Special Tax Alert

Coronavirus Crisis Raises Executive Compensation Concerns

Brian Cumberland, Managing Director

bcumberland@alvarezandmarsal.com

James Deets, Senior Director

jdeets@alvarezandmarsal.com

J.D. Ivy, Managing Director

jivy@alvarezandmarsal.com

March 24, 2020 / North America

The coronavirus crisis is causing unprecedented, negative economic impacts in an accelerated fashion.  From the stock market losing substantial value in just a few weeks, to widespread travel and business disruptions, the crisis is dramatically impacting many sectors. Many experts, furthermore, believe that the coronavirus crisis is just getting started, and that the countermeasures that are causing such negative economic impacts may last not for weeks, but for months or longer.  Whether engaged in the airline, hotel, restaurant, physical fitness, cruise line, retail, oil and gas, or other industry, significant impacts will flow through all sectors, with few, if any, insulated from the downturn.

These circumstances present significant challenges to companies from an executive compensation standpoint.  While many companies will survive the downturn, for many others, conditions will push them into a restructuring and perhaps, even into bankruptcy.  Even for companies that survive, the crisis will generate circumstances that make it difficult to motivate and retain their best executive talent.

Initially, the negative economic impact of the crisis is causing business results in many cases to fall far below estimates.  As a result, payouts under annual incentive plans will be negatively impacted. This, of course, may not be due to any actions (or inactions) of the executives themselves, but because of the negative economic impacts of the coronavirus crisis.

Flowing from the negative economic situation is also a marked reduction in the value of company stock.  This is reflected in the precipitous fall that the public stock markets have witnessed over the past few weeks.  Because of the declines, many executives are in a situation where their long-term incentive awards—most often provided in the form of stock or stock-based awards—are losing value or have already become worthless.

Faced with these conditions, executives will find little motivating value in their existing compensation programs.  Annual bonus payouts will be reduced or eliminated by the negative short-term economic climate, and LTIP awards will be handicapped at best, and in many cases, rendered completely worthless. Employers may also be facing a restructuring or bankruptcy. Therefore, it is imperative that organizations find alternative methods to motivate and retain key executive talent, or else they may not be able to fight through these tumultuous times.

Annual Incentive Plans
Many companies undoubtedly will have already set performance targets under their annual incentive plans for this year.  Consideration should be given to whether and to what extent performance targets should be reestablished, taking into account the impact of the coronavirus crisis. Since the scope and extent of the current crisis is unknown, companies may wish to adopt a “wait and see” approach as opposed to taking swift action to adjust performance metrics too quickly, to avoid the need for multiple revisions to the performance criteria, which would undoubtedly be viewed negatively by shareholders and shareholder advisory firms alike.

Some factors to consider when determining whether or how to modify the performance criteria include, among other things, SEC disclosure requirements (to the extent the revisions apply to a pubic company’s named executive officers); the accounting impact of any changes; how the press might portray changes to performance metrics; and the message that such changes might convey to employees and investors…

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