Executive Compensation: Just 6 Percent of Russell 3000 Companies Have Announced COVID-Related Incentive Plan Changes, but 2021 Payouts Likely to Dip

While the COVID-19 crisis has fundamentally altered the business environment across industries, only 6% of companies in the Russell 3000 Index have announced changes to their incentive compensation plans to date. Moreover, the types of changes made to compensation plans – such as reducing the target or maximum payout, or even cancelling the plan – indicate that executive bonuses for 2020 are on track to be lower than pre-pandemic expectations.

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CEO & Executive Compensation Database

The insights about executive compensation during the pandemic are derived from a new live database from The Conference Board, Semler Brossy, and ESGAUGE— the only tool of its kind made fully available to the public in the U.S. market. The newly expanded database now encompasses not only base salary (which the three partners released in May), but also changes in annual and long-term incentive compensation. The database will be updated periodically to account for new announcements made as companies adjust their 2021 compensation policies in response to the uncertainty posed by the pandemic.

“COVID-19 has upended the business context in which many companies made their last compensation decisions, only a year ago,” said Matteo Tonello, Managing Director of ESG Research at The Conference Board. “In this rapidly evolving environment, where economic forecasts can be elusive and performance expectations hard to set, corporations can benefit from accessing fresh information on how peers are redesigning compensation plans. We are proud to offer this resource with the invaluable partnership of Semler Brossy and ESGAUGE.”

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Key COVID-19 Findings

According to the analysis to date, just 177 Russell 3000 Index companies announced structural changes to existing and/or future incentive compensation plans for executives—including annual incentives, long-term incentives or, in some cases, both. As pandemic-related developments continue to unfold, though, the database will capture yet-to-be-announced alterations. Insights gleaned from the database include:

• Types of changes to annual incentives plans: The most common change to annual incentive plans was to reduce the target or maximum payout opportunity, and some companies announced their decision to cancel or suspend annual bonuses altogether.  Some companies have added new goals, modified performance periods, or shifted from cash to equity.  Only a very small number have reset goals.

“The challenges of 2020 have accelerated the trend towards ESG-related measures in annual incentive plans,” said Todd Sirras, Managing Director at Semler Brossy. “Many boards are also considering using discretion in interpreting results this year and shareholders are receptive to judicious use of judgment and robust disclosure, which is a reversal of a multi-year trend towards formulaic incentive plans and the attendant goal-setting and short-termism difficulties.”

“Those businesses that were severely harmed by the pandemic may have no choice but to grant some degree of discretion to compensation committees making the final annual payout determinations—so that they can modulate pay-for-performance according to the specific circumstances they face,” said Satender Singh, Chief Operating Officer at ESGAUGE. “If so, what matters is that the company be transparent about the criteria that will be used to exercise such discretion—some type of resiliency scorecard or some other framework for measuring the accomplishments of executives who are leading the business on the road to recovery”.

• Types of changes to long-term incentives (LTI) plans: A smaller group of companies announced changes to their LTI plans, which may reflect the fact that proxy advisory firms have taken a position against such changes.

“The events of the last year have raised fundamental questions about the role of long-term incentives,” said Blair Jones, Managing Director at Semler Brossy. “While many near-term actions have served to de-risk long-term incentives, longer term, forward-thinking boards will want to work to ensure long-term incentives re-emphasize value creating activities, not only for shareholders, but for broader stakeholders as well.”

The launch of the live database of COVID-related compensation changes accompanies the release of CEO and Executive Compensation Practices in the Russell 3000 and S&P 500: 2020 Edition. The annual report updates the review of historical trends on executive compensation. Among other insights, this edition of the report highlights that stock options remain in the mix for both CEOs and other highly compensated executives, and they may make a comeback in 2021.  Stock options continue to be included in compensation structures across company size groups, and a majority of larger companies use some (often small in value) stock option grants to reward their CEOs. As the COVID-19 crisis continues, these options may be retained as an alternative to stock awards with unrealistic performance targets.

“When the first changes to incentive plans started to emerge at the beginning of the pandemic’s spread, one of my first thoughts was that the simplicity of stock options – as long as they did not exploit depressed stock prices – might make them a very attractive alternative to the uncertainties of setting long-term targets,” said Paul Hodgson, Senior Adviser at ESGAUGE. “Notwithstanding proxy advisors’ concerns over switching from performance-related equity incentives to so-called time-based awards, it looks like compensation committees may again avail themselves of this option.”

“Looking ahead, investors do not expect companies to overhaul their executive compensation programs in light of COVID-19,” said Paul Washington, Executive Director of the ESG Center. “To avoid negative say-on-pay votes, compensation committees will need to ensure that the vast majority of executive compensation remains ‘at risk,’ rewards relative out-performance, and is appropriate in light of the treatment of the overall workforce.”