Women Get On Board is a member-based company that connects, promotes and empowers women to corporate boards. That’s why we’ve launched the Women Get On Board Virtual Speaker Series, focused on topics that are essential for boards to be more effective in their roles.
For our most recent speaker series on January 12, 2021, Deborah Rosati, FCPA, FCA, ICD.D, Corporate Director & Founder and CEO of Women Get On Board introduced Paul Gryglewicz, Head of Canada & Senior Partner at Global Governance Advisors. A recognized expert in executive compensation, governance and risk, Paul brings a wealth of experience in providing boards of directors and senior management teams with advisory and technology solutions.
As organizations look back on 2020 and consider executive compensation, directors are in uncharted territory.
“The impact of the COVID-19 pandemic has either harmed businesses dramatically or has potentially helped businesses accelerate their growth and their successes right now,” Paul said.
Some sectors have seen unprecedented levels of unemployment, while others—wholesale trade, professional, scientific and technical services, and educational services—have seen growth during the crisis, with employment exceeding pre-COVID levels. Paul pointed out that employment growth has also been uneven across demographics as well as sectors. According to the labour force survey in November 2020, there has been evidence of employment growth for women ages 25 – 54 since the pandemic hit.
As we look ahead, what do these trends mean for executive and director compensation? What is the most prudent approach for boards to take for annual bonus plans and long-term incentive grants? And just as importantly, how should boards effectively communicate compensation plans to shareholders?
Paul said that organizations can use current market trends as a guide. For sectors hardest hit by the COVID-19 pandemic, we are currently seeing no adjustments and even rollbacks to compensation levels. However, the sectors that are benefiting from the pandemic are trending toward increases.
“The polarization that the economy has gone through this particular year is materially different than it has been with other macroeconomic experiences,” Paul said.
With most boards deciding bonuses over the next two months, many directors have questions about applying discretion. In this extremely unusual year, the typical formulaic approach to bonuses may not be appropriate, as boards consider how the pandemic has potentially harmed or helped an organization’s annual budget.
Fortunately, Paul said that shareholders who previously felt negatively toward discretion have had a “change of tone” this year, recognizing that the standard formula may not be applicable in the current climate.
How does a board apply discretion? First, take the budget and the performance criteria in the company’s annual bonus plan into account. Next, consider the results the organization achieved over the past year, comparing those results with the original budget and performance criteria as if it were a normal year. That metric should then be compared with this year’s actual results.
When applying discretion, directors should consider what was within management’s control and what was outside its control. By making this distinction, you can find ways in which management added value.
For example, the way a company mobilized its workforce to be productive at home during the pandemic is a great example of decision-making that is inside management’s control. Some firms chose to establish spending accounts for employees to purchase appropriate office furniture at home in order to help them work more productively from home for an extended period of time. Leadership might have also demonstrated creativity in how they chose to market the organization’s products or services during the pandemic to stabilize the cashflows of the business as much as possible.
An example of a force outside of management’s control might be government intervention. For example, the federal government’s limitations on air travel undoubtedly affected revenue for airlines this year, and there was little those companies could do to combat those restrictions.
The last component to consider is how the pandemic will continue to impact the 2021 budget. Not only is it vital to understand how the 2021 scorecard could be affected by the pandemic, but it is important to relay this information to the shareholder base through public disclosure.
Disclosure: What Shareholders Expect
Paul’s advice on shareholders’ disclosure was that you should start doing the work now. Although shareholders are showing a change in tone regarding discretion, they will still expect an in-depth explanation. It is crucial that the board is prepared to describe why they chose discretion and how they applied it.
“And using high level language such as, ‘The CEO demonstrated great leadership through the pandemic,’ is not sufficient,” Paul said.
Be prepared to describe the challenges that the organization incurred due to the pandemic and how management responded to them. How did they preserve jobs or attempt to return furloughed employees to work as quickly as possible? What did leaders do to care for the health and mental well-being of their people throughout the crisis? The positive outcomes from such decisions may often be compensable.
Shareholders will be much less accepting of the use of discretion if it results in a bonus above what the executive’s target would be in a regular year. For this reason, Paul recommended avoiding discretionary awards that exceed targets.
Environmental, Social, and Governance Issues
This year more than ever, boards should be cognizant of environmental, social, and governance issues (ESG) and factor them into compensation decisions. With the pandemic weighing heavily on everyone’s minds, social factors are of particular importance to shareholders.
ESG issues can be measured both quantitatively—with metrics such as carbon footprint or injury frequency—but they can also be measured qualitatively, using softer measurements of success. Both types of metrics should be used where possible.
Long-Term Incentive Plans
For many organizations, the beginning stages of the pandemic—and the resulting declines in share prices—lined up with compensation meetings in the previous year. For this reason, directors should consider the value added for equity received in 2020 when determining this year’s compensation. Because of last year’s volatile markets, the answer will be substantially different based on the exact timing of the award.
For long term incentive plans, grant a blend of time and performance vesting equity and consider
36- to 48-month vesting. To factor in uncertainty, shorten the performance period, with intention of returning to longer performance periods when business understands the new normal.
Paul also recommended avoiding the overuse of stock options in compensation packages in the current climate, recognizing that there could still be another decline in the capital markets over the coming months. If another major lockdown occurs, or the markets take a hit for another reason, such use of stock options could over-expose the organization.
The bottom line? This is a year like no other, and directors must account for the extraordinary circumstances when considering executive compensation. Fortunately, shareholders are also recognizing the challenging factors at play, and are open to new approaches.
Interested in learning more about effective boards and governance? Join us for our next Women Get On Board Virtual Speaker Series on February 11th about IP Questions Directors Should Ask. The session will feature Natalie Giroux, Managing Director of Stratford Intellectual Property sponsored by Stratford Managers Corporation. Register here.