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COVID-19 and Key Issues to Consider in Executive Compensation Programs

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COVID-19 and Key Issues to Consider in Executive Compensation Programs
As employers navigate ways to incentivize and retain employees in this rapidly changing business environment, below are some key considerations when addressing the impact of COVID-19 on executive compensation. Equity Award Vesting and Furloughs Equity awards are often subject to vesting based on a predetermined length of service as defined in an equity plan or award agreement. COVID-19-related furloughs may interrupt these vesting schedules, depending on the length of the furlough. Employers should review the express terms of affected executives’ equity plans or award agreements to determine if lengthy furloughs — typically 90 days or longer — could be treated as a termination of service for purposes of these plans or agreements, in which case equity awards may stop vesting and unvested awards may be subject to forfeiture. Employers should review equity plans or award agreements to determine if amendments or clarifying changes need to be made in order to prevent unwanted financial outcomes for furloughed executives. Performance-Based Compensation Companies that have not yet set 2020 performance metrics for their incentive compensation programs may wish to consider the following:
  • Delay setting performance targets until there is a better understanding of the near- and long-term effects of the pandemic;
  • Use alternative performance metrics to set targets based on current and projected pandemic impact on stock price and company operations;
  • Provide the plan administrator with flexibility to adjust performance targets as necessary due to pandemic impact; or  
  • Draft provisions narrowly so compensation is not transformed from performance-based to discretionary.
Companies that have already established their 2020 performance metrics should delay making adjustments as long as possible since the full economic impact of the pandemic is still unknown.  However, if you choose to adjust now, be sure that your plan permits such adjustments for extraordinary events. In addition, consult with your tax advisor and auditor to ascertain whether the adjustments will trigger charges or other accounting or tax consequences. Compensation Compliance Obligations Pre-negotiated severance pay. Section 409A regulations may apply in cases where severance pay:
  • Extends for more than 24 months;
  • Is paid in installments;
  • Is subject to a release of claims; or
  • Is triggered by an employee that has “good reason,” “constructive termination,” “disability,” or voluntary termination rights.
Employers may be limited in the changes they can make in payment terms or timing if severance can be characterized under Section 409A as “nonqualified deferred compensation.”  Deferred salary and pay reductions. Employers that seek to have employees defer or reduce wages may be subject to restrictions imposed by state wage and hour laws, Section 409A, and payroll tax regulations. Employers considering whether to defer wages in 2020 with a promise to pay later should consult with legal counsel because of the complex laws regulating deferred or reduced compensation. Trading cash for equity. Employers that are weighing whether to replace a portion of cash wages with equity compensation will need to take into consideration federal, state, and local wage and hour laws, including the requirement for non-exempt employees to be paid certain minimum wages and the necessary salary threshold for exempt employees to maintain their exemption. Severance Plans or Policies Employee severance plans or policies that are overly broad may prompt regulation by ERISA as well as an annual filing requirement with the Department of Labor. While there are pros and cons to ERISA severance plans, designing a severance plan or policy that complies with ERISA offers several employer benefits, including:
  • Preemption of state law;
  • Jury trial waiver;
  • Limits to punitive damages for claims;
  • Possible use of arbitration terms and conditions; and
  • Possible inclusion of non-compete and non-solicitation agreements in jurisdictions where they may otherwise be restricted.
Option Pricing and Repricing  Pricing.  During times of market volatility, companies that base awards on grant date fair value using spot pricing may wish to consider the alternative of using a trailing average price to avoid atypical pricing. Keep in mind that for options to be exempt from Section 409A of the Internal Revenue Code, the fair market value used to determine the exercise price cannot be determined by a trailing average of more than 30 consecutive trading days. Option repricing.  Reassess equity award mix (full share grants vs. option grants) to determine whether any outstanding stock options should be repriced due to current market volatility. Option repricing requires shareholder approval unless it is expressly authorized in your equity plan. Having a team like the experienced ERISA attorneys at Hall Benefits Law on your side means having someone you can depend on for clarification on newly enacted rules and regulations. Call our team today at 678-439-6236.
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