A critical look at pandemic-related executive compensation changes

Compensation Advisory Partners (CAP), an executive compensation consultancy, recently conducted an analysis of select broad-market COVID-19 executive compensation actions and their corresponding commentary from ISS. “For calendar year-end filers, these reports will serve as weathervanes for ISS’ reaction to incentive plan changes made in response to the pandemic,” Shaun Bisman, a principal with CAP, and Theo Allen, an analyst at CAP, stated in their analysis.

The analysis highlighted six companies that made various changes to their annual and long-term incentive plans and awarded one-time special grants: Walgreens Boots Alliance; Becton, Dickinson; Aramark; Meritor; PTC; and Digi International.

According to CAP’s analysis, preliminary findings indicate that “when there is an elevated level of concern, ISS seems likely to delve more deeply into a compensation program and view any COVID-related changes more critically.” Under these circumstances, ISS will likely recommend a vote “against” a say-on-pay proposal. “To date, we have observed three companies that experienced sharp declines in their say-on-pay results, with one failing to receive majority support,” Bisman and Allen wrote.

ISS has indicated it’s “highly skeptical of one-time special awards and discretionary upward adjustments to annual and long-term incentive payouts, especially if payouts were tracking well below target,” according to CAP. Among the companies analyzed, ISS took issue with four for making discretionary incentive plan changes, “such as altering performance periods to exclude the months most heavily affected by the pandemic and trigger payouts despite COVID impacts,” the analysis found. “ISS also found special grants problematic, particularly when used to replace underperforming performance-based awards.”

Conversely, the types of executive compensation changes with which ISS did not take issue, as demonstrated by two companies, included “adjustments to the threshold and target performance goals for in-flight long-term incentives; bifurcated performance periods with payouts well below target for annual incentive awards; and modest special one-time grants,” CAP found.

“As calendar year-end companies confirm 2020 payouts, design 2021 incentive plans, and finalize their Compensation Discussion and Analysis (CD&A) in the proxy statement, beware that ISS is highly critical of special one-time awards, upward (discretionary) adjustments to payouts, front-loading annual equity awards, and reductions in performance-based long-term incentives,” Bisman and Allen warned.

“It will be imperative that companies have compelling rationales as to why these decisions were made and how they are aligned with long-term shareholder value creation,” they added. “As proxies continue to be filed and companies disclose more COVID-related changes, we should have a better sense of proxy advisory firms’ receptiveness to such alterations.