Special Awards: Staying Within the ‘Guardrails’

Boards often find themselves in the crosshairs between feeling compelled to grant a special award to retain key executive talent in unique situations and balancing the disapproving reactions from investors and proxy advisors. Despite these risks, a recent Semler Brossy article indicates that the use of special awards has increased since 2019 and suggests that the recent economic downturn (which left many equity award payouts below target levels) combined with the competitive talent market could be the perfect environment to see continued use of special awards.

While acknowledging that special awards should be used sparingly and that alternative changes to the pay package may yield the same retention and motivational results, the consulting firm discusses the questions boards should ask themselves to determine if a special award is warranted.

• Consider the “why” and think about timing. What specific factors are driving the desire to issue a special award? Common reasons include retention during key organizational changes, investing in a high-performing individual’s potential, increasing “stickiness” for a critical role or pre-emptively addressing flight risks in a tight talent market. Then consider the optics in timing from the business operations standpoint and if recent messages about company performance align with a message about a special award. Also review Say-on-Pay history and historical use of special awards.
  
  
• Review the compensation program. Make sure this is not a knee-jerk reaction to one bad performance year. Look back at payout levels over multiple years and model future projected payouts to assess whether the current program can sufficiently reward performance without a supplemental award.

There are four aspects of a special award that investors and proxy advisors consider when assessing the “reasonableness” of the grant. Based on Semler Brossy’s analysis of the 2019-2021 data, they suggested guardrails within each element intended to strike a balance of a meaningful award without strong shareholder scrutiny.

• Magnitude. A range of $2-3 million for NEOs and $3-5 million for CEO is recommended. Awards should be less than or equal to the annual equity value. Approximately half of awards above $3 million received an “against” recommendation and risk being perceived as paying for nonperformance.
  
  
• Performance Requirements. A minimum of 50% should be performance-based and metrics should “complement annual equity grants” with different goals or metrics from the equity plan. Time based awards are viewed less positively.
  
  
• Vesting. A 3-year minimum period is the most common and aligns with the regular performance plan.

Forfeiture Provisions. Investors are looking for unvested portions to be cancelled in the event of a voluntary departure or performance issue.