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Article | Executive Pay Memo North America

COVID-19 (coronavirus) impact on metric and goal setting

Amid continuing uncertainty, companies are adopting an informed wait and see approach

Compensation Strategy & Design|Talent
COVID 19 Coronavirus

By Heather Marshall and Derek Mordente | March 6, 2020

With the ripple effect of COVID-19 being felt around the world, companies are reviewing the implications for their compensation plans.

As uncertainty regarding the extent of COVID-19 (coronavirus) continues, companies are prioritizing the physical and financial wellbeing of their employees in the worst affected areas. Our early February work arrangements pulse survey in China found that most companies have either suspended work or implemented work from home policies. For those working from home over 80% of companies indicate that employees are being paid their regular wages, with additional pay for those that must resume work early or during the suspension period. Details of this and other COVID-19 studies can be found on our COVID-19 page.

With the ripple effect being felt around the world, whether it is the manufacturing of products from heavily disrupted areas or the reduction in consumer activity, companies outside the region are reviewing their policies (e.g. travel bans, mandatory quarantine periods when returning from high risk areas, work from home advisories) and the compensation implications.

Over 200 companies responded to our pulse survey, reflecting more than 30 industry segments. Around two in five respondents have some presence in Wuhan or the Hubei province, with the majority (>80%) having a presence in Greater China, and/or Asia and/or the rest of the world (i.e. outside North America and Asia).

A short-term concern

As we enter March, many compensation committees are being asked to approve performance goals for 2020. In recent weeks events and the economic impact of COVID-19 have been moving quickly.

Fewer companies expecting moderate or large negative impact over the long-term
Fewer companies expecting moderate or large negative impact over the long-term

As part of a series of pulse surveys related to COVID-19, we collected information on the COVID-19 survey of benefits managers beginning on February 19.Their initial expectations on the economic impact were muted with 15% of firms expecting COVID-19 to have a moderate or significant negative impact over the next six months. In this second survey, focused on variable compensation implications and conducted entirely amidst the market correction that occurred during the week of February 24, compensation managers put that number at 34%. While this may reflect differences in the responsibilities and perspectives of the respondents, it is also aligned with the growing concern reflected in the market reaction during this period.

Against that backdrop, 44% of companies indicate their annual incentive plan has been or they anticipate it will be impacted. It is notable that around 43% of those companies (around 20% of all respondents) indicated that while there is an anticipated business impact, no adjustments will be made to the annual bonus plan. Thirty-five percent of companies that operate performance-based long-term incentive plans anticipate an impact.

Over two-fifths of respondents, almost half at a regional level, are yet to discuss the matter, although several respondents note it as an agenda item for their March meetings. At an enterprise-wide level, most companies that have discussed the impact on their plan are maintaining their existing goals but with the intention of applying discretion at the end of the year once the full extent of the impact is better understood. These answers reflect a lack of visibility for many in these relatively early stages of the year.

Most employers have not yet discussed the impact of COVID-19 on short-term incentive goal setting
Short-term incentive goal setting
Most employers have not yet discussed the impact of COVID-19 on short-term incentive goal setting

The minority actions already taken include reductions in goals, broadening of ranges and companies changing metrics to reflect their evolving strategies.

As noted above, when it comes to performance-based long-term incentive plans only 35% of companies anticipate an impact. The vast majority indicated that at this time there is no intent to adjust goals or metrics given the long-term and multi-year nature of the plans.

Expect discretion at the end of year

75% of respondents are making no adjustments to sales incentive plans
Sales incentive actions
Three-fourths of respondents are making no adjustments to sales incentive plans

The most clear-cut response across all variable compensation is in sales compensation where three quarters of companies are not making adjustments and are instead maintaining a “business as usual” approach. Respondents indicate that until there is clearer cause and effect between sales and the virus it is too soon to think about adjustments. While the role of the sales force may change with an increasing number of companies instituting travel restrictions, other mediums remain viable for interactions with customers.

We anticipate that companies will continue to monitor their goals, and indeed broader HR policies and practices such as merit increases as the effect of COVID-19 on business becomes more apparent.

Authors

Senior Director, Executive Compensation (New York)

Director, Executive Compensation (New York)

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