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Compensation and Performance Management for Executives and Directors: Trends, Changes and Practices
May 12, 2020
On May 5, Michael Hartmann, Principal, The Directors College and guest panelists Christopher Chen, Managing Director, Compensation Governance Partners and Rachel O’Connor, Practice Lead, Leadership and Performance, Watson Inc. discussed how director and executive compensation and performance management approaches are adjusting in the face of the Covid-19 pandemic in the tenth session from The McMaster Collaboratorium.
Executive compensation processes have remained largely unchanged for the past decade. Generally with Fall planning, Spring implementation.
From a Compensation Governance Partners survey for the situation ranking risk right now: Financial risk is number 1, People risk, usually around number 8, has moved to number 3. 98% are actively monitoring the financial impact from the pandemic. 40% of compensation committees are considering the impact of the pandemic in their planning.
Compensation decisions are being driven on three levels: Businesses who are severely financially impacted are freezing or decreasing compensation. Businesses who are thriving are considering the optics of compensation packages that may be supported by their own financial situation, but are out of step with the majority of the economy. Businesses who are holding the line or Crown corporations may contribute to lower tax levels over the next 18 months to 2 years.
Leadership performance evaluations may shift in the short and long term to account for performance measurements in the face of the unprecedented crisis brought about by the global pandemic, where businesses are being largely impacted by external forces.
Board evaluations must consider the handling of the crisis as well as against the original goals of the organization. It is time to take a closer look at board composition, the CEO and leadership team, and identify talent gaps, and reward strong performers, in order to recover effectively.
Courageous organizational changes are being made – change becomes more possible in times of upheaval. Adaptability, flexibility and agility are required to move at the current speed of change.
Some data also indicates that corporations who were more strongly aligned with corporate social responsibility policies, were more immune to dire consequences in the fallout from the pandemic, which supports the pre-pandemic push for compensation and performance metrics related to ESG.
Profit sharing plans can be of benefit in the short-term as businesses look to reward their workforce to continue positive performance as a collective to overcome the current challenges.
A new seasonality to business cycles
Changing metrics to include the impact of crisis management
Executive compensation and performance management that is measured in a more discretionary way, versus formulaic
Old patterns, stress testing and modeling will change to consider new worst and best case scenarios
Performance and compensation benchmarking, which came into focus after the 2008-09 financial crisis, may again be relied upon, relative to reality
Long term incentives will change to account for more discretion
Short term incentives could be team or department based
Incentives must become less complex – simplified to tie in with big picture goals
Compensations decisions made in Q1 must be revisited
Holistic compensation review and design should be implemented
Incentive designs will be influenced by new metrics – especially in situations where management has been working diligently through a crisis that has impacted pre-set financial goals
Ensure that feedback processes occur
Don’t waste a good crisis – make difficult changes around talent now
Optics around executive compensation will be critical – look at all decisions through multiple lenses
Watch key messages from the webinar here.