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Pay experts have urged compensation committees to keep a gimlet eye on how the company is performing on incentive metrics throughout the year to avoid any surprises when assessing payouts at the end of 2020. It appears management is doing the same.
According to Agenda’s Directors’ and Officers’ Outlook Survey for the third quarter of 2020, 68.1% of respondents said CEOs have inquired how the company is doing with respect to in-flight performance-based compensation plans. Some 57.1% said their CEO asked about both annual and long-term plans, while 8.8% said their CEO asked about their annual plan only, and 2.2% said long-term only.
According to Aalap Shah, a managing director in the New York office of Pearl Meyer, comp committee members should ask for even more data.
“Directors should be asking management teams to provide performance on other metrics that aren’t actually part of their performance share plan,” Shah says. For instance, he says a long-term plan scheduled to pay out at the end of 2020 may have appeared on track to pay out at or above target before the pandemic hit. But now, looking at financial performance or total shareholder return, it might pay out at zero or below target.
“Directors are still waiting until later in the year to figure out what to do, but in anticipation of that, what they should have management teams start doing is collecting information on what I’ve been calling ‘pivot metrics,’” Shah says.
“What have you had to pivot to [in order to] manage your business, and how effective have you been at doing that? Whether it’s part of the formal program or not, demonstrating how you’ve been performing through that pivot is really going to be important for them in order to make a determination on how those programs should pay out, if at all,” Shah explains. These metrics could include measures of operating cost efficiencies or more qualitative factors such as how management has developed strategic plans in the face of the pandemic.
“How have you thought about the business differently in terms of the post-acute pandemic response?” Shah asks.