COVID-19 is unlike anything we have seen before, its effect on society and our future is growing exponentially. Businesses are facing many difficult decisions in the weeks and months ahead. When you take a step back and examine the impact of COVID-19 from a wider lens, you will notice that we have faced similar periods of uncertainty before. Most recently, events like 9/11 and the financial crisis of 2008, sent the economy into uncharted territories and caused disruptions to many businesses, both small and large.
This blog series examines the impact of COVID-19 on compensation. For more information about annual bonuses and practical suggestions to help click here. This post will focus solely on Long-Term Incentive Plans. Long term incentives are just that – meant for the long term, and if the shutdown continues for a longer period, they will also be affected. This post will give you ideas and suggestions to consider as you review your LTIP program.
Long-Term Incentive Types
Many long-term incentive plans use equity or some form of notion equity for compensating employees. The introduction of cash elements is an option. After the crisis of 2008, the EU and UK introduced additional rules for Material Risk-Takers. Employee’s deferred compensation included a cash portion with a longer vesting schedule. Splitting your long-term awards between cash and equity is one item to consider that will reduce exposure to any the volatility in the market .
Compensation Split Between Short Term and Long Term
Does your organization have the right split between short term and long-term incentives? If you are deferring a percentage of compensation into LTIP, do the deferral rates make sense and should they be adjusted to reflect the current economic environment. Consider modelling out different deferral rates and what impact that may have on cash awards vs. LTIP.
Reassess Share Ownership Requirements
With depressed share prices, employees with a share ownership requirement are under pressure to ensure they hold enough equity. This is a good time to review those requirements and extend grace periods considering COVID-19.
Many of the suggestions listed above involve making changes to the long-term incentive plan. Before exploring those options further, it is important to understand what changes can be made to the compensation program. Does the plan have provisions for unique events like COVID-19 which allows for changes to allocations and award types? If not, it may be important to start the process of including such items to ensure flexibility going forward.
Do our employees understand their compensation plans and the total value of our offering beyond just bonus and salary? Use this opportunity to highlight other areas in addition to bonuses and salaries. A total rewards statement is a great way to communicate those programs and highlight the return on long term incentive programs over the last decade. It’s important to remind employees of the perks and benefits outside compensation your organization offers. The total rewards portal is also a great way to communicate the culture of the organization, especially those organizations that are working on the front lines on the fight against COVID-19.
Award New Employees
This current situation can also be an opportunity to extend your LTIP program to more employees. More and more organizations are broadening their offerings of Restricted Share Units (RSU) and notional share programs to larger employee groups. There is no better way to reward loyalty than making your employees feel like owners.
As you review these items, one of the key enablers is access to good data and the ability to run various analyses. CompTrak works with many different organizations to operationalize and communicate changes to compensation programs. For a free consultation contact us today!