What compensation committees need to be thinking about in 2021

Reflecting on 2020, there’s no doubt US businesses faced remarkable challenges. First was COVID-19 and the resulting economic and workforce impact. Then, amid this crisis, a summer of protests put a spotlight on calls for racial equity, and many corporations have responded by affirming their commitment to diversity and inclusion. As compensation committees make decisions on 2020 pay and prepare for 2021, they must weigh the impact of this new economic and social landscape on executive pay and talent management decisions.

Questions compensation committees should be asking as they close 2020 and look forward to 2021

How do we strike the right balance in 2020 pay?
What’s the right approach to goal setting in 2021—and beyond?
Are our equity grants keeping key personnel motivated?
When and how should we restore the status quo?
How will shareholders and other stakeholders react?

How do we strike the right balance in 2020 pay?

Most boards felt their companies have navigated the pandemic quite well.* But some annual and long-term incentive plans’ goals set early in 2020 might be out of reach. In these unique times, boards should consider whether to exercise discretion in determining payouts under these plans. There will likely be scrutiny of these decisions, so understanding how industry peers and the market at large is handling the same issues is prudent. If adjusting payouts under the annual incentive plan isn't palatable, boards might consider making one-time awards to keep executives motivated to continue to help the business recover.

^{*PwC, Facing the COVID-19 challenge in corporate boardrooms, July 2020.}

What’s the right approach to goal setting in 2021—and beyond?

Even with vaccines expected to help bring the pandemic under control this year, the damage to the economy may linger. Compensation committees may wish to reexamine the goals and performance periods used in annual incentive plans. Many three-year plans that include 2021 may require modifications to reflect reasonably achievable performance measures and expectations or at least to align them better with what is in management’s control.

Are our equity grants keeping key personnel motivated?

With the economy battered by the pandemic, big swings in the stock market have become commonplace. Often, movements in a company’s shares can have more to do with the big-picture outlook than the details of its own performance. When falling share prices bring down the value of equity compensation, companies may feel vulnerable to the loss of key talent and leaders. Compensation committees should closely examine the range of equity grants available under their companies’ plans, and ensure they are using the right type.

When and how should we restore the status quo?

Boards can help keep leaders motivated by ensuring that pay cuts don’t last longer than necessary. If the CEO has shown exceptional leadership, compensation committees will want to find the right way to reward it—even if financial performance has suffered. But these impulses need to be measured against the current economic backdrop—recognizing that reacting too late could mean losing top talent.

How will shareholders and other stakeholders react?

Compensation committees that adjust pay as discussed above should consider how their decisions for 2020 will appear to shareholders, and whether proactive engagement with key investors is merited to help explain those decisions. Being proactive may help companies avoid the backlash some faced from shareholders after the 2008 financial crisis, when some handsome payouts to CEOs drew intense public scrutiny.