Incentivising executives during a financial crisis

23 March 2020

Allan Feinberg , Managing Director, Remuneration & Reward Services |

As COVID-19 continues to wreak havoc on the global economy, companies have enacted sweeping changes to secure their business continuity: from hiring freezes to delaying projects to forcing millions to work from home.

But executive remuneration and incentive pay is a far trickier beast to navigate—with a number of interwoven ethical, financial and legal implications to consider.

“The financial impacts of COVID-19 are unprecedented and we still don’t know the extent of the damage,” according to Allan Feinberg, Managing Director, Remuneration & Reward at BDO. “Amending executive remuneration at this time requires a practical and balanced approach – one that takes into the account the organisation’s financial standing while still incentivising senior executives to rebuild from ground zero.”

In the first quarter of this year, many executives were expecting some type of short-term incentive pay-out either in cash and/or vesting of options. But this was before COVID-19 slithered into our daily lexicon, reshaping the economic landscape drastically.

“Whatever value that had been created over the past few years has now been obliterated in the past few weeks,” Feinberg explained.

“We are quite literally in unchartered territory, a war-zone, and our ‘peace time policies’ i.e., current remuneration practices may not necessarily be aligned to the measures required to rebuild our companies in a current and post COVID-19 world.

Modelling future incentives to rebuild an economy

Current incentive plans can hardly be said to be entirely relevant in the current environment and certainly, not fit for the purpose for which they were designed for, namely, to attract, retain and motivate the right calibre of executive to lead us to safe ground.  

Short term incentives aside, share values are currently at an all-time low, with some arguing that new allocations today could lead to excessive pay-outs in the future once the market resets. In this regard, it should be noted that this ‘upside’ would ‘offset’ the incentives and rewards lost in 2020. In addition, if incentive schemes are not revised now, key executives will be attracted to more competitive firms where they can be rewarded at prevailing share prices. Boards must decide whether their company can afford to risk losing their key executives over for example, proxy and shareholder body guidelines that may not necessarily be ‘fit’ for a COVID-19 world.

“In order to retain and motivate as well as balance ‘lost’ remuneration as a direct result of COVID-19 i.e., the ‘Corona Cost’, new and/or additional incentives should be considered at prevailing share prices and geared towards long term recovery and sustainability,” explained Feinberg.

“Company value has been destroyed, and we need executives not just to go the extra mile, but to win the war. Those executives who take it upon themselves to not only lead, but drive economic stability and job creation will be in short supply.”

How boards can strategise to attract and retain leaders

 “This isn’t a time for a haphazard ‘wait and see’ approach,” Feinberg stresses. “Boards exist to safeguard the financial future of the companies they serve, and incentivising high-achieving executives is good business.”

At this critical impasse, boards must take a proactive approach, bedding down long-term remuneration strategies that will rebuild and restore value for shareholders. They need to act boldly and fulfil their fiduciary duty to act in the best interests of the Company while being supportive of management, and enabling a framework for a performance turnaround.

This approach may result in some tough talks with shareholders, and the need to agree to disagree on the right way to remunerate executives going forward may arise. What is critical is that the interests of the Company are aligned to that of the management team.

And while financial markets will continue to fluctuate, having a remuneration framework in place with in-built contingencies will make it easier to navigate the unstable economic terrain of the coming months.

Questions boards should be addressing now include:

  • Do we decrease fixed remuneration? If so, can we make this up in incentives? If an executive sacrifices a dollar of fixed pay, what is the additional incentive opportunity that should be awarded?
  • Is our current incentive plan relevant? Do we scrap it? What does a ‘simple’ and ‘fluid’ incentive plan look like?
  • What type of performance should be rewarded? What metrics are required to restore our sustainability? Should an additional incentive plan be introduced?
  • Should current options be issued at prevailing share prices? Should we issue less because the market has spiralled or not?
  • If current plans do not suit the purpose for which they were designed for should they be cancelled?
  • How will we explain our approach to proxy and shareholder groups? If we are misaligned to their view, are we prepared to be misaligned? Do we care if they do not support our plan?

BDO encourages organisations to get in touch with any further questions or concerns pertaining to corporate remuneration and incentive programs. For more information contact our advisory team.