The COVID-19 outbreak in the U.S. coincided with the timeframe for annual incentive awards for many companies and threw a sizable wrench into the decision-making process on how to structure compensation packages going forward. As companies 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 incentive compensation.
Annual Equity Grants
Share availability. Equity award pools may be depleted due to a drop in stock price, which means that previous burn rate projections may now be obsolete. Companies may wish to amend plans to increase the number of shares, which requires shareholder approval. If your annual meeting has already been held, you may need to convene a special shareholder meeting to approve an amendment to the equity plan that allows you to ensure equity award pools are sufficient to cover upcoming grants.
Timing. Companies making grants based on the awards’ grant date fair value may currently be considering a delay for these annual grants. However, prior to taking this action, management is advised to review grant policies, plan terms, and prior SEC disclosures to ascertain whether there are any restrictions on grant timing (either written or stated). Amending a plan to reschedule awards may trigger Form 8-K reporting.
Companies also need to take into consideration the effect that delaying grants has on employees in this uncertain environment. One alternative is to stagger annual equity grants on a quarterly or semi-annual basis. This strategy could also mitigate potential fallout from management receiving a perceived windfall if equity grants are distributed at a time when market fluctuations cause a company’s share price to be artificially low.
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.
Multi-year performance targets. Setting long-term performance goals in a volatile business environment is challenging at best. If possible, consider delaying this until market volatility eases somewhat or use relative rather than absolute performance metrics that can be adjusted later.
Equity award mix/option repricing. Reassess your 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.
2020 Performance Metrics
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. Draft provisions narrowly so compensation is not transformed from performance-based to discretionary.
Companies that have already established their 2020 performance metrics should delay adjusting 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.
We help organizations set up the benefits plans that are right for their members, put processes in place to ensure regulatory compliance, and keep those benefit plans updated based on changes in laws and regulations. To learn more about the services we offer, call 678-439-6236 today.
Hall Benefits Law, LLC
