As you can imagine, a lot of energy and creativity is going into figuring out how to make sure executives do not lose their bonuses because of COVID-19 economic uncertainty. We are watching this closely as it subverts the entire concept of incentive compensation if it is all upside and no downside. Incentive compensation is supposed to align the interests of executives with shareholders. If shareholders do not get bailed out, executives should not either.
We’ve already seen the term “smoothing” used. And now this from the Compensation in Context newsletter issued by Veritas compensation consultants:
Decreases in stock prices of many public companies as a result of the COVID-19 pandemic have required them to issue more shares in order to provide the same intended value of equity compensation that they would have granted in the absence of such price declines. As a result, many public companies face a potential shortfall in the number of shares that will be available under their equity compensation plans.
Public companies whose shares are listed on national stock exchanges are required to obtain shareholder approval prior to adopting equity compensation plans or increasing the number of shares available under equity plans. As a result, listed companies facing potential shortfalls in the number of available shares are considering various alternatives. Such alternatives include:
Increasing the amount of cash compensation to offset the reduced availability of equity
Granting equity awards that are payable in cash (although this alternative results in “mark to market” financial accounting)
Delaying annual equity awards until a later time in the hope that stock prices will have rebounded
Setting the number of shares subject to equity grants based on a trailing average stock price that includes a prior trading period when prices were higher
Granting equity awards outside the shareholder-approved equity compensation plan as “inducement grants” for newly hired employees
We question the use of the term “required.” This newsletter addresses “inducement grants” for new employees outside the approved plan. We question this as well.