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10/1/21, 3:36 PM 5 Executive Pay Issues for 2021

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5 Executive Pay Issues for 2021 Pandemic-related challenges take a toll on executive compensation

By John A. Morrison and Alexandra Orsini Barone © Ogeltree Deakins

November 20, 2020

he 2021 executive compensation season will be more challenging than usual for most companies due to the �nancial and economic

consequences of the COVID-19 pandemic. To meet these challenges, companies should be aware of several key issues as they

design their 2021 executive compensation programs.

1. Revisiting Clawbacks and 'Cause' De�nitions

Expanding clawbacks and "cause" de�nitions to cover misconduct beyond �nancial matters may help ensure that a company will be able to

recoup executive compensation in the event of reputational harm to the company or adverse publicity.

Recently, the U.S. Securities and Exchange Commission (SEC) announced (https://www.reginfo.gov/public/do/eAgendaMain?

operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=3235&csrf_token=739

86BB1C8D8833E7C234D63D2431A704BEFB764D7F40398DEE4CDAA0AE09B71BAFC48906485A4984A5D914BEF28D9B88936) that it

will issue revised rules to implement the clawback provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2021.

The existing proposed SEC clawback rules (https://ogletree.com/insights/faqs-on-the-secs-proposed-clawback-rule/) generally require a

public company to adopt a clawback policy to recover excess incentive compensation paid to current or former executive o�cers during

the three �scal years prior to the date the company is required to �le a �nancial restatement due to a material error, regardless of whether

the restatement is caused by an executive's misconduct.

Although the SEC's clawback rules apply to public companies, private companies are viewing clawback policies as good corporate

governance and are adopting similar practices. In anticipation of this new guidance, companies may want to review their clawback policies

to con�rm they comply with current SEC guidance.

Companies might also consider implementing clawback policies that extend beyond �nancial restatements (e.g., requiring employees to

return incentive compensation awards if grounds exist for a "for cause" termination), as well as revisiting the "cause" de�nitions in executive

compensation arrangements to con�rm that they adequately protect the company.

2. Change in Control and Severance Agreements

Due to �nancial challenges, a number of companies are facing di�cult restructuring decisions. In addition, many �nancial buyers and

competitors have not abandoned their strategic business plans and may initiate acquisitions of companies that are temporarily undervalued

in the COVID-19–disrupted economic environment. Accordingly, companies may want to review existing change in control or severance

arrangements or implement new arrangements.

With respect to severance arrangements, it is important to consider whether they are subject to the Employee Retirement Income Security

Act (ERISA) and Internal Revenue Code Section 409A, and, depending on how post-termination health bene�ts are provided, determine

any continuing health bene�ts compliance issues under COBRA. Companies should consider reviewing change in control arrangements to

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https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=3235&csrf_token=73986BB1C8D8833E7C234D63D2431A704BEFB764D7F40398DEE4CDAA0AE09B71BAFC48906485A4984A5D914BEF28D9B88936

https://ogletree.com/insights/faqs-on-the-secs-proposed-clawback-rule/

10/1/21, 3:36 PM 5 Executive Pay Issues for 2021

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ensure leadership continues to be focused on the company's business and is protected in the event of an unexpected or unwanted

transaction.

3. Temporary Salary Reductions

In light of the ongoing COVID-19 pandemic, many companies have changed a number of their internal compensation policies or practices in

2020. For example, companies may have implemented temporary salary reductions with promises to repay forgone salaries either later in

2020 or in a future year. It may be a good time to revisit such arrangements and ensure that any repayment is completed prior to March 15,

2021 to avoid potential Code Section 409A concerns.

In addition, companies may want to be aware of any state wage and hour laws implicated by these salary reductions. Publicly traded

companies may want to con�rm whether repayments are required to be disclosed under SEC rules.

Companies that implemented salary reductions may be at risk of losing key executives to competitors and should consider whether

restoring compensation (or, alternatively, o�ering discretionary bonuses or retention awards) would assist in e�orts to retain and motivate

key executives.

[SHRM members-only toolkit: Designing Executive Compensation Plans (www.shrm.org/resourcesandtools/tools-and-

samples/toolkits/pages/executivecompensationplans.aspx)]

4. 2020 Performance Awards

The pandemic has a�ected the ability of many companies to e�ectively set performance goals and determine payouts for long-term and

annual incentive compensation programs. In determining 2020 incentive award payments, companies that have been signi�cantly

impacted by the pandemic may choose to exercise compensation committee or board discretion to adjust performance metrics set earlier

this year.

In making these determinations, companies may want to con�rm that incentive compensation plan documents provide the compensation

committee or board with discretion to make adjustments. Companies should also consider establishing a framework that takes into account

how discretion will be applied this year and in future years.

Publicly traded companies planning to adjust performance goals should be aware of guidance from proxy advisory �rms, such as

Institutional Shareholder Services and Glass Lewis.

5. 2021 Incentive Compensation

Because the e�ects of the pandemic on the economy in 2021 and beyond remain unclear, it may be helpful to con�rm that incentive

compensation programs explicitly provide the compensation committee and board with the discretion to adjust performance metrics and

determine payouts.

In designing 2021 incentive compensation programs, companies may want to consider the current economic climate while keeping in mind

that incentive programs serve the important purpose of e�ectively motivating and retaining key executives. For instance, some companies

may change �nancial performance metrics to strategic metrics (such as satisfying diversity, equality, and inclusion objectives) to address the

economic uncertainty or may delay setting performance goals until later in 2021 when there is more clarity regarding a company's business

outlook and macroeconomic trends.

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https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/executivecompensationplans.aspx

10/1/21, 3:36 PM 5 Executive Pay Issues for 2021

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SHRM provides content as a service to its readers and members. It does not o�er legal advice, and cannot guarantee the accuracy or suitability of its content for a particular

purpose.

Disclaimer (www.shrm.org/about-shrm/Pages/Terms-of-Use.aspx#Disclaimer)

Other companies may include a lower maximum payout but also lower the eligibility threshold for receiving a performance award. To

address the uncertainty of incentive compensation payouts, it might also be useful to provide retention bonus opportunities to key

executives to maintain and motivate current business leadership.

Each of these key issues is important to discuss with outside counsel and compensation consultants when making decisions about

executive compensation this year and when considering 2021 changes.

John A. Morrison (https://ogletree.com/people/john-a-morrison) is the team leader of the executive compensation practice at law �rm

Ogletree Deakins, in the �rm's Atlanta and New York City o�ces. Alexandra Orsini Barone is an associate in the �rm's Washington, D.C.,