Liz recently blogged about ISS’s updated FAQs on pandemic-related pay adjustment. It looks like investors are steadily expecting companies to go back to pre-pandemic compensation designs, although there’s still some confusion swirling around with new COVID-19 variants. That uncertainty makes it challenging for compensation committees working to incentivize and retain executives during this time, especially when it comes to setting appropriate performance targets. Meridian shared some practical pointers on clawbacks, compensation disclosure and performance-based equity, based on a recent Conference Board webcast. Here is an excerpt of the practical PSU pointers for compensation committees to consider:
– Use a wider range. Set the performance threshold for a minimum payout at a level that still gives executives a chance of an earnout even when the company has a bad year, but set a high bar for a maximum payout to keep your shareholders happy and to drive superior performance.
– If you’ve moved away from relative total shareholder return (TSR), consider reintroducing it or making it a more prominent feature of your program. Relative TSR has disadvantages as a performance metric because so many factors affect stock performance that are out of executives’ control. But it allows for payouts if your industry or the entire economy are affected by a major negative event, and it clearly aligns payouts with your shareholders. So consider having, for example, 50% of your PSUs linked to a company-specific financial metric, while 50% is linked to relative TSR.
– Simplify and verify the “adjustment” process. If you’ve chosen a metric such as adjusted earnings per share (Adjusted EPS) as your performance target, avoid asking your compensation committee to approve a lot of de minimis[.] Consider having the audit committee approve adjustments to financial performance before they go to the compensation committee. Ensure adjustments can go both ways: don’t just back out the bad news; back out the unexpected windfalls too.
– Keep your performance share plan simple. One way of avoiding having a single bad year putting all of your outstanding PSU plans underwater is by “banking” PSUs on an annual basis as you go along. But keep in mind that you still want these to be long-term plans and don’t want to make your program so complicated that it cannot be understood by investors or by the executives it is intended to motivate.
-Emily Sacks-Wilner, CompensationStandards.com December 14, 2021