Executive Compensation Trends: 2021

Wednesday, November 11, 2020

The 2021 government compensation season might be more difficult than common for many firms as a result of monetary and financial penalties of the COVID-19 pandemic. To satisfy these challenges, firms ought to pay attention to a number of key points regarding government compensation as they design their 2021 government compensation packages.

1. Revisiting Clawbacks and “Trigger” Definitions

Increasing clawbacks and “trigger” definitions to cowl misconduct past monetary issues might assist be sure that an organization will have the ability to recoup government compensation within the occasion of reputational hurt to the corporate or opposed publicity. Not too long ago, the U.S. Securities and Trade Fee (SEC) introduced that it’s going to difficulty revised guidelines to implement the clawback provisions of the Dodd-Frank Wall Avenue Reform and Shopper Safety Act in 2021. The current proposed SEC clawback guidelines usually require a public firm to undertake a clawback coverage to recuperate extra incentive compensation paid to present or former government officers through the three fiscal years previous to the date the corporate is required to file a monetary restatement as a result of a fabric error, no matter whether or not the restatement is attributable to an government’s misconduct. Though the SEC’s clawback guidelines apply to public firms, personal firms are viewing clawback insurance policies nearly as good company governance and are adopting comparable practices. In anticipation of this new steerage, firms might need to assessment their clawback insurance policies to verify they adjust to present SEC steerage. Firms may additionally take into account implementing clawback insurance policies that reach past monetary restatements (e.g., requiring workers to return incentive compensation awards if grounds exist for a “for trigger” termination), in addition to revisiting the “trigger” definitions in government compensation preparations to verify that they adequately shield the corporate.

2. Change in Management and Severance Agreements

On account of monetary challenges, numerous firms are going through tough restructuring choices. As well as, many monetary patrons and rivals haven’t deserted their strategic enterprise plans and will provoke acquisitions of firms which might be quickly undervalued within the COVID-19–disrupted financial atmosphere. Accordingly, firms might need to assessment current change in management or severance preparations or implement new preparations. With respect to severance preparations, it is very important take into account whether or not they’re topic to the Worker Retirement Earnings Safety Act (ERISA) and Inside Income Code Part 409A, and, relying on how post-termination well being advantages are offered, decide any persevering with well being advantages compliance points below the Consolidated Omnibus Price range Reconciliation Act of 1985 (COBRA). Firms ought to take into account reviewing change in management preparations to make sure management continues to be targeted on the corporate’s enterprise and is protected within the occasion of an surprising or undesirable transaction.

3. Short-term Wage Reductions

In mild of the continuing COVID-19 pandemic, many firms have modified numerous their inside compensation insurance policies or practices in 2020. For instance, firms might have carried out short-term wage reductions with guarantees to repay forgone salaries both later in 2020 or in a future 12 months. It might be time to revisit such preparations and be sure that any reimbursement is accomplished previous to March 15, 2021 to keep away from potential Code Part 409A issues. As well as, firms might want to pay attention to any state wage and hour legal guidelines implicated by these wage reductions. Publicly traded firms might need to affirm whether or not repayments are required to be disclosed below SEC guidelines. Firms that carried out wage reductions could also be prone to dropping key executives to rivals and will take into account whether or not restoring compensation (or, alternatively, providing discretionary bonuses or retention awards) would help in efforts to retain and encourage key executives.

4. 2020 Efficiency Awards

The pandemic has affected the power of many firms to successfully set efficiency targets and decide payouts for long-term and annual incentive compensation packages. In figuring out 2020 incentive award funds, firms which have been considerably impacted by the pandemic might select to train compensation committee or board discretion to regulate efficiency metrics set earlier this 12 months. In making these determinations, firms might need to affirm that incentive compensation plan paperwork present the compensation committee or board with discretion to make changes. Firms also needs to take into account establishing a framework that takes under consideration how discretion might be utilized this 12 months and in future years. Publicly traded firms planning to regulate efficiency targets ought to pay attention to steerage from proxy advisory companies, equivalent to Institutional Shareholder Providers Inc. (ISS) and Glass Lewis, and institutional shareholders.

5. 2021 Incentive Compensation

As a result of the results of the pandemic on the financial system in 2021 and past stay unclear, it might be useful to verify that incentive compensation packages explicitly present the compensation committee and board with the discretion to regulate efficiency metrics and decide payouts. In designing 2021 incentive compensation packages, firms might need to take into account the present financial local weather whereas preserving in thoughts that incentive packages serve the necessary function of successfully motivating and retaining key executives. As an illustration, some firms might change monetary efficiency metrics to strategic metrics (equivalent to satisfying range, equality, and inclusion aims) to deal with the financial uncertainty or might delay setting efficiency targets till later in 2021 when there may be extra readability concerning an organization’s enterprise outlook and macroeconomic tendencies. Different firms might embody a decrease most payout but in addition decrease the eligibility threshold for receiving a efficiency award. To deal with the uncertainty of incentive compensation payouts, it may additionally be helpful to offer retention bonus alternatives to key executives to keep up and encourage present enterprise management.

Every of those key points is necessary to debate with exterior counsel and compensation consultants when making choices about government compensation this 12 months and when contemplating 2021 adjustments.