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Article | Executive Pay Memo North America

COVID-19 uncertainty impacting organizations’ long-term goals

How are organizations grappling with this still evolving issue?

COVID 19 Coronavirus

By Heather Marshall and Derek Mordente | February 24, 2020

As companies look to finalize incentive plan goals for 2020, the continuing uncertainty around the long-term economic impact of COVID-19 is causing challenges. 

The outbreak of COVID-19 (coronavirus) has had far reaching effects globally. Of course, the virus’ toll on people, families and communities is the most significant. But this global health crisis is also affecting the macroeconomic environment. The spread of the virus has caused indirect and direct disruption (or raised the specter of it) in the day-to-day operations of companies across industries.

The impact on business operations — closed manufacturing facilities, supply chain disruption, reduced consumer demand and access — is causing financial uncertainty. This is happening just as companies traditionally set their short-term and long-term incentive plan goals, and many organizations are grappling with how to set goals that are informed, meaningful, motivating to participants and acceptable to shareholders.

As management teams and boards deliberate, many are asking the same questions:

  • If we’ve already approved goals, should we adjust them?
  • If we haven’t yet approved goals, should we wait?
  • Should we change metrics for affected performance periods as the focus of the organization pivots?
  • Do we have the ability to make adjustments or apply discretion, if appropriate, at the end of the performance period?
  • Should we even consider making adjustments, given our shareholders will feel the negative impact on our financial performance and in our stock price?
  • How are others responding?

Over the last several weeks, we have been partnering with our clients as they work through these questions. From our vantage point, organizations have discussed or decided upon actions including:

  • Delaying metric and goal setting until Q2
  • Modifying regional level and/or enterprise wide goals
  • Having proactive discussions about the likely need for discretion later in or at the end of the performance period

Delaying metric and goal setting until Q2 appears to be the prevailing response in the market so far. Delaying decisions provides more time to determine the success of virus containment, monitor efforts to mitigate economic disruption and better understand the longer-term business impact. It is also less disruptive to existing incentive plans than other potential responses and is now viable given the changes to 162(m) resulting from the 2017 Tax Cuts and Jobs Act (i.e., the flexibility to establish performance goals more than 90 days into a performance period).

In order to better gauge and understand how companies are responding to the financial impact of COVID-19 on incentive plan design, Willis Towers Watson has launched a short pulse survey with three questions on incentive plan design (short-term, long-term and sales incentives).

You can participate here. To ensure the information is timely, we are asking for responses by close of business Thursday, February 27. We plan to share responses in early March. The survey should take no more than 5-10 minutes to complete and all responses will be kept strictly confidential. Once the survey is completed, this article will be updated with the results, the implications of those results and our general observations.

Willis Towers Watson is also fielding a broader survey on the business and risk implications of COVID-19 for completion by senior business leaders. That survey can be found here.

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