Although most companies have seen their operating plans upended by the
Although most companies have seen their operating plans upended by the
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Boards Reworking Bonus Plans Amid Crisis


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July 8, 2020 | Agenda



Thanks to Melissa J. Anderson


Although most companies have seen their operating plans upended by the Covid-19 pandemic, compensation committees have largely declined to announce changes in the midst of the crisis to annual incentive plans for the year. Now, however, as the impact of the pandemic is coming into focus, some companies are beginning to disclose revisions to previously set annual bonus programs.
Throughout June, several companies, including Sabre and Adobe, announced alterations to annual plans such as revised metrics and lowered minimum performance thresholds. Other companies — for example, FedEx — are opting to forgo a fiscal 2021 annual incentive plan altogether, while instead offering one-time restricted stock or options grants to executives who will not be receiving bonuses.
According to Bob Barbetti, managing director at J.P. Morgan’s private bank and the global head of its executive compensation and benefits division, changes to compensation plans are largely being driven by how companies are dealing with unknowns associated with the virus. Even at companies that haven’t announced revisions, he says, comp committees are having discussions about performance plans even if they haven’t settled on specific changes yet.
“Certainly, when the performance period is coming up this year, they have to consider modifications or flexibility or relative performance measurements to do it, or an adjusted payout curve.”
“We don’t know exactly what impact the virus will have this fall,” he adds. “Is there going be an uptick?”
Plan Revisions
Adobe announced changes to its annual incentive plan in an 8-K filed June 11, largely focusing on performance and payout ranges. The company had previously announced its AIP performance goals in January, and the amended and restated plan revises the GAAP revenue target minimum performance threshold downward from 94.64% to 60%, and its non-GAAP earnings-per-share target minimum performance threshold from 95% to 80%.
The new plan also lowers the maximum financial performance result (the portion of the award based on financial metrics as opposed to any individual strategic performance adjustment) from 125% to 110%, and revises the payout scales “to align with a revised annual operating plan for fiscal year 2020.”
The June 8-K was accompanied by a press release touting Adobe’s record revenues while withdrawing its 2020 fiscal targets “in light of the macroeconomic environment” and other strategic shifts.
“How companies go about assessing whether to change ranges is really going to depend on their business circumstances,” says Heather Marshall, senior director in Willis Towers Watson’s talent and rewards business, who did not comment on specific companies. “So, it’s reasonable to assume for companies that are struggling through the pandemic, financial performance will be down. For those organizations, we hear clients taking actions such as broadening the ranges and lowering goals, but also bearing in mind that for lower performance it may be appropriate to lower the payout opportunity.”
Marshall is quick to point out that most compensation committees have left annual incentive plans untouched for the year.
    In a global survey of employers fielded May 11 through May 13 and published last month, Willis Towers Watson found that 74% of companies said their executives’ annual incentive plans were operating on a “broadly similar” basis as last year. Some 12% said they had made changes to the plan, such as incorporating different metrics, moving from a formulaic to a discretionary plan or using non-annual performance periods. Meanwhile, 5% said they had suspended their plan altogether, and 9% selected “other.”
    For companies eyeing metrics changes, Marshall says, “where these changes are being made, it comes back to how do you realign metrics to reflect the organization’s priorities through this time of crisis.”
    For example, she says, companies that are struggling to maintain top-line growth and sales may pivot toward focusing on operational efficiency, setting up the organization to return to growth post-pandemic, or managing cash flow. They may also rely more heavily on existing non-financial metrics or introduce new ones, she adds.
    At travel technology and booking company Sabre, the business experienced “a rapid decline in airline and hotel bookings, exacerbated by a significant number of bookings cancellations” as a result of the pandemic, according to an 8-K filed June 15. The company said it will continue facing uncertainty in its operating environment. As a result, Sabre has replaced its previously selected financial performance metrics (revenue and pre-tax and pre-annual incentive adjusted earnings per share) to “focus the program on expense management for the remainder of the year.” The company will cap bonus payouts at “50% of their original target annual cash incentive opportunity.” Sabre is planning changes to its long-term plan performance metrics as well.
