This newsletter’s Table of Contents is as follows:
- Fixing “Busted” Incentive Plans
- A chair’s point of view with Five principles of a strong board during the COVID-19 (or any) crisis
- PwC’s COVID-19 US Employee Pulse Survey: how do employees feel about returning to the workplace?
- A Positive COVID-19 Corporation Game Changer- Making Corporate SOCIAL Purpose A Reality
1. Fixing “Busted” Incentive Plans
One of the downstream casualties of the current COVID-19 crisis is that corporate short-term incentive plans that have moved from “achievable” to “highly unlikely” payouts due to the crisis. So, what can or should a Board do—particularly when front line employees and institutional shareholders are watching carefully? According to a Corporate Board Member survey, only 10% to 15% of companies have taken immediate actions to revise short-term incentives. The vast majority of companies are taking a wait-and-see approach.
Here is an Incentive Support Model to provide Boards with a roadmap.
1. Financial Adjustment: The first lever to consider using is adjusting the financial targets used in the incentive plan. This pandemic’s financial impact was not one of the scenarios that was anticipated when companies were setting their goals. To the extent this lever is “activated” by a Committee when calculating final results and payouts, the adjustments would need to be explained in detail in any public filing or media coverage.
2. Overriding Discretion: This lever must be used carefully, as the institutional shareholders get concerned when it is applied. Again, the Board needs to reason through when it is appropriate to apply discretion, in what situations and with which executive/management populations. This lever is best used in situations where actual performance is significantly off plan and/or the impact is harder to disaggregate from other factors (such as commodity prices, regulatory changes, etc.).
3. Incentive Plan Restart: This lever would suspend the annual plan that was implemented at the beginning of the year, and re-set goals (and possibly change metrics) for the last six months of the year in a “new” six-month plan. Payout potential is correspondingly cut in half as well. Committees need to reason through how critical goal alignment, and/or a new direction are for the back half of the year.
4. Incentive Caps: This final lever would come into play if performance results produce a windfall payout, primarily due to exogenous factors. Caps can be set depending on the circumstances anywhere between target and 125% of target goals. Great care should be taken when considering maximum payouts for any non-financial goals.
Caveats
In addition to the shareholder concerns raised earlier, cash management is a primary goal of the executive team in this crisis. Cash considerations should provide an overlay to any potential decisions that are made, as activating any of these levers (except the cap) would be a net negative to cash flow.
Source: Corporate Board Member
2.A Chair’s point of view with Five principles of a strong board during the COVID-19 (or any) crisis
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3. PwC’s COVID-19 US Employee Pulse Survey: how do employees feel about returning to the workplace?
As states begin to loosen shelter-in-place mandates, companies are planning for a return to the workplace by implementing a raft of safety measures. But how do employees feel about returning to the workplace? To find out, PwC surveyed more than 1,100 workers nationwide during the week of May 4, 2020. The results might surprise employers. Some of the key findings include:
• Among the workers surveyed, 39% were forced to stop working (while still being paid) or were forced to work remotely. Of the 39%, 51% cited the fear of getting sick from being at work as the reason they would not be able to return to work, while 24% said they are unwilling to take public transport. Others also stated being a parent or caregiver as reasons for not being able to return to work.
• A little over half of all workers who had been forced to stop working or forced to work remotely are seeking safety measures from their employers. Topping the list of measures they would like employers to take is providing personal protective equipment (56%), followed by notifying employees if someone they work with has tested positive (51%) and requiring customers to follow safety and hygiene practices (51%).
• Workers have reservations about tracing tools. Among safety measures employers may require, 31% say they’re “very concerned” about the use of wearable devices to track location and proximity to infected individuals. Phone apps that track location also have 31% of employees surveyed “very concerned.” Additionally, 45% are in favor of mandatory COVID-19 testing for health clearance before returning to the workplace.
Source: PWC
4. A Positive COVID-19 Corporation Game Changer- Making Corporate SOCIAL Purpose A Reality
Calls for a more responsible capitalism have gone louder in recent years. A major shift happened last August 2019 when the Business Roundtable (BRT) published a ‘Statement on the Purpose of a Corporation’. For the first time, the BRT, an organisation that represents the CEOs of America’s largest companies, embraced the concepts of a corporation’s social purpose and stakeholder capitalism. This was followed by the World Economic Forum’s Davos Manifesto which highlighted that a company serves not only its shareholders, but all its stakeholders. Meanwhile, investors are placing greater focus on how companies “create value” for the longer term and what their REAL “purpose” is. They have been progressively integrating environmental, social and governance (ESG) factors in their investment decisions while they have experienced a rise of inflows in their sustainable investing products.
The shift in mindset and in capital allocation have undoubtedly put management teams in a challenging situation whereby they need to balance the market’s demands for financial returns while ensuring that their actions are not detrimental to the interests of other stakeholders. As the coronavirus pandemic is providing an acid test to the sustainability claims of companies and investors, this crisis and its aftermath may accelerate the adoption of a more stakeholder-oriented decision-making process at companies. In the words of the historian Yuval Noah Harari: “That is the nature of emergencies. They fast-forward historical processes. Decisions that in normal times could take years of deliberation are passed in a matter of hours.”
SquareWell has already witnessed evidence of this shift of behaviour from some investors who have pushed their portfolio companies during the crisis to prioritize their other stakeholders. For example, Legal & General Investment Management (“LGIM”), managing more than $1 trillion of assets, is reported to have sent a letter to portfolio companies that the suspension or reduction of payments to shareholders may be necessary to guarantee the long-term sustainability of the company. BMO Global Asset Management (with over $500 billion of assets) expects companies to reconsider their share buybacks programs given the effects of the crisis, while UK asset manager Schroders (with over $500 billion of assets) asked companies that they “prioritize their key stakeholders, in particular employees but also customers and suppliers”, as doing so will benefit both the economy and investors.
In this journey to a more responsible capitalism, companies that have defined their purpose will have a big head start as they should be better at managing the tradeoffs between their different stakeholders.
Source: Harvard Law
