Snell & Wilmer
Southwest Benefits Update
 
     

April 7, 2020

Glass Lewis, COVID-19 and Public Company Executive Compensation

By Greg Gautam

As noted in a prior S&W Benefits Update, the spread of COVID-19 is impacting executive compensation programs in a meaningful way. Among other approaches, our update suggested that management and their corporate boards might consider tackling COVID-19 by adjusting 2020 performance goals, delaying compensation decisions and changing the mix of equity awards by making more full value grants. We also noted that certain actions might be viewed unfavorably by Glass Lewis (“GL”) and other proxy advisors. GL recently provided guidance on its approach to navigating the governance issues, including compensation issues, related to COVID-19. While reading the entire Glass Lewis memorandum is suggested, GL makes clear that a “business as usual” approach to executive pay will face opposition in situations where employees and shareholders see their own paychecks cut. Below we highlight a few key concepts from the GL guidance:

  • GL expects that ALL governance issues will be impacted by COVID-19, including executive compensation, and that it will exercise “discretion and pragmatism to prioritize timing, certainty, disclosure and voting on any affected proposals” and that discouraging “pragmatism, discretion and context” does not serve the interests of shareholders.
  • GL will support executive compensation changes and adjustments that reflect a “proportional approach” where shareholders and employees share in the pain.
  • GL acknowledges that executives at “responsible companies” may need to take a pay cut and that planned salary increases or above target bonuses may need to be rolled back.
  • GL expects to see increasing shareholder concerns relative to repricings, dilution, burn rates, hurdle adjustments, changes to vesting schedules, caps and cuts to incentives and the quality of disclosure around the exercise of the Compensation Committee’s discretion. Importantly GL notes “[c]ompanies with strong pay structures will be challenged to abide by them, and firms with less robust programs will be forced to choose between lying in the bed they’ve made or changing arrangements and all but guaranteeing shareholder ire.”
  • GL acknowledges that for the next 18 months or so there will be a “heavy burden of proof for boards and executives to justify their compensation levels in a drastically different market for talent.”
  • GL emphasizes that effective disclosure and rationales for company decisions will be important in GL’s determination of whether changes made as a result of COVID-19 are justified and reflective of shareholder concerns and, with respect to executive pay, changes must align with employee and shareholder experiences.
  • Companies with a good track record on governance, performance and the use of discretion will be afforded more leeway in GL’s analysis.
  • GL states that it is particularly important that the timing of decisions is not delayed or postponed significantly on matters that are material to a company’s ability to address risks, manage operations and maximize shareholder returns. Companies that have delayed 2020 compensation decisions should consider whether the delay might adversely impact shareholders.

While GL’s guidance is certainly welcome, we continue to emphasize that the “right” approach on executive compensation in light of COVID-19 will depend on your industry, your board’s compensation philosophy and the ultimate economic impact that COVID-19 has on your business.

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© 2020 Snell & Wilmer L.L.P. All rights reserved. The purpose of this publication is to provide readers with information on current topics of general interest and nothing herein shall be construed to create, offer, or memorialize the existence of an attorney-client relationship. The content should not be considered legal advice or opinion, because it may not apply to the specific facts of a particular matter. As guidance in areas is constantly changing and evolving, you should consider checking for updated guidance, or consult with legal counsel, before making any decisions.