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Managing Uncertainty in Executive Pay

As yet another turbulent proxy season approaches, many Compensation Committees are wondering how best to manage uncertainty without unduly irritating shareholders and proxy advisors. A recent ClearBridge article provides a good framework for how to approach executive pay during volatile times – without losing sight of the big picture.

  • Identify the Objective. The article makes the interesting point that volatile times call for companies to make choices about which objectives are most important. For some companies, providing flexibility and motivating and rewarding top talent will be top of mind, especially if there are retention issues. For others, achieving key business objectives will be paramount, and for still others, aligning with shareholder interests may take priority (especially if there has been a low Say on Pay vote, activist investor, or negative press coverage).

  • Make the Change. Armed with the primary objectives identified in the first step, the job of assessing and adjusting incentive plans will be easier. The article highlights a number of options companies may be familiar with – setting wider performance ranges, setting target goals as a range, switching to relative metrics, shortening performance periods, etc. The key here is to assess each option against the company’s primary objectives. If shareholder alignment is critical, shortening performance periods or making one-time retention grants may be less favorable. If retention is critical, a stronger focus on time-based restricted stock or individual performance may be warranted.

  • Stakeholder Feedback and Disclosure. Once the hard decisions are made (and if possible, vetted with shareholders), make sure the storytelling is right. Ensure the Committee’s process, rationale and strategy are clear. If this is a one-time needed change to retain talent or achieve a critical goal, verify that this is clear in the disclosure to mitigate shareholder concerns.

 For more insights on setting incentives during volatile times, see the Center’s recent analysis here.

Published on: May 6, 2022

Authors: Ani Huang

Topics: Compensation Committee and Board, Executive Pay Plan Design

Ani Huang

President and CEO, Center On Executive Compensation

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Contact Ani Huang LinkedIn

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