Over the last two months, there has been a great deal of focus on compensation changes and how they are being disclosed externally. As many are reporting, most actions thus far have been around executive-level base salary reductions, non-employee director cash retainer deferrals/reductions, and broad-based employee furloughs.
But as we approach the second half of 2020, attention in “Boardzooms” is certain to turn to incentive plans. Tough decisions need to be made about applying discretion at year-end or the possibility of restructuring incentive programs to ensure they are aligned with critical initiatives for the remainder of the year and keep key talent engaged and productive in their work. How can organizations keep management teams focused on driving performance during a year when it’s highly likely that bonuses will pay out well below target, if at all?
Managing employees’ expectations during this time of uncertainty has become one of the most important objectives for companies large and small. In turn, most have already stepped up their regular cadence of employee communication and are successfully leveraging new channels to deliver messages on various topics in a more frequent and efficient manner. If your organization hasn’t already started a dialogue with bonus-eligible employees about the potential implications for incentive compensation as a result of the pandemic, we strongly recommend opening that line of discussion sooner rather than later—even if your company isn’t planning on making any changes to its plans.
Of course, the tone and style of your communication should reflect your organization’s voice and culture, and you should employ methods of delivery (e.g., video conference, personal phone calls, email) that will help your messages resonate with your participants, but before the finesse and delivery, it’s more important than ever to hit on all cylinders with the message itself. Here are five key things you should be sure to do in crafting your internal messages:
- Reinforce the mission, vision, and values of your organization. There is never a bad time for leadership to take the opportunity to remind their employees what their company is striving to achieve and how people contribute to overall success. Giving employees confidence that the organization remains focused on its core principles—even through the toughest times—will help keep them engaged in their work and connected to their colleagues.
- Explain why any changes to performance goals and/or measures are necessary, appropriate, and fair. It will be important for people to understand why resetting goals and/or implementing new financial and/or strategic performance measures are essential at this time. And if you’re not changing goals or measures, you can use this as an opportunity to reeducate participants about the purpose of incentive plans and the basics of how they work. For example, providing an overview of why threshold, target and maximum performance levels are set and how they work will help manage messages later in the year should goals fall short. Be sure to explain how the company uses discretion (if applicable) and the factors the compensation committee can consider when making decisions about adjusting goals.
- Provide and/or reinforce rationale for performance measures. Just like your investors, your incentive plan participants should have a clear understanding of why your company believes the performance measures in the incentive plan(s) are the right ones. If you are using absolute financial measures, explain why they were chosen and how they connect to the business strategy. If you are using relative financial measures, be clear about what you are comparing results to, for example a performance peer group, an industry, or stock market index.
- Give examples of how people can influence performance results through their individual contributions. One of the best things you can do during this time is to remind people to focus on the things that they can control. With respect to incentive plans, make clear to participants how their daily actions can impact outcomes—either negatively or positively. While most plan participants have some understanding of high-level measures (e.g., revenue, profitability, cash flow, earnings, shareholder returns, etc.), they often fail to connect the dots to what they can do in their jobs to affect results. It becomes increasingly challenging when measures are qualitative in nature. For example, personal goals set at the beginning of the year may no longer be relevant. Now would be a good time to revisit those goals and make any necessary adjustments.
- Be clear about how, when, and by whom decisions will be made, especially if discretion will play a significant role. Sharing or resharing information about the process by which decisions will be made is a best practice. Now more than ever, people need time to digest new information so they can process it appropriately, ask questions, and seek guidance, if needed. Don’t underestimate the comfort people may take in knowing that even if the news is not positive, there is a process and a timeline in place on important pay decisions.
