Incentive Compensation on the “Chopping Block” For Some Amid Continued Uncertainty

As the slowdown and uncertainty in the economy continues, employers are carefully reviewing options to reduce employee payroll costs after several years of higher-than-average salary increases, strong incentive payouts and enhanced benefits used to attract and retain talent during the labor shortage. According to a recent WSJ article, some companies are considering or have reported cutting stock-based compensation as a tactic to improve the bottom line during this slow growth period.  A targeted move – as equity compensation is primarily reserved for executive and senior management positions – it is a way to reduce costs without pulling back on benefits company-wide or taking more drastic pay reduction measures. In the short-term, this may involve reducing the size of annual target grant awards, limiting the number of new roles eligible for stock or from a long-term perspective, modifying the plan design to reduce the accounting expense over time.

For example, Salesforce recently announced their plans to reduce the expense of stock-based compensation for the year ending in January 2024, shifting from 10.5% of revenue in the prior year to less than 9%. This will occur amidst larger cost-cutting measures that include a reorganization with layoffs impacting approximately 10% of its workforce as well as the sale of some real-estate properties.

Meanwhile, other firms like DSW (a division of Designer Brands) are taking cost-cutting initiatives deeper within the organization by reducing bonuses. The Designer Brands CFO, who also adjusted bonuses during the pandemic, explained that the decision to raise the target performance level that needs to be met in order to achieve a bonus for the year “best aligns the actions of management and company shareholders in times like this.”

It is often instructive to look at the tech industry in times like this, as it frequently proves a bellwether for other industries. So far, strategies are mixed – while firms like Unity Software and Meta are considering reducing shares awarded in upcoming grants or adjusting bonuses, a WTW pulse survey found most tech organizations are “holding the line” on LTI participation and funding and only 8% intend to fund bonuses below 75% of target. However, these early projections could change significantly as actual earnings are reported in the latter half of 2023 and 2024 forecasting takes shape.