Corporate Compensation and Human Capital Actions in ... ... Corporate Compensation and Human Capital Actions in Response to COVID-19 Sample as of August 31, 2020 Eric Hosken, Melissa

Corporate Compensation and Human Capital Actions in Response to COVID-19

Sample as of August 31, 2020

Eric Hosken, Melissa Burek, Bonnie Schindler and Whitney Cook

Compensation Advisory Partners (CAP) is tracking COVID-19 actions for the S&P 500 (500 largest U.S. public companies by market cap), S&P MidCap 400 and S&P SmallCap 600

▪ CAP is monitoring corporate public announcements to compile a database of pay actions taken in response to the COVID-19 pandemic:

• Compensation actions for chief executive officers (CEOs), other executives, boards of directors and employees

• Annual and long-term incentive design changes

• Workforce reductions and expansions

• Changes in dividend policy and share buybacks (not covered in depth in this document)

▪ Corporate actions are made to help companies conserve cash, ensure employee safety, compensate front-line

employees for increased risk, and meet the changing demand for products and services caused by the pandemic

• The stimulus bill limits executive pay and returns to shareholders. Some actions may be to comply with the bill

▪ The three S&P indices were selected because 1) they allow for size comparisons and 2) they make up the S&P Composite 1500 index, which covers approximately 90 percent of the market capitalization of U.S. public companies

1

Sample as of August 31, 2020

Company details, as well as more than 600 additional U.S. and non-U.S. companies,

are available on CAP’s COVID-19 Resource Center.

S&P 500 (Large Cap) S&P MidCap 400 S&P SmallCap 600 S&P Composite 1500

500 largest U.S. publicly

traded companies by

market capitalization

400 U.S. publicly traded

companies with a market

cap of $2.4 billion to $8.2

billion at the time of

addition to the index

600 U.S. publicly traded

companies with a market

cap of $600 million to $2.4

billion at the time of

addition to the index

U.S. publicly traded

companies in the S&P

500, 400 and 600 indices;

index covers 90 percent of

U.S. market cap

Companies must meet financial viability requirements for inclusion in all indices

https://www.capartners.com/covid-19-compensation-trends/

Executive and board pay cuts have been prevalent throughout the crisis. Positive broad-based employee actions were overtaken by negative actions in late March

S&P Composite 1500 corporate actions spiked in late March, remained steady in April, and began to slow in mid-May

2

Sample as of August 31, 2020

Number of S&P 1500 Corporate Actions Because of COVID-19 By Week of Announcement and Type of Action

Stimulus Bill

Signed

Mar 27

Stock Market

Worst Week

Mar 23

U.S. Declares National

Emergency Mar 13

U.S. Unemployment

Hits 14.7%

May 13

Executive Pay Reductions

Board Pay Reductions

Negative Broad-based Employee Actions

Positive Broad-based Employee Actions

Incentive Plan Changes

Shareholder Actions

0

100

200

300

400

500

600

700

Mar 1 Mar 15 Apr 1 Apr 15 May 1 May 15 Jun 1 Jun 15 Jul 1 Jul 15 Aug 1 Aug 15

T o

ta l W

e e k ly

A c ti o n

s

Six months into the pandemic, select companies are beginning to announce modifications to prior salary actions and/or changes to their outstanding annual and long-term incentive ▪ Salary Actions

• Restore all or a portion of salaries

• Extend salary cuts

• Make up lost compensation

▪ Annual Incentive Plan Changes

• Change or supplement performance measures

• Reduce target opportunities and/or maximum payouts

• Adjust payout timing and measurement periods

• Cancel plans

▪ Long-Term Incentive Plan Changes

• Adjust performance measures and goals

• Change the mix of LTI vehicles

• Shorten the duration of plans

• Reduce award opportunities

• Shift to retention vehicles from performance-linked vehicles that require goal-setting

3

Sample as of August 31, 2020

CAP’s report of these actions provides a glimpse into decisions being made by

compensation committees across corporate America.

https://www.capartners.com/cap-thinking/as-the-pandemic-continues-so-do-executive-pay-actions/

