Last week, Proxy Analytics and Soundboard Governance issued a reference guide for 2020 annual shareholder meetings and related SEC disclosure in light of the ongoing COVID-19 pandemic. While oriented for corporate governance and securities practitioners, the guide is very user friendly, covering such topics as logistical considerations for annual meetings and how to acknowledge COVID-19 as part of your shareholder communications.
The guide also contains an extensive section on the impact of the pandemic on compensation practices, including the types of disclosures that are starting to appear in proxy statements. The guide divides the disclosures being made into three categories: cautionary statements on the timing of information included in proxy materials, current impacts or changes to compensation practices and forward-looking statements on potential impacts on compensation practices.
In the first category are disclosures that address the fact that the compensation matters being disclosed predate the recent crisis. For example, Chart Industries, Inc. provides the following introduction to its Compensation Discussion and Analysis (at page 20):
This Compensation Discussion and Analysis provides an overview of our business performance in 2019, highlights the key components and structure of our executive compensation program, discusses the principles underlying our compensation policies and procedures, and addresses other matters we believe explain and demonstrate our performance-based compensation philosophy. Since it describes our executive compensation program for 2019, this Compensation Discussion and Analysis does not address the impact of the coronavirus (or COVID-19) on the global economy, our business and financial results, or our executive compensation for 2020. The Compensation Committee will consider such impacts when reviewing our 2020 executive compensation program and may align 2020 executive compensation with the current economic environment. Those 2020 executive compensation program decisions will be described in our proxy statement for next year’s Annual Meeting.
Other companies have already made changes to their compensation program, generally reducing cash compensation to preserve cash or even changing aspects of the overall compensation program. For example, Alaska Air Group, Inc. discloses in the section of its Compensation Discussion and Analysis discussing base salaries that its senior executive officers have either waived their base salaries or agreed to take pay cuts in the near term (at page 38):
In light of the significant financial impact of the coronavirus pandemic on the Company, Mr. Tilden and Mr. Minicucci waived their base salaries for the period from March 6 to September 30, 2020. The Company’s NEOs are anticipated to receive base salary cuts of 30% effective on or about April 1 to September 30, 2020, while other officers are expected to receive base salary cuts of 20-30% in the same period. The extent and duration of these reductions will be approved and reassessed by the Committee as the situation evolves.
Another example is Stratus Properties Inc., where the compensation committee opted to pay a portion of its annual incentive awards in the form of RSU awards (at page 26):
In March 2020, the committee evaluated the company’s accomplishments and performance during 2019, both independently and as compared to the peer group, the key roles of each of Mr. Armstrong and Ms. Pickens in those accomplishments, and each executive officer’s overall compensation. Although not impacting 2019 performance, the committee also believed it was important to consider the current and rapidly evolving COVID-19 pandemic, which is having a significant impact on the hotel and entertainment industries, including our Block 21 operations, as well as on the restaurant and retail tenants at our retail developments. As a result, despite the 2019 accomplishments noted below, the committee decided to decrease the annual incentive awards for 2019, and approved cash awards of $700,000 for Mr. Armstrong and $160,000 for Ms. Pickens, which amounts represent an approximate 20% reduction for each as compared to the annual incentive awards received for 2018. The committee also elected to increase the annual RSU grant for our executive officers for 2020, thereby shifting a portion of the reduced 2019 annual incentive award to a long-term award, the value of which is dependent on our stock price. For Mr. Armstrong, this increase resulted in an award of 25,000 RSUs during 2020, up from the annual grant of 12,000 RSUs he has received in recent years.
Finally, there are the companies that haven’t yet finalized their compensation arrangements for the current year (or haven’t decided whether to modify their program in light of the pandemic). Generally, these companies have included language in their Compensation Discussion and Analysis noting that the Board of Directors or compensation committee is currently reviewing or monitoring developments and may make changes in the future if warranted. One example of this type of disclosure is contained in The Hackett Group, Inc. definitive proxy statement (at page 35):
At its meeting held on February 12, 2020, the Compensation Committee reviewed and approved 2020 base salaries and cash and equity incentive plan targets for the Company’s named executive officers, as well as for the Company’s other senior leaders. Consistent with prior years, the Compensation Committee specifically approved a program for its named executive officers that, in addition to base salaries, would pay annual cash and equity incentive bonuses in connection with the achievement of specified 2020 performance targets. The Compensation Committee chose to retain the pro-forma diluted net earnings per share as the performance target in the 2020 program.
The Company’s Compensation Committee has once again established challenging performance targets for 2020. The Company’s pro-forma diluted net earnings per share must improve at least 13% from $0.97 in order for the named executive officers to earn their “Goal” cash and equity performance incentive awards. The Company’s pro-forma diluted net earnings per share must improve at least 20% in order for the named executive officers to earn their “Superior” cash and equity performance incentive awards. The Compensation Committee established these performance targets in mid- February without the benefit of being able to consider the more recent developments regarding the evolving impact of coronavirus or COVID-19 on our projected pro-forma diluted net earnings per share. As a result, the Compensation Committee may exercise its discretion to adjust the performance targets as appropriate to take into account the impact of the coronavirus pandemic on the Company’s results of operations.
As reflected by these examples, there’s a lot of interesting and valuable information in the reference guide. For many companies, it will probably serve as a useful checklist in a fluid and constantly changing environment. In addition, if you’re still working on your executive compensation disclosure for your proxy statement (or have yet to begin), it’s probably worth a quick read to see if there’s anything useful that you can leverage. I’ve found that it’s always helpful to see what others have been disclosing when attempting to draft a specific item (particularly as it relates to such an unusual topic as COVID-19). Many thanks to the folks at Proxy Analytics and Soundboard Governance for allowing me to share their research with you.
-Mark Borges, CompensationStandards.com April 13, 2020
