The spread of COVID-19 is having an unimaginable impact on all facets of life, including our economy. While executive compensation programs might not be the most pressing issue facing corporate boards right now, volatility in the stock market, slowing supply chains, closed retail stores and restaurants, and the inevitable staff and expense reductions facing certain industries will undoubtedly have an impact on executive compensation programs and designs. Although the situation is unfolding rapidly, below we offer some observations to help management and corporate boards navigate what looks to be a challenging 2020:

• Adjustment of 2020 Performance Goals. For any compensation committee that has already met and established 2020 performance goals, now might be a good time to re-evaluate and perhaps even adjust those goals, especially for programs that reflect goals that the compensation committee believes will never be satisfied. For many companies, a wait-and-see approach (either until the end of the year or until the economy normalizes) may make sense, but even for those companies, socializing the idea within the committee, participating management, and perhaps even with key shareholders, will establish a foundation for future adjustments, including the potential use of positive discretion, if any. For any compensation committee that has not yet met and established 2020 performance goals, it might consider expressly reserving the right to adjust the 2020 goals to account for the impact of COVID-19 or to introduce an additional qualitative performance goal to the 2020 program that gives the committee more flexibility to adjust payout at year-end or measuring attainment relative to a peer group or against an index instead of on an absolute basis.
• Delay of Compensation Decisions. While the changes made by the Tax Cuts and Jobs Act were largely unfavorable to public company executive compensation programs, there is a silver lining. Under the pre-Tax Cuts and Jobs Act rules, many companies had to establish their annual performance goals within the first 90 days of the performance period to secure certain tax deductions. Because the performance-based compensation exception to the $1,000,000 limitation on deductions has been eliminated, a compensation committee may wish to delay annual goal-setting until there is less volatility in the economy. For the same reasons, a compensation committee might consider staggering its long-term incentive grants (e.g., grant in two tranches) to account for the current market volatility.
• Sufficient Share Pools. With the depressed stock prices, does your company have enough shares to cover awards for the foreseeable future? For companies that have not yet had their 2020 annual meetings, there might still be time to review share pool information, and if additional shares are needed to cover higher than expected burn rates, submit the increase for shareholder approval at the 2020 annual meeting. If the 2020 annual meeting has already passed and an employer finds itself with a suddenly depleted share pool, there are situations where certain equity grants can be made contingent upon future shareholder approval.
• Reconsider the Award Mix. The current climate might cause companies that still grant stock options and stock appreciation rights to consider awarding more full value restricted stock units or performance unit awards than they would absent the current volatility. Full value awards continue to have some retentive value even when stock prices decline and, for this reason, less shares can be used to deliver an employee value equivalent to that of a stock option. Stated differently, using full value awards could prolong the life of an equity plan in situations where stock prices are depressed.
• Consider the Use of Trailing Averages. For companies that set award sizes based on dollar value, it might make sense to use a historical trailing average to establish the number of shares subject to an award to soften the impact of a volatile market. For stock options, for example, the exercise price must be established by the compensation committee in connection with the grant of the award. If the committee desires to use an averaging approach and if certain technical requirements are met, it could specify an averaging period (not to exceed 30 days) that precedes the date of grant, and use the average closing price of the stock preceding the date of grant to set the exercise price for the options.
• Repricing of Stock Options. Stock option repricings are complex, expensive from a professional fee standpoint, almost always require shareholder approval, and are largely frowned upon by Institutional Shareholder Services (“ISS”) Glass Lewis, and other proxy advisors. In our view, it is too early to consider stock option repricing programs, but we do note that repricing programs did gain some steam following the 2008 financial crisis and might become a valuable tool as this pandemic continues to play itself out.

The right approach will certainly depend on your industry, your board’s compensation philosophy and the ultimate economic impact of COVID-19. To be sure, implementing any of the above suggestions will require a team approach with input from executive compensation consultants and lawyers, securities law lawyers and accounting advisors, and we encourage a robust dialogue with these advisors before making any changes to your approach to executive compensation.