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COVID-19 and the Impact on Short and Long-Term Incentives

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March 05, 2020 | Jennifer Namazi

COVID-19 and the Impact on Short and Long-Term Incentives

Coronavirus (COVID-19) will undoubtedly go down as one of the major disruptors of 2020. There’s the main priority of public health and associated concerns and outcomes. There is also the fact that COVID-19 has already created a significant ripple effect on the business and economic sectors.

With supply chain gaps, halted production of goods, travel grounded for many, consumer reactions in the form of changes in supply/demand, along with other impacts, it’s not hard to see that COVID-19 will affect many businesses.  A question is emerging as to how companies should set and monitor their performance goals and metrics in light of such an unexpected and uncertain situation.

Willis Towers Watson recently published insight on how management teams and boards are evaluating the rising questions around short and long-term incentive goals (“COVID-19 uncertainty impacting organizations’ long-term goals” by Heather Marshall and Derek Mordente). Some of those questions include:

  • If we’ve already approved goals, should we adjust them?

  • If we haven’t yet approved goals, should we wait?

  • Should we change metrics for affected performance periods as the focus of the organization pivots?

  • Do we have the ability to make adjustments or apply discretion, if appropriate, at the end of the performance period?

  • Should we even consider making adjustments, given our shareholders will feel the negative impact on our financial performance and in our stock price?

  • How are others responding?

Marshall and Mordente identified a few potential responses to these questions in the form of the following actions:

  • Delaying metric and goal setting until Q2

  • Modifying regional level and/or enterprise wide goals

  • Having proactive discussions about the likely need for discretion later in or at the end of the performance period

The prevailing response appears to be a delay of metric and goal setting until Q2. Marshall and Mordente explain that “Delaying decisions provides more time to determine the success of virus containment, monitor efforts to mitigate economic disruption and better understand the longer-term business impact. It is also less disruptive to existing incentive plans than other potential responses and is now viable given the changes to 162(m) resulting from the 2017 Tax Cuts and Jobs Act (i.e., the flexibility to establish performance goals more than 90 days into a performance period).”

Many organizations are already having conversations about COVID-19 – which include implementation of actions necessary to protect employees and steps to mitigate the uncertainties and disruption to the business. As those discussions occur, companies should consider the above insights in forming decisions around short and long-term incentive goals.

-Jennifer

 
 
 

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