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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

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  • 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%

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