Better Not Cry: Reasonable Executive Compensation Changes May Be Tolerated. But Crocodile Tears Won’t Be.

Written By Vini Oliveira, Senior Director

December 16, 2020

In “normal” years, executive compensation plans rely upon metrics like sales and profit to determine short-term remuneration. However, 2020 has been anything but normal. With COVID-19 spreading like wildfire around the globe, everything from sports to the presidential election has felt the impact, and corporate performance hasn’t been spared. Yet, even while many companies saw their critical numbers plummet, executives were putting in herculean effort to help their businesses navigate unprecedented challenges.

All this begs the question: How should executives be rewarded when the numbers don’t tell the real story of their contributions and successes?

As CFOs and compensation committee members struggle to find the right answers, shareholders and proxy advisors are weighing in to lessen the burden. They are signaling more tolerance to unexpected changes to compensation programs along with a willingness to take this year’s challenges into consideration. However, the onus is on the companies to justify such shifts by producing detailed disclosure on how exactly the coronavirus has affected performance and how their decisions are ultimately in their shareholders’ best interest.

Here’s what you need to know about the signals being sent by major proxy advisors and the largest institutional investors around the issue of executive compensation changes, and what you can do to reciprocate their tolerance.


  • What to know:
    • Will evaluate midstream adjustments to annual incentive programs within the context of the “extraordinary circumstances of the current economic downturn”
    • Resulting outcomes of any changes must appear reasonable
  • What to do:
    • Clearly disclose specific challenges incurred as a result of the pandemic
    • Describe how original compensation programs were rendered obsolete or initial performance targets became impossible to achieve
    • Specifically address how changes to compensation programs are not reflective of poor management performance
    • For one-time discretionary awards, justify why one approach was chosen over another, give insight into specific, underlying performance criteria, and show how the decisions align with investors’ interest, i.e. by retaining top talent
    • Avoid generic rationales for one-off grants, such as “strong leadership during challenging times” and instead give specific details of actions taken or programs implemented by the executive and the results of such actions
    • Disclose how resulting payouts compare with estimated payouts that would have been paid under the original program design
    • Avoid above-target payouts under changed programs unless there is an extremely compelling justification  
    • Include examples of positive long-term changes made as a result of lessons learned during the crisis

Glass Lewis

  • What to know:
    • Policy changed in March to support organizations hosting virtual-only meetings
    • Will take into account the COVID-19 effect on executive compensation
    • Recommends flexibility in the evaluation of remuneration issues and capital matters in general
    • Warns against “dogmatic application of pre-existing standards by investors” that “could mean the difference between a company surviving this crisis and shareholders suffering even greater losses”
  • What to do:
    • Enhance disclosure and include detailed rationales, especially with regard to executive pay
    • Avoid “crocodile tears” for maintaining or even increasing executive compensation levels, especially in the wake of poor performance or massive staff layoffs
    • Explain how changes made as a result of the crisis address material shareholder concerns


  • What to know:
    • Will take sector-specific realities into account
    • Will be looking for proactive leadership on executive pay adjustments to the crisis
    • Will specifically look for strong rationale, duration of the changes, and clear guidance that the board is maintaining a long-term outlook when it comes to incentive programs
  • What to do:
    • Disclose how decisions were reached, the metrics or forecasts used to inform these decisions, and situations where payouts were made above target despite low performance
    • Use operational metrics as opposed to relative performance metrics when possible

State Street

  • What to know: 
    • Recognizes the negative impact of COVID-19 on financial metrics
    • Understands that financial metric may misrepresent the performance context in which compensation decisions were made
    • Expects compensation committees to use discretionary powers appropriately to ensure outcomes that reflect company and executive performance and align with shareholders’ best interests
    • Does not expect a significant increase in votes against say-on-pay proposals; the percentage of such resolutions in the first half of 2020 (6%) is in line with State Street’s voting record
  • What to do: 
    • Simplify bonus plans to show clear linkage to strategy; complex plans make it difficult to determine what the executive is being incentivized to focus on and how business results translate into awards
    • Shift toward performance-based equity in long-term incentive plans (and shift away from time-vested awards without performance conditions attached) to illustrate stronger alignment between executive rewards, company performance, and shareholder value
    • Take a more holistic approach to metrics by using a blend of relative TSR and long-term operational metrics that align with corporate strategy

Robust, transparent, and detailed disclosure has never been more important.

Tolerance is perhaps the best holiday gift shareholders can extend to companies as the world’s corporations look to wrap up a tumultuous year. However, companies need to be willing to give more, too. The task ahead for boards and investor relations teams across the country is to enhance discourse like never before and clearly explain the rationale for any unscheduled changes in pay structure. If companies fail to present evidence that changes in compensation programs were due to the effects of COVID-19 and made to protect shareholders’ interest, then shareholders will assume mismanagement. And that’s not on any corporation’s holiday wish list.


ISS – U.S. Compensation Policies and the COVID-19 Pandemic Frequently Asked Questions

Everything in Governance is Affected by the Coronavirus Pandemic. This is Glass Lewis’ Approach

Proxy Advisors Split on COVID Impact on Executive Pay, Discretion

State Street 2020 Proxy Season Review

Back To Blog