately Held Companies was conducted in December 2017 among WorldatWork members. The salary and pay survey is the fifth edition of the compensation report produced for privately held companies with the last report data released in 2015.

Short-term cash incentives continue to be popular motivational tools at U.S. privately owned companies, nonprofits and government organizations (NGOs), according to recent research conducted by Vivient Consulting and WorldatWork. The 2017 executive and employee compensation research spotlights short- and long-term incentive pay practices and is unique in its focus on entities that are not publicly traded.

Vivient and WorldatWork surveyed WorldatWork members in late 2017 and published the results in May 2018 in two reports:

This 2017 compensation survey provides a long-term view of typical incentive pay practices at private companies and NGOs as well as a snapshot of current and emerging pay practices and compensation trends.

Typical Incentive Pay Practices

What do typical incentive pay practices look like at non-publicly traded entities? Nearly all private, for-profit companies provide some form of short-term incentive (STI), with annual incentive plans (AIPs) being the most common type. Other STIs include:

  • Discretionary bonuses
  • Spot awards
  • Team/small-group incentives
  • Project bonuses
  • Profit sharing.

The survey excludes sales and commission plans. Although not as prevalent as at for-profit counterparts, some form of short-term incentive compensation is used by 80% of the NGOs represented in the survey. And short term incentives at nonprofit organizations have increased in the decade that the survey has been conducted, as these organizations have to compete for talent with the for-profit sector.

On the long-term incentive (LTI) side, more than half of private companies provide LTIs, with multi-year, cash-based performance awards being the most common vehicles. Other types of long term compensation incentives include:

  • Real equity, which includes restricted stock and stock options
  • Phantom equity, which includes phantom stock and stock appreciation rights (SARs).

Long term incentives at private companies continue to be primarily reserved for executives. Private companies reported using LTIs for retention, alignment with long-term goals and market competitiveness. At NGOs, longer term pay incentives continues to be rare, but prevalence increased to 24% in 2017 from 16% in 2015. Future compensation research will determine whether this trend continues.

96%54%80%24%0%20%40%60%80%100%120%Short-termLong-termShort-and Long-Term Incentive Pay PrevalencePrivateNonproft/gov

Incentive Pay Trend: Increase in Short Term Incentive Spending

Private companies are spending more on STIs to motivate employees and compete for talent in a tight labor market. Private-company spending on short term incentives increased to 6% of operating profit at median from 5% in prior years. In addition, spending on STIs increased to 3% (from 2% in 2015) at the 25th percentile. At the 75th percentile, spending increased to 14% from 12% in 2015.

At NGOs, compensation survey respondents provided nonprofit estimated spending on short term incentives as a percentage of net organizational surplus (revenue minus expenses). In contrast to private companies, NGO spending on STIs slightly dropped at the median to 2.3% in 2017 from 3% in 2015. Similarly, reported spending by NGOs at the 75th percentile dropped to 9% in 2017 from 10% in 2015. However, participants expected STI spending as a percentage of their operating surplus to increase to 3.5% at median in 2018, as the budgetary outlook for 2018 appeared positive.

12%5%2%1%1%1%14%6%3%9%2.3%1%14%6%3%10%3.5%1%0%2%4%6%8%10%12%14%16%75th PercentileMedian25th Percentile75th PercentileMedian25th PercentilePrivate, For-ProftNonproft/GovernmentSTI Spending as a Percent of Operating Proft/Budget201520172018 (Proj.)

Incentive Pay Trend: Increased Annual Incentive Plan Eligibility

At private companies, the prevalence of exempt, salaried employees and nonexempt (salaried or hourly) employees included in Annual Incentive Plans increased in 2017. The biggest jump occurred for nonexempt employees. About two-thirds of nonexempt employees are now eligible for annual incentives, a significant increase from half in 2015. Annual incentive plan eligibility is now offered organization-wide at most private companies, reflecting the tight labor market and increased competition for talent. Eligibility for incentive plans is good news for employees who are now able to earn annual incentive awards and increase their overall compensation levels based on performance.

For nonprofit and government organizations, AIP eligibility increased for all organizational levels from manager/supervisor and above. Annul Incentive Plan eligibility decreased slightly for exempt employees and remained stable for nonexempt employees. The increased AIP eligibility for supervisory and management positions and above at NGOs indicates that these entities are using their limited annual incentive dollars within their salary and compensation budgets to compete with for-profit peers for top managerial and executive talent.

Incentive Pay Trend: Annual Incentive and Long-term Incentive Targets as a Percentage of Salary

For the first time in the Vivient/WorldatWork Private Company & NGO Compensation Survey’s history, participants were asked to provide typical AIP and LTI targets as a percentage of salary for broad position levels. For-profit, private companies that provide Annual Incentive Plans offer CEOs a median target award of 80% of salary. Target AIP awards decrease by approximately half for each broad position band below CEO. NGOs that provide Annual Incentive Plans tend to offer more modest target awards than for-profit counterparts.

