Executive Compensation Planning Ideas in an Economic Downturn

Any time the economy is growing, it’s important to consider and plan for the next economic slowdown. When exactly this will occur is something that experts debate, and opinions vary from industry to industry, but planning for lean years during the good years is always wise, especially in the area of executive compensation. Planning creates a smooth path and ensures that executives and management team members are incentivized and able to bring your company through the next downturn, whether it’s a shallow one or a full recession.

  • Performance Metrics: Executive compensation is often tied, at least in part, to performance metrics that align with your company’s strategic goals. These metrics should drive the appropriate performance during periods of economic growth, but they should also encourage the right behavior during an economic slowdown. Your compensation committee should consider whether a metric encourages or discourages risk-taking and short-term or long-term success. Metrics may also include non-financial markers such as employee retention or brand footprint and company sustainability goals such as reducing scrap or lowering logistics costs.
  • Cap Compensation: Something your company may want to consider is a cap to executive compensation, especially when it is being scrutinized by shareholders. One way to do this is to tie compensation to overall company performance so that compensation cannot exceed a company’s ability to pay. Compensation committees can also design a compensation plan in such a way that an executive must meet minimum performance standards on all metrics before being paid for his or her highest performing metrics.
  • Equity Compensation: Many executive compensation packages include awards of shares in addition to monetary compensation. A drop in stock price would impact the value of the share reserve, and if the compensation is framed as a dollar value in shares, then the share reserve needs to be increased to meet potential drops in value.
  • Severance Planning: Your executive compensation arrangement should consider what happens in the event of a voluntary or involuntary termination. Formal severance plans must be ERISA-compliant and take into account a number of scenarios. Making changes to your severance plan during an economic upswing is often much easier than during a downturn when employees and executives are worried about their positions.
  • Employment Agreements: Just as with severance plans, making changes to employment agreements is likely easier during good economic times. Review agreements to ensure they cover a variety of situations and can be met even during a slowdown. Furthermore, make sure there is consistency in your policies for executives and management. You want to include detailed information, for example scenarios when salaries can be cut, so that you can easily do so if needed.

Creating an executive compensation package that incentivizes your leaders and protects your company is imperitive. The ERISA attorneys at Hall Benefits Law work with clients to craft these plans and take into account both industry best practices as well as the specific goals of a particular business. Making changes now is one way to plan for the future and enter an eventual downturn knowing your compensation plan is ready. To learn more or to get help designing or making changes to your plans today, call 678-439-6236,  or visit the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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