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The Big Picture for Compensation in a Pandemic

The Big Picture for Compensation in a PandemicZoom inDownload PDF

The coronavirus pandemic is an unprecedented public health and economic crisis, forcing companies to make difficult decisions. CEOs are trying to lead under extraordinary circumstances. As one executive remarked to us in a recent conversation: “I’ve been through many downturns before—maybe nothing quite like this, but still difficult times. And the one thing I’ve learned is that the decisions you make now will define your company for years to come.”

Among those decisions for boards is how to pay their senior leaders through a period of significant disruption. The pandemic changes not just the calculations for compensation, but also the context. Now, executives and boards can demonstrate leadership in a way that will reverberate in their company’s culture and beyond. With rising calls for stakeholder capitalism from the Business Roundtable and leading investors such as BlackRock, the corporate world was already moving toward a greater emphasis on social responsibility. In response to the current crisis, many companies will therefore need to develop new approaches to executive pay. Below we outline three foundational principles for compensation committees.

  1. Stakeholders come first. Any adjustments to incentives or new compensation designs need to consider the pandemic’s impact on all stakeholders, especially employees, business partners, and shareholders. Boards should determine executive pay so that it is proportionate to those impacts. Decisions should be holistic—integrated into how the company is stepping into the breach to support employees and communities—while remaining fair and balanced. Everyone who normally keeps watch over executive pay will be taking an extra careful look at decisions made in this environment, and see them as demonstrations of corporate values. Even companies not substantially affected or even benefiting from the pandemic should be sensitive to the broader social context.
  2. Focus on engagement rather than retention. In normal times, a significant drop in stock price and the prospect of falling pay would raise concerns about retaining key employees. But when the pandemic is affecting nearly every industry and country around the world, those normal concerns need to be level set. Some companies may have their talent targeted by better-off competitors, and while select retention efforts
    may be warranted, these actions should be focused and limited to critical needs. In this time of uncertainty, focusing on retention is reactive, while working on engagement and culture is proactive. Companies that win the hearts and minds of employees—by being sensitive to how the crisis has impacted their economic situations and by helping them rebuild—are likely to suffer fewer departures.
  3. Pay for performance matters more, not less. Simply as a matter of engagement, it’s important for executives and employees to feel that their work still matters—and monetary rewards can reinforce that message. But boards must align performance and pay outcomes to create the appropriate incentives, in many cases redefining what good performance looks like while also addressing continued market uncertainty. Compensation committees will need to balance shareholder returns with effective post-crisis management for other stakeholders. Proportionality, rather than absolute levels, is the key for most committees. The performance bar will need to be both high and multidimensional, but still achievable.

Most boards are going to be focused on dealing with the pandemic’s effects on markets, customers, and employees for the foreseeable future. But the crisis also gives them an opportunity to reexamine executive pay in a fresh way. The recession and health-related dislocations are making the actions by companies somehow more real and human. The pandemic will likely accelerate the increasing emphasis on corporate social responsibility. Companies have a big impact on the economy and society, and compensation is part of that. Leading companies will consider how this broader context should continue to inform and influence their pay philosophy and guide their pay decisions into the future.

This article by Blair Jones, John Borneman, and Kathryn Neel originally appeared in the May/June 2020 issue of NACD Directorship magazine. To save and share a copy, download the PDF.