The coronavirus recession may wreak havoc on your incentive plans. How should your firm respond?
Millions of Americans have been laid off or furloughed due to COVID-19. But as employers recover and shift their focus forward, they are faced with a new question: What does this financial uncertainty mean for my firm’s incentive plans?
Long-term and short-term incentive plans are a key component to any total rewards program. They provide a form of variable pay that is added to base salary and benefits. If the company performs well, the incentives will be higher.
With many incentive plans based on firmwide financial metrics, funding for incentive programs may be at risk in the current climate, Eric Larre, partner at consulting firm Mercer. Because of this, employers must evaluate their incentive plan programs to understand whether they need to make adjustments.
“Corporate financial performance is at the heart of funding for any type of incentive plan,” Larre says. “It starts with how much money the company has to spend. And that's typically driven by how the organization performs as a whole.”
Many firms have already made adjustments to their compensation plans, disclosing changes in SEC filings and news releases. WestRock Company’s incentives will be paid in common stock, rather than cash, at 50% of their target levels, according to its most recent 8-K. In recently filed proxies, Ralph Lauren disclosed a reduced maximum payout level, from 200% of target to 125% of target, and Hess Corporation disclosed their plan to “adjust weightings and targets for certain annual enterprise-level metrics to reflect the company’s shift in priorities given the economic crisis.”
Larre says that companies have two options: leave incentive plans as is, allowing for discretionary adjustments at the end of the year, or try to assess the impact of COVID-19 on the firm and adjust incentive plans accordingly.
“There are companies who think that they can assess and isolate what the impact of COVID-19 has been and will be for the rest of the year, and they're adjusting their current metrics to reflect that,” Larre says. “But there are also companies that have said, ‘We're not really sure.’”
A recent survey from Willis Towers Watson found that, for firms who noted their short-term incentive plan had been negatively impacted by COVID-19, 58% were planning to adjust previously approved plan targets. The number was 46% for long-term incentive plans.
For firms who plan to make changes to their incentive plans, adjustments have varied by company. Willis Towers Watson’s survey found that changes fell in a few main categories: adjusting previously approved targets, delayed goal setting, changing metrics, lowering threshold performance levels or delaying equity grants. Not mentioned in the survey, but present in firm SEC disclosures, were approaches like paying incentive compensation in company stock rather than the typical cash payment 一 as in the case of WestRock Company and Dave and Busters.
Companies may also split metric performance periods, or the periods for which firms measure certain metrics to grant awards. For example, MAXIMUS disclosed July 19 that they “established new goals for each metric that will apply to the second half of fiscal 2020 that are in line with the company’s recently revised guidance.”
Catherine Hartmann, rewards practice leader for North America at Willis Towers Watson, sees firm COVID-19 responses as a three-stage process: managing through the crisis, restoring stability and operating post-crisis. Adjusting incentive plans in response to COVID-19 fits into stage two, she says.
“What we’re seeing in the current “restoring stability” phase is [firms] reviewing and redesigning rewards and retention programs for critical roles,” Hartmann says. “This can include adjusting performance metrics goals and rewards for 2020 and 2021 relative to business expectations, and reviewing options to align to new ways of working.” Hartmann also emphasizes that incentive plans are just one facet of a total rewards program, and the changes each employer makes will depend on the firm’s unique workforce.
At WorldatWork’s recent Total Resilience conference, Elizabeth Walgram, senior consultant at human resources and benefits consulting firm Segal, discussed four broad topics for employers to keep in mind when making any changes to incentive plans: fairness and motivation, administration and governance, communication and perception and tax and legal applications. They created the framework to assist clients with making decisions around incentive plan adjustments 一 a topic many clients were asking questions about.
“In the last several months, a lot of our clients were saying, ‘It feels as if I should be doing something. The situation is changing, and yet, I'm not sure what the right course of action is and what types of things that I should be considering as my leaders and my board are pushing me to make changes,’” Walgram said. “It’s important to diagnose [problems] and learn how to treat them.”
As the situation continues to evolve, firms should look towards a longer-term solution, Hartmann says, shifting focus from restoring stability to operating post-crisis.
“[Firms are] going to be very much focused on building financial and human capital resilience,” Hartmann says. “They’re asking, ‘How can we be better equipped to manage through these financial surprises? Are there things that we should do from our metrics standpoint that put us in a better position so going forward, when the sort of watershed moments happen, we have a plan to address that from an incentives perspective?’”