Target Annual Incentive Award at Private Companies & NGOs

(Percent of Salary)

For-Profit Private

NGO
CEO 80% 40%
Other Executives/Officers 40% 25%
Managers/Supervisors 15% 10%
Exempt Salaried 10% Insufficient data

Nonexempt Salaried and Hourly

5% Insufficient data

NOTE: Excludes companies that do not offer Annual Incentive Plans

For Long Term Incentive Plans, private companies reported target long-term awards as a percentage of salary for executives. Data specific to private companies is difficult to find in published compensation surveys, which shows the value of this survey to WorldatWork members. The survey findings indicate that private companies offer an annual Long Term Incentive benefit that is approximately equal to the Annual Incentive Plan opportunity. This rule of thumb provides private companies that offer long-term incentives with a starting point for evaluating appropriate LTI levels for executives.

Target Long Term Incentive Awards at For-Profit Private Companies

(Percent of Salary)

CEO 80%
CEO’s Direct Reports 50%
Vice Presidents/Officers 30%

NOTE: Excludes companies that do not offer Long Term Incentive Compensation

Incentive Pay Trend: Concerns About Annual Incentive Plan Effectiveness

Both private, for-profit companies and nonprofits reported a downward trend in the effectiveness of their Annual Incentive Plans. The risk-reward trade off was the biggest AIP weakness noted at both private companies and nonprofit/government organizations. This indicates that award payouts may not be adequately calibrated with results in terms of employee performance. For example, outstanding performance may result in only a moderate increase in the annual incentive payout. Conversely, below-target performance may result in a disproportionately small decrease from the targeted award level.

The level of discretion also was cited as a common weakness in Annual Incentive Plans, especially at private companies. The survey asked participants to provide information on strengths and weaknesses in the use of discretion. Private companies cited communication of the rationale for discretion, and the perception of fairness and consistency across the organization as the biggest weaknesses in the use of discretion. In contrast, NGOs do not seem to use discretion as much as private-company counterparts and did not report on specific weaknesses in its use. This lack of response may indicate that NGOs may see the need for a greater role for discretion in their AIPs, as it is more difficult to quantify performance at these organizations.

Incentive Pay Trend: More Cash-Based and Less Real Equity for Private-Company Long Term Incentives

With respect to Long Term Incentives, LTI performance awards — long-term cash plans, performance units and performance shares — continue to be the most popular vehicles at private companies. Because private companies do not have equity that is traded and valued on a stock exchange, cash-based plans are simpler and less expensive to design, operate and administer. The use of real equity decreased in 2017 after an uptick in the use of stock options in the 2015 survey. Private companies appear to now favor simpler, cash-based long-term incentives to avoid equity-related complexities such as valuation, liquidity and the dilution of ownership.

Incentive Pay at Family-Owned Private Companies

Nearly one-third of the private-company sample was family-owned, and these firms mirrored the broader private-company sample results although with some key distinctions:

  • Higher short term incentive spending at family-owned companies
    • Family-owned companies reported higher spending on short term incentives as a percentage of operating profit relative to the broader sample. Family-owned companies spent 10% of operating profit at median in 2017 and project an 8% STI budget for 2018. In contrast, the broader sample of private companies spends a median of 6% of operating profit annually.
    • The higher spending on STIs at family-owned companies may be a strategy to attract external talent to help manage the business. Also, family-owned businesses typically provide a pay mix that is heavier on short-term cash compensation, as they tend to be more selective in providing longer term incentives.
  • Lower use of long term incentives at family-owned companies
    • Family-owned companies are less likely than the broader sample to offer an LTI plan. Only 44% of family-owned companies offer LTI plans, compared to 54% in the broader sample.
    • Like the broader sample, family-owned companies favor performance awards, such as cash plans or performance units, over real equity or phantom equity that requires a company valuation.

Compensation Trends at Private Equity-Owned Companies

For the first time in this 2017 compensation survey research, respondents were asked to report whether private-equity firms own a stake in their companies. About a quarter of the respondents reported private equity investments in their companies and had some key distinctions in survey findings:

  • Lower Short term incentive spending at private-equity owned companies
    • Private equity-owned companies spend slightly less than the broader sample on STIs. These companies spend 5.5% of operating profit at median on STIs, in contrast to 6% for the broader sample.
    • Private equity owners have the strategy of aligning executives’ economic interests with their own (i.e., creating a value realization event). As a result, executive compensation is focused more on LTIs than on short-term incentives.
  • More long-term incentives and real equity ownership at private-equity companies
    • Private-equity owned companies are more likely to provide LTIs than the broader sample. Almost two-thirds of private-equity-owned companies reported having an LTI plan.
    • LTIs based on real equity — stock options and restricted stock — are favored by private equity investors, as these vehicles align the incentives of management with the shareholders and provide a retention mechanism. Also, private-equity owned companies tend to grant LTIs deeper into the organization versus the broader survey sample.

Where Private Company and NGO Compensation Preferences Are Trending

Private companies and NGOs continue to favor short-term and cash-based incentives. Future compensation research by Vivient Consulting and WorldatWork will focus on whether the tight labor market and competition for talent continue to drive non-publicly traded entities to spend more on incentives and broaden incentive participation across more employees.