For some companies, it may still be too soon to understand how, or if, the COVID-19 (coronavirus) pandemic will impact their 2020 (and future years) performance. For others, unfortunately, the impact is already all too clear. In either case, as compensation committees set their agendas for their Summer 2020 meetings, COVID-19 and its actual, or potential, impact on business and employees must be considered. While the actual considerations will vary from company to company, here are a few things that should be on the committee’s summer agenda in light of the COVID-19 pandemic:
- State Of The Industry & Economy. One way that a committee can begin to understand potential actions and alternatives is by reviewing publicly available disclosures from other similarly situated companies, as well as companies generally, that have already taken action. While this might not necessarily be a determining factor for the committee, there is value in knowing how others are approaching COVID-19.
- Incentive Plans. With respect to incentive plans, the most immediate need is likely to be revisiting performance metrics established for 2020 performance. In the normal course, committees will establish performance metrics in the early part of the calendar year (for 2020, it is likely that this happened before the most drastic impact of COVID-19 was seen throughout the United States).
- Committees should at least consider whether the metrics established in early 2020 are now beyond reach. If so, committees will need to consider how to continue to motivate their executive teams. If it is not yet clear how much of an impact COVID-19 has had, then committees will want to continue to monitor its impacts and be prepared to act quickly should the need arise.
- With respect to long-term incentives that cover performance over a number of years, although monitoring is essential, there is likely less urgency to revisit the performance metrics because their long-term nature arguably is intended to take into account the ”ups and downs” that can occur over several years. But, as the situation continues to unfold later into 2020, committees should also be prepared to consider the impacts of COVID-19 on long-term plans. Establishing parameters now around such a review might help shape the discussions that could occur later in the year.
- Legal Compliance & Shareholder Engagement. Any changes to incentive plans (or other arrangements) should take into account tax, accounting, securities disclosure and shareholder engagement considerations. From a tax perspective, keep in mind that the deferred compensation rules under Code Section 409A may limit flexibility in restructuring incentives. Securities disclosure rules will likely require public companies to disclose any material changes to incentive plan structures. With respect to shareholders, the committee should consider how a reasonable investor might view the decisions made over the course of the year.
- Succession Planning. While senior executive succession planning is likely a principal consideration for all committees (and, often times, entire boards), given the human health implications of COVID-19, this is a good time to assess the company’s overall succession plan. Committees will want to ensure that they are considering strategies for supporting the health and safety of their employees, executive teams and board members themselves.
- In particular, given their specific duties relating to senior executives, committees should consider risks associated with each executive’s performance of duties. Also, committees will want to understand any plans for “role coverage” in the instance that an executive contracts COVID-19, as well as proposed plans for disclosure of such illness if ever deemed necessary.
- CARES Act Restrictions. Certain programs described under the CARES Act impose restrictions on executive compensation. The committee should consider whether the company participated in any of those programs and what, if any, executive compensation restrictions apply.
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We have been on the forefront of dealing with COVID-19 for our clients. Please contact us if you would like to discuss reopening your business, including issues related to workplace transmission of the coronavirus or other employment matters impacted by COVID-19, or if we can otherwise be of assistance in any way.
We recommend you evaluate the following pandemic-related business and legal considerations that we have been discussing with our clients: