Why Our Current Crisis is Very Different from 2008

The economic repercussions of the COVID-19 pandemic have many of us making comparisons to the Great Recession of 2008-2009, but there are some critical differences which impact how companies should approach potential compensation issues. First, the Great Recession was largely created by an overly aggressive (some would say out-of-control) banking system. Government actions to control the damage were both essential and extremely unpopular, resulting in legislative backlash (Dodd-Frank) and little sympathy for the Great Recession’s impact on management pay. By contrast, our current economic crisis is the result of an act of nature.

Second, with few exceptions, the devastating impact of the Great Recession was felt across all business sectors, whereas the impact of the COVID-19 pandemic has discriminated between industries, with some sectors—such as grocery chains and pharmacies—actually benefiting while others—such as airlines, brick-and-mortar retailers, and dine-in restaurants—are bearing the brunt.

The third difference between the two crises is social context. Partly driven by the reform movement in the wake of the Great Recession, we now live in an era of heightened concern over environmental, social, and governance issues (ESG). That a global pandemic is the cause of our current economic crisis only reinforces this concern.

These differences imply two, perhaps seemingly contradictory, signals regarding potential compensation actions. First, any action should be tailored to your company’s specific circumstances and be a direct function of the degree to which your firm is affected by COVID-19. Second, companies will face an unprecedented level of scrutiny regarding how their actions respond to ESG concerns and a community-wide sense of fairness.

As illustrated below, the economic impact varies greatly across industries. For those most negatively affected, we believe there will likely be much greater tolerance on the part of management and the board for compensation actions that address major reductions in cash incentives or the loss of equity/stock option value. But at the same time, those companies will be held to a higher standard of fairness and shared sacrifice. As an example, a company forced into plant closures might find a new tolerance for cancelation and replacement of equity incentives if executives earn no cash bonuses for the year and take meaningful salary cuts along with the broader workforce.

Actions taken by companies that are significantly impacted by the virus can logically be more proactive and aggressive, and likely will result in little backlash so long as care is taken that sacrifice is shared. This said, large discretionary bonuses or stock options granted at current depressed prices are likely not the answer, even if justified by outstanding individual effort and performance. Rather, more defensible actions later on might include increasing 2021 annual and long-term incentive opportunity to replace a portion of lost 2020 bonus and LTI value, provided global health and the economy are significantly improved.

In contrast, companies benefiting from, or even performing well despite the crisis, must take care that they are not perceived as profiteers and ignoring the broader community impacts taking place. Paying out maximum bonuses, even if justified by financial results, will be viewed quite negatively.

While it is natural to look to past crises for guidance regarding the present crisis, it is important to heed the differences as well and there is certainly no roadmap for this current one. Companies must take into account their very specific market and operating circumstances and how their workforce is affected, and take great care that they can feel proud of their actions in the future.