Executive Compensation Adjustments Resulting from COVID-19 Impact

Institutional Shareholder Services (ISS) has released the results of its annual global benchmark policy survey, which included executive compensation adjustments made as a result of the COVID-19 impact on the workplace, the economy, and life in general.

Of the 519 respondents to the survey, 175 were institutional investor representatives, which includes asset managers, asset owners, advisors to institutional investors and other investors. The 344 participating non-investors primarily represented public corporations, including public corporation board members and advisors to public corporations. Additionally, one half of the respondents were from U.S. based organizations, while the other half was primarily, but not exclusively, from the United Kingdom, continental Europe, or Canada.

In addition to looking at stakeholder expectations regarding compensation and adjustments to incentives, the survey also addressed issues of climate change, sustainable development goals, auditors and audit committees, and racial and ethnic diversity on corporate boards. In the commentary below, Mike Melbinger (author of the Executive Compensation blog) shares his synopsis of the survey results specifically related to executive compensation adjustments and incentive programs. .

Results of ISS’s Annual Policy Survey (Executive Compensation Adjustments)

(published September 25, 2020) Today, ISS released the results of its annual policy survey. … Among the items most relevant to executive compensation professionals are the results on the expectations of investors and non-investors regarding compensation adjustments in light of the COVID-19 pandemic, including both short-term and long-term incentive plans.

Expectations regarding compensation adjustments: When asked about the respondent’s viewpoint regarding executive compensation in the wake of the pandemic, a significant majority of investor respondents (70%) indicated that the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed to shareholders. Among non-investors, a majority (53%) indicated that the pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.

Adjustments to short-term/annual incentive programs: Many companies have announced changes to their immediate annual incentive or bonus programs in response to the COVID-19 pandemic and the resulting general economic downturn. Regarding short-term/annual incentive programs and the respondents’ views on what is a reasonable company response under most circumstances, slightly over one-half of both investors (51%) and non-investors (54%) indicated that both (1) making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities; and (2) suspending the annual incentive program and instead making one-time awards based on committee discretion could be reasonable, depending on circumstances and the justification provided. Less than 5% of either group supported suspending the annual incentive program and instead making one-time awards based on committee discretion.