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Article | Executive Pay Memo North America

Heavy lifting ahead for comp committees and comp professionals

Governance Advisory Services |Executive Compensation
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By Don Delves | October 19, 2020

The challenges introduced this year into the world of compensation are significant, but they also offer a great opportunities.

As is the case with just about everything in 2020, the compensation world is full of unprecedented challenges and incredible opportunities for positive change. Sometimes, it’s hard to see the opportunities — the silver linings — but they are there. But no matter how you look at it, there is hard work ahead for all of us.

As we compensation professionals look to the current moment and the months ahead, there are several important topics that require our focus.

2020 Incentives

Helping compensation committees assess 2020 performance and make decisions on annual and long-term incentive awards will be challenging. Much has been written on how to exercise “structured discretion,” which factors to consider in determining whether to make a payout, how much and for what — and then how to communicate these decisions to shareholders. This will occupy much of the compensation committee’s agenda for the remainder of 2020 and the first month or two of 2021 (for calendar FYI companies).

2021 Incentives

The biggest challenge most compensation committees and compensation professionals face right now is how to structure annual and long-term incentives for 2021 and beyond. Have there been fundamental changes in the company’s strategy? How it makes money? How it creates value? In the key measures and drivers of performance?

Are those changes temporary or permanent? Should performance be measured on a relative basis? Has the basic level of risk and uncertainty in the economy and the industry changed? How does that need to be reflected in goal setting, performance ranges and payout curves?

Human capital measurement and disclosure

The U.S. Securities and Exchange Commission (SEC) has mandated that publicly traded companies disclose “material” information about their human resources to shareholders. This has elevated the topic of human capital measurement and disclosure higher on the list of issues to be addressed by management, the board and — most likely — the board.

The SEC has allowed companies a lot of leeway, using a “principles-based” approach for determining what to disclose. Willis Towers Watson has a webcast on the final regulations, providing insights on navigating the coming months leading up to the initial disclosure. It is clear that companies and their boards will need to determine what to measure and disclose relatively soon.

While human capital disclosure extends well beyond compensation, the compensation committee is the logical place for human capital to be measured, monitored and governed. So, this significant topic may be added to the committee’s agenda. (The term “compensation committee” is being used generically here; many companies have expanded the committee charter and remit to include broader HR topics and have names like Management Development and Compensation Committee, Human Resources Committee and so on.)

Environmental, social and governance (ESG) issues

Despite a sudden economic downturn, the investment community has continued to focus on ESG. If anything, the level of interest has increased as 2020 placed a spotlight on human, social and environmental factors, and their critical importance to company performance and resilience.

Compensation committees are under pressure to consider adding ESG measures to incentive plans. Compensation professionals will help assess which measures are most relevant and material, and which should be measured by management, monitored by the board, disclosed to shareholders and, possibly, included in incentive plans. Comp professionals will be called on to determine how to best include these non-financial — and often imprecise — measures in annual and/or long-term incentives.

Inclusion and diversity (I&D)

Many companies are considering adding I&D measures to their incentive plans, or solidifying “soft” I&D goals currently included in subjective incentive components. The pressure to do so is coming from investors, employees, customers and communities. And, perhaps most importantly, it is coming from board members themselves who want to see the companies they serve be exemplary in all dimensions of a inclusive and diverse workforce, leadership team and board. Compensation professionals will have significant challenges and opportunities to make a difference in this key area.

Any one of these items would make for a challenging year for comp committees and comp professionals. Most companies will have some combination of these issues to address in the next few months. While this presents significant challenges, it also offers great opportunities to re-position compensation, re-shape incentives, measure new and important things, improve corporate governance and play a significant role in the evolution of companies to better serve all stakeholders.

Author

Managing Director, Executive Compensation Practice Leader - North America (Chicago)

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