Part 2: Performance Target SettingBy March 1 of this year, your company may have had a firm grasp on your annual bonus programs - confidently looking ahead March 31 to lock in equity or cash-based award targets. Or maybe you had already set your 2020 performance targets.
Then everything changed.
The COVID-19 pandemic has had a swift and powerful impact on business operations and financial markets. And at many companies, the uncertainty is coinciding with the annual incentive award cycle. Incentive setting is a science under the best of circumstances, so how should companies address it in this volatile environment?
In an April 8 webinar, Shearman & Sterling’s Gillian Emmett Moldowan discussed some key considerations for companies and their boards as they navigate performance targets in these stormy seas. The full webinar also provides Ms. Moldowan’s guidance on stock repricing alternatives and termination impacts during this global health crisis.
If your company sponsors an annual bonus plan, you’ll need a game plan. Here’s a snapshot of Shearman & Sterling’s guidance.
Scenario 1: You’ve already set your 2020 performance targets
Unless your organization is thriving right now, you’re probably considering downward adjustments to your performance targets in light of the COVID-19 outbreak and its impact on businesses worldwide.
With goals set too high and out of realistic reach, you lose the sense of achievability and with it your program’s motivational power. At the same time, the future is hard to predict, and re-setting targets now may be premature.
What are your options?
- Wait and see, hoping outsized targets don’t negatively impact motivation and retention
- Make adjustments to targets in order to keep employees motivated. Tax reform passed in late 2017 removed the limitations of Section 162(m) of the Internal Revenue Code regarding adjustments to performance targets, but any adjustments should be made in compliance with your plan and in consultation with your auditors.
- Your board or compensation committee might consider setting new and additional short-term goals (such as quarterly goals) relating to COVID-19 response and recovery targets while longer-term impacts on your business remain uncertain.
Scenario 2: You haven’t yet set your 2020 performance targets
If your organization has not yet acted on your 2020 annual performance targets, consider delaying until you know more about the impact of the pandemic.
Amendments made to Section 162(m) also allow for more flexibility in the timing of performance target setting, so now might be the time to focus on business continuity and emergency preparedness rather than trying to predict potential outcomes and plan incentive goals. However, you’ll want to weigh plan terms, accounting impacts and employee reactions when deciding how long to delay target setting.
If you decide to move forward with setting performance targets now, here are some options:
- Use relative as opposed to absolute performance metrics to account for uncertain conditions
- Consider individual performance metrics that tie, for example, to effective crisis response
- Provide the plan administrator with added discretion to make adjustments to annual bonus targets
What about long-term incentive programs?
Setting multi-year performance targets is always challenging, even more so in this complex environment. Many of Moldowan’s recommendations for annual plans apply here as well.
- Consider proceeding with other incentive components while delaying setting targets for long-term incentive programs
- Avoid letting too much of the applicable performance period go by before goal setting
- Review plan documents to confirm plans do not require specific grant dates or have adjustment restrictions
- Retain discretion for adjustments, but be mindful of potential accounting implications
For any action you consider for your bonus plans, be sure to consult with your legal, tax and accounting advisors. Or reach out to a Certent administrative services team member now.