Over half of S&P 1500 companies have announced compensation and human capital actions in response to COVID-19

4

Sample as of August 31, 2020

Companies Taking Action in Response to COVID-19

297

200

284

59%

50%

47%

0%

10%

20%

30%

40%

50%

60%

70%

0

50

100

150

200

250

300

350

S&P 500 (LargeCap) S&P MidCap 400 S&P SmallCap 600

% o

f In

d e x C

o m

p a n

ie s

# o

f C

o m

p a n

ie s

# of Index Companies % of Index Companies

The stock market is improving, but companies that reported actions still have significant market cap declines. Smaller companies have fared less well throughout the crisis

5

Sample as of August 31, 2020

Companies in S&P Indices that Took Action vs.

Overall Index Market Cap Decline

Mar 1 - Mar 31

Companies in S&P Indices that Took Action vs.

Overall Index Market Cap Decline

Mar 1 – Aug 31

S&P Indices

Companies in S&P Indices that Reported Actions

2% 2% 2%

-25%

-40%

-44%

S&P 500 (Large Cap)

S&P MidCap 400

S&P SmallCap 600

14% 11% 12%

5%

-11%

-18%

S&P 500 (Large Cap)

S&P MidCap 400

S&P SmallCap 600

The consumer discretionary and industrials sectors acted early and on a sustained basis

6

Sample as of August 31, 2020

Oil Prices

Turn Negative

States Begin Closing

Nonessential Businesses

Note: Sector breakdown by industry group is detailed on page 18

Number of S&P 1500 Corporate Actions Because of COVID-19 By Week of Announcement and Industry Sector

Airlines

Slash

Capacity

Communication Services

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Real Estate

Utilities

Federal Reserve Cuts Interest

Rates by Half A Percentage

Point

0

100

200

300

400

500

600

700

Mar 1 Mar 15 Apr 1 Apr 15 May 1 May 15 Jun 1 Jun 15 Jul 1 Jul 15 Aug 1 Aug 15

T o ta

l W

e e k ly

A c ti o n s

CEO pay cuts were made by one in four firms, while executive and board pay cuts were made by about one in five. Large- and mid-cap companies have been less likely to cut board pay CAP believes that some companies have refrained from cutting board pay because of the increase in the workload for the board and the need for management to have external advice. While S&P 600 companies have been more likely to cut director pay, the size of the pay cuts has been smaller.

7

Sample as of August 31, 2020

S&P 500 (Large Cap)

S&P MidCap 400

S&P SmallCap 600

23% (n=114)

21% (n=104)

16% (n=80)

26% (n=104)

24% (n=94)

18% (n=73)

27% (n=164)

24% (n=146)

23% (n=137)

Executives: Reduced CEO Base Salary

Executives: Reduced Other Executive Base Salary

Board of Directors: Reduced Pay

CEO salary cuts are more common than bonus actions, but CAP expects many companies not to pay bonuses in 2020 or to increase discretion in bonus decisions

8

Sample as of August 31, 2020

Number of Companies Reducing

CEO Salary Only, Bonus Only or Both by Index

Reduced Only CEO Bonus

(n=4) 3%

Reduced CEO Salary & Bonus

(n=9) 8%

Reduced Only CEO Salary (n=105) 89%

S&P 500 (Large Cap)

Reduced Only CEO Bonus

(n=2) 2% Reduced CEO

Salary & Bonus (n=13) 12%

Reduced Only CEO Salary (n=91) 86%

S&P MidCap 400

Reduced Only CEO Bonus

(n=6) 4%

Reduced CEO Salary & Bonus

(n=11) 6%

Reduced Only CEO Salary (n=153) 90%

S&P SmallCap 600

The median CEO salary cut is 50% in large- and mid-cap companies, and 30% in small-cap firms. Other executive salary cuts are made on a graduated scale, with typical cuts at 20% to 25%

9

Sample as of August 31, 2020

Disclosed CEO Salary Reduction

Among Those Reducing

Disclosed Executive Salary Reduction

Among Those Reducing

23%

8%

27%

10%

15%

5%

12%

22%

2%

24%

11%

17%

1%

23%