Jeannemarie O’Brien, David E. Kahan, and Michael J. Schobel are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.
The COVID-19 pandemic has in a matter of weeks upended life in America, including in American business. Public companies have witnessed dramatic decreases in market value and business challenges that were largely unexpected weeks ago. Executive compensation programs must adjust to the new reality and continue to motivate leadership and performance. While every company will face its own challenges, and no solution will be one-size-fits-all, certain common concerns are emerging. Sound responses will need to balance effective incentives with sensitivity to investor, public and political perception.
2020 Annual Incentive Programs. For many companies, the most immediate compensation issue presented by COVID-19 relates to 2020 annual incentive programs. Most companies had already approved, or were on the verge of finalizing, their 2020 incentive programs before the advent of the market turmoil. In many cases, the original 2020 projections are no longer realistic; what made sense in January is no longer appropriate. Companies should consider revising their metrics to attainable levels, or implementing additional metrics that are aligned with current priorities, to ensure that management is appropriately incentivized, while being sensitive to the pain being inflicted on shareholders by declining stock prices. An additional challenge is that the current level of uncertainty may make it premature to re-design business plans and incentive goals. For some companies, it may make sense to defer revising goals until there is more stability, or to rely upon discretion to create flexibility. In any event, reserving the right to make adjustments for unexpected events and expenses related to COVID-19 should be considered. The 2017 elimination of the performance-based exception to Section 162(m) of the Internal Revenue Code allows companies to modify plan design and to preserve flexibility without a tax penalty, although companies must be mindful of shareholder and proxy advisory firm reaction to, and public and political perception of, such actions.