Step 1: Incentive Compensation, Initiating Your Emergency Reward Program

“Flattening the Curve” on an incentive compensation plan facing distress

Step 1 of INCENTIVE AND Equity Compensation, Unprecedented Times Require Unprecedented Actions

The world is facing and fighting its most significant health challenge in more than a century. As a result of the global battle against COVID-19, we have seen stock markets in turmoil and companies dealing with business challenges that would have seemed insurmountable only a few weeks ago. One of the critical health objectives has been the effort to “flatten the curve.” Essentially this is a process of acting before things get worse to provide the time and resources to overcome the disease properly.

FutureSense is recommending a similar approach to your equity compensation and other incentive plans. The recent market downturn may not have materially impacted your company and programs yet. So, getting prepared and beginning to act soon is the best way to ensure you avoid the most problematic impacts that may result from an extended recession or slow recovery.

Consider this series of articles a critical element of your “Emergency Reward Program.” Before you get started, you need to complete Step 0. Step 0 is building your Emergency Reward Program. This will include:

·       Your plan documents, agreement documents, and any related executive and employee contracts.

·       A brief document or presentation that discusses the intent or purpose of each plan and the key features that support or drive that objective.

·       An accessible file with links to various published articles and resources.

·       Detailed reports should include:

o   Participants in each plan

o   Value of their awards when given and as originally modeled based on target goals, or acceptable growth rates

o   Start dates and project end dates for each element

o   Any other key details you typically use to level, grant, award, communicate, or present to the Board, executives, and staff

With Step 0 completed, you are now ready to shelter in place and get to work on preparing your rewards programs for the future.

Step 1

Initiate the items below as part of your Emergency Reward Program

The design of your Emergency Reward Program must meet the specific needs of your company as well as your employees. We have provided some ideas above, but your list should reflect your company and its capabilities. Please use our contact or Q&A Forum information below to discuss your details.

Address each employee group uniquely. This process may require different communications, various plans, or altered features. There are a few rules regarding fairness, and your counsel should have summaries available on a moment’s notice. This differentiation may extend to the optionality available to employees at different levels. Cash may be affordable as a correction for smaller values, but it may be too expensive to offer higher levels of anything other than a non-cash component. Equity CHOICE programs (more on these in an upcoming article) may make sense for more sophisticated employees. Still, you may not have the time or resources to build effective communications for lower-level staff.

Your employees are not a monolith. Some may have recently received their first award under a given plan. Some may have been eligible for the first time for an award that is now on hold. People who joined your company via a recent acquisition may have a very different perspective than those who were “natively” hired. Documenting your understanding of potential audience(s) is something you can put together now, so it is ready the day your CEO or CHRO says, “let’s get started.”

“We have never done this before” cannot be a hurdle that blocks your success. Everything available or conceivable in the equity/reward toolkit must be on-the-table for consideration. Companies can target to set aside an “Emergency Reserve” of equity to provide additional room in the overhang. Cash earmarked for future executive bonuses may be better used to buy-out devalued equity from rank and file staff. Your burn rate concerns may become secondary to your concerns about continuing operations and growing through unusual times. You may need to temporarily replace or augment sales incentive programs with equity or other non-cash elements.

In this first step, your objective is to gather the facts, reestablish the intent of each program, and list possible solutions, without making any decisions. As we move through the process, you will refine your approach, disqualify some ideas, tighten up your employee segmentation to ensure it is manageable, make decisions on the best path(s) to follow, and execute quickly. The key to success is rapid preparation to support early execution.