As a result of the global health pandemic, companies across the world have been impacted differently. The more severely impacted responded quickly by cutting costs, including reductions in employment, compensation, and benefits, to ensure the longer-term viability of their businesses to weather the evolving economic storm.
As scientists work to help the world in sequencing the virus and to develop a vaccine, so too should companies begin to develop their own sequencing game plan. Such a plan would help determine the order for which a company might reinstate any employment, compensation, and benefit reductions. While exact timelines are likely unknown, having a thoughtful sequencing game plan to know what to reinstate first, next, and last is vitally important to appropriately manage internal and external optics as the impact of this economic crisis has set itself apart from the last.
Coming out of a number of May compensation committee meetings, we know that many companies are generally taking a wait and see approach to addressing incentive compensation plans and are starting to think about when to reinstate base salaries for employees, executives, and their board of directors. But before companies jump into reinstating base salaries, it would be helpful to think about the sequencing of the reinstatement of any employment, compensation, and benefits reductions taken previously. Questions to ask when developing a sequencing game plan may include the following:
- Does it make sense to reinstate base salaries for employees before bringing back furloughed employees?
- What percent of furloughed employees should return before reinstating base salaries?
- Should 401k or ESPP plans, which touch all employees, be restored before base salaries?
- Should base salary reductions for employees be reinstated before executives?
- When should board cash retainers be reestablished?
- Should incentive compensation of any kind, even if small or for retention purposes, be paid before the reinstatement of furloughed employees, 401k and ESPPs, base salaries, etc.?
Note that reinstatement of a specific item might be best split into separate actions. And it’s important to acknowledge that the “right” order of a sequencing game plan for one company may not be the same exact answer for another.
Prior to the global pandemic, many companies were beginning to focus on Environmental, Social, and Governance (ESG) issues. I find myself reflecting on the notion that the reinstatement of employment, compensation, and benefits and a company’s sequencing game plan falls squarely in the “S” category, further highlighting how important it is to be thoughtful and planful about your company’s approach.
It is with all of this in mind that management teams should begin to discuss and design its own sequencing game plan that can be reviewed with the compensation committee and/or the full board. It would be helpful to look at the cost savings achieved to date or expected, and the future cost add-back for the year(s) to each of the various steps and to include that information when reviewing with the board.
Although the timing of each stage of the game plan is likely unknown, management teams should develop a basic time horizon or range for each step (e.g., over the summer, Q3 or Q4, by year-end, etc.) and can revisit the timing from month to month as the global pandemic and economic crisis plays out.
Lastly, management teams should also consider the need for communications associated with each of the steps in the sequencing game plan. This should address both internal messages to employees and external messages, including proactive notice for investors and proxy advisory firms like Institutional Shareholder Services and Glass Lewis, which are watching and asking companies to contemporaneously disclose changes to employment, compensation, and benefits.
