Skip to main content
Article | Executive Pay Memo North America

CD&As critically important in a COVID-19 environment

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Heather Marshall , Brian Myers and Chris Vaughn | August 20, 2020

Companies will need to effectively communicate executive pay decisions, rationale and context under heightened scrutiny 

The coronavirus (COVID-19) has presented companies with challenges spanning from the safety of their workers, to the ability to sustain business operations and meet demand, to the harsh realities of longer-term financial survival. Inherent in a company’s ability to reach these decisions and execute on them is having a solid executive team that knows the business and can run it effectively in times of crisis, which brings us to the next looming challenge for boards: disclosing and gaining shareholder support for executive pay decisions and outcomes for 2020.

Expect your shareholders and proxy advisors to take a closer look at executive pay this year

Several institutional investors and the major proxy voting advisory firms have issued public statements on the impact of COVID-19 on businesses and their views on actions companies may have taken in response. While these statements don’t constitute “voting guidelines,” they generally signal that this will be an atypical year, and even greater judgment will be applied in reaching voting decisions and recommendations. This should be a clear message to companies: Compensation Discussion & Analysis (CD&A) disclosures need to be transparent and informative to help investors reach decisions and increase the likelihood of favorable voting recommendations from Institutional Shareholder Services and Glass Lewis.

ESG will provide a lens through which to assess decisions

Over the past several years, environmental, social and governance (ESG) issues have gained ever more prominence. The inherent human capital impact of a pandemic has intensified this, and we expect that the social and governance pillars will prove to be critical factors for many stakeholders in reaching voting decisions in one specific area: the notion of “equivalency” in treatment among investors, employees and executives.

What does this mean? Investors may be less inclined to support companies taking what they perceive to be disproportionate actions to protect executives at the expense of or in contrast with others.

Social Governance
  • Furloughs
  • Reductions in force
  • Reliance on government aid programs
  • Broad employee pay-cuts
  • Reduced or suspended dividends
  • Increased dilution
  • Outbreaks at sites or among employee populations
  • Customer safety

Social and governance factors that may lead to increased scrutiny of executive pay

From an executive pay perspective, certain areas will attract more attention, such as long-standing red flags for investors and proxy advisors, practices that have been signposted in guidance statements issued during 2020 or areas that our experience tells us could be problematic. These include:

  • Pay-for-performance misalignment
  • Overriding formulaic outcomes through the use of discretion
  • Changes to incentive plan metrics or goals for the year without strong and clearly disclosed rationale
  • Changes to long-term incentive vehicles, in particular a reduction in the use of performance-based vehicles in favor of time-based vehicles
  • Changes to or overriding outcomes for in-flight long-term incentive awards
  • One-time retention awards
  • No evidence to protect for the risk of windfall gains through either reduced award sizes or value caps
  • Lack of executive pay cuts, or concerns about speed of reinstatement or “keep whole” policies
  • Any long-standing known concerns for investors and proxy advisors that remain unchanged or have worsened

Companies that check any of these boxes will need to address them head-on in the CD&A.

Use the CD&A to communicate difficult messages in a compelling way

Over the past five years, we have witnessed the evolution of CD&As from dense and unwieldly legal compliance documents to a more balanced storytelling approach with clearer language, more branding and graphics, and improved focus on demonstrating pay-for-performance practices. With this evolution, we have seen several CD&A elements become widely prevalent:

  1. Executive summary

  2. Pay mix graphic

  3. Shareholder engagement

  4. Recent changes

  5. Process overview

  6. Best practices list

  7. Pay for performance

Widely used disclosure elements in CD&As

We have also seen the design of CD&As improve markedly, with greater thought given to the flow and delineation of content; improved graphic treatment, often moving toward alignment with other investor documents; and the use of tables and infographics to make content more digestible. In the current climate, we anticipate that several new elements will become increasingly common:

Element How it could be useful
Substantive letter from the compensation committee Demonstrate accountability in a more personal tone; could be used as an alternative or in addition to the executive summary, depending on the assigned purpose
Alignment of compensation with purpose and strategy Contextualize the executive compensation framework relative to the company’s purpose, its multiple stakeholders and strategy
Overview of performance metrics and why they matter Rationalize metric selection and/or changes in the context of strategy, and clearly explain why they are relevant and important
Insight into the goal-setting process Provide comfort about the robustness of the process and make a demonstrable connection between pay and performance from the outset
Discussion on the role of ESG in executive compensation Preempt investor questions and demonstrate awareness of a topical issue; highlight existing practices or documents that may not have been widely known about to date

The optimal tools for any given company will be informed by their specific circumstances, the nature of the content to be communicated, and the broader investor engagement and messaging strategy.

Addressing the impact of COVID-19

We are working with clients also to prepare COVID-19 CD&A disclosure strategies. At the two extremes are approaches of having a stand-alone section or embedding content within the CD&A. Generally speaking, we recommend companies adopt a hybrid approach.

If COVID-19 isn’t addressed early in the CD&A, either within the executive summary or in a letter from the committee, companies run the risk of appearing tone deaf and raising concerns for the reader. Equally, ring-fencing details of the actions and changes in one place may make it hard for readers to follow content as they navigate specific elements of compensation and the decisions that were made.

The executive summary or committee letter can serve as a useful channel to acknowledge the pandemic:

  • Business impact on multiple stakeholders (primarily shareholders and employees)
  • Actions taken to ensure worker safety, business continuity, and long-term value preservation and creation
  • Resulting changes to executive pay
  • The overarching pay-for-performance perspective

The balance of the CD&A can then be used to go into more detail on specific items, to the extent that they have been impacted.

Do not shy away from the controversial issues

Investors are clear: Don’t bury the items you know may be controversial. Address them early and seek to bring investors inside the boardroom, to better understand the context and rationale for each decision. While a controversial issue may still raise questions, hiding it toward the back of the CD&A may raise more questions, suggesting either a lack of awareness regarding the likely reaction to the decision or general discomfort with the decision itself.

Start now

What is clear is that companies will need to proactively address any actions taken in a clear and transparent manner in their CD&As, providing the necessary perspective, context and confidence for shareholders to be able to support say-on-pay proposals. The drafting process will probably take longer this year, with the likely need for more change and the engagement of a broader group of internal stakeholders. Willis Towers Watson is well placed to assist in this process, with our experts in CD&A disclosure spanning the Executive Compensation and Communication practices. We have a proven track record of helping our clients communicate technical and often emotive executive compensation matters, in a clear and readily understandable way.


Senior Director, Executive Compensation (New York)

Governance Team Lead, North America & Director, Executive Compensation (Arlington)

Associate Director, Talent & Rewards (Dallas)

Contact Us