    Meanwhile, effective June 15, 2020, the company granted executives awards of time-based restricted stock units, with half vesting next year and the rest vesting in 2022.
    The company did not specify the number of stock units or the value of the awards and it did not specify the metrics it plans to use to replace revenue and adjusted EPS in its AIP. Sabre did not respond to requests for comment.
    It did, however, note in the filing that it looked forward to engaging with investors this fall and, as stated in its 2020 proxy, the board planned to recommend that say-on-pay votes will be held annually moving forward in its 2021 say-on-frequency vote. Previously, the company held say-on-pay votes every three years.
    As Agenda has reported, proxy advisory firms and investors have warned that changes to incentive plans may not be viewed favorably. Institutional Shareholder Services has urged companies to disclose changes to plans; however, in many cases companies are not required to disclose comp changes until their 2021 proxy statement.
    “As the compensation committees navigate these increasingly challenging discussions, it’s important to think about how shareholders are going to react and how you are going to bring shareholders inside the boardroom and help them understand the discussion and decision-making process,” Marshall says.
    “It’s making the case for any change and really meaningfully connecting the dots between what’s going on within the organization, the way it’s been experienced by shareholders, employees and executives and how the actions you are taking have been responsible and necessary within that framework.”
    Special Awards
    Other changes that have been disclosed in 8-Ks have included the introduction of special incentive awards or programs.
    For example, at gas station chain Casey’s General Stores, the company said in an 8-K filing on June 8 that the board approved a special performance RSU grant to John Soupene, its senior vice president of operations, for his “significant contributions and efforts in leading the Company’s Covid-19 ‘task force.’” The grant consists of 2,000 shares of the company’s stock and will vest on June 2, 2022.
    Meanwhile, auto-component manufacturer Meritor said in an 8-K disclosure on June 10 that its compensation and management development committee had approved a special incentive plan that would enable employees to recoup lost salary in light of pay reductions the company implemented in response to the pandemic. Most of its employees, including executives, will be eligible for incentive payouts based on performance metrics related to improving the company’s liquidity and reducing costs, according to the filing. Its AIP remained unchanged, it said, noting that executives were unlikely to meet the AIP goals.
    The change follows an announcement on June 2 that the company would restore base pay for its salaried employees and a percentage of base pay for the CEO and executives, along with retainer fees for board members. In that same announcement, Meritor said it would cut its global salaried workforce by 8% and eliminate certain hourly roles.
    Meritor declined to comment.
    Marshall says it’s important that compensation committees keep in mind that many AIPs extend through the company’s workforce, not just to top executives.
    Meanwhile, some companies are already disclosing fiscal 2021 changes. For example, in an 8-K filed last week, FedEx, whose fiscal year begins on June 1 and ends on May 31, said it would not offer any annual incentive plan for executive officers for FY 2021 as a result of economic and business uncertainty related to the pandemic. It also reported a non-cash goodwill impairment charge of $348 million last quarter related to declining print revenue and temporary FedEx Office retail store closures because of the pandemic.
    In the same filing, FedEx said the board had approved one-time, special restricted stock grants to each of the company’s executive officers, besides the chairman and CEO Frederick Smith and the president and COO Rajesh Subramaniam, worth 50% of each executive officer’s annual restricted stock grant and any associated taxes. The CEO and COO will each receive a one-time, special stock option grant with an exercise price of $130.96 that will vest ratably over four years beginning on June 15, 2021. The filing did not note the size of the stock options grants. FedEx’s stock price on June 15, 2020, was $133.68.
    Chris Allen, a spokesperson for FedEx, said in a statement, "Annual and long-term incentive payments and stock options represent a significant portion of our executive compensation program. This variable compensation is 'at risk' and directly dependent upon the achievement of corporate financial performance goals or stock price appreciation."
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