Maj Vaseghi and Lori Goodman are partners and Sarah Ghulamhussain is a senior associate at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Vaseghi, Ms. Goodman, Ms. Ghulamhussain, and Jordan Salzman. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).
Companies poised to enter into the upcoming annual report and proxy season should start disclosure preparations early in order to address the complexities that will have inevitably resulted from an unprecedented 2020. In particular, companies will need to take proactive steps to evaluate the impact of the COVID-19 pandemic on executive compensation, the role of new human capital management disclosure requirements and continued focus on diversity and inclusion, knowing that this year’s disclosures are likely to be heavily scrutinized by investors, proxy advisors and other stakeholders given the volatility and ethos of the preceding months. This post identifies several key executive compensation and related governance issues to keep in mind:
1. Compensation discussion and analysis (CD&A) disclosure for compensation decisions made in connection with COVID-19
As has always been the case, companies should continue to strive to present the CD&A in a clear, well-detailed and balanced manner. This will be of increased importance as companies prepare to communicate executive compensation program changes prompted by the COVID-19 pandemic, and particularly the case for companies whose boards revised performance metrics or exercised discretion in determining incentive payouts. Compensation committees that have not already done so should develop a process and framework for reviewing the appropriateness of changes to compensation programs or in exercising discretion to determine 2020 annual incentive payouts. This process and framework will allow companies to explain the rationale behind the compensation committee’s decisions in the CD&A. For example, the CD&A may discuss whether the compensation committee reviewed the Company’s performance relative to its peers, its ability to meet cost cutting measures or liquidity objectives, or its ability to stage a recovery or prepare for one when approving compensation changes. A similar framework should be used in designing 2021 incentive programs and setting 2021 performance targets. For example, if an e-commerce company outperformed in 2020 due to COVID, is it appropriate to set 2021 financial targets below 2020 attainment levels? This is an issue that ISS has scrutinized in the past. Other design considerations compensation committees are assessing include using a range rather than a single target financial metric, increasing the use of relative rather than absolute performance measures and increasing the use of non-financial targets, such as strategic or sustainability goals. Moreover, while the CD&A requires only a discussion of compensation decisions related to the named executive officers, companies may choose to include a summary of the impact of COVID-19 on the broader workforce to provide context for executive pay decisions.
