Gretchen Harders, Member of the Firm in the Employee Benefits practice, in the firm’s New York office, was quoted in Law360, in “Pandemic Means Crisis Plans in Future Exec Comp Packages,” by Emily Brill. (Read the full version – subscription required.)
Following is an excerpt:
The trend toward cutting top brass’s pay in light of the coronavirus pandemic likely won’t stick around long-term, but experts say COVID-19 will have one lasting impact on executive compensation: Companies will adopt strategies for adjusting higher-ups’ pay during crises.
Whether that strategy will come in the form of a “hard” plan, like a force majeure clause in an executive pay agreement, or a “soft” plan, like having a conversation with the C-suite about compensation expectations during disasters, depends on the company, attorneys said.
In any case, once companies exit survival mode, executives will probably create some form of game plan for approaching long-term international crises that includes an executive compensation strategy, attorneys said.
“I don’t think any company is going to forget this,” said Gretchen Harders, a member of Epstein Becker Green’s employee benefits and executive compensation practice. “I think it’s going to be something that’s considered in every compensation decision going forward.” …
Exec Comp Dips in a Crisis
At least 381 U.S. corporations have announced changes to executives’ pay since the pandemic started, according to the data company Equilar Inc. …
Executives are taking these salary cuts with an eye toward their relationship with employees and their company’s reputation, which could be damaged if managers were taking home big bucks while workers faced large-scale layoffs, attorneys said.
But salaries, of course, are only one part of an executive’s compensation package, and often a small one at that. Executives also receive bonuses, stock options and various forms of deferred and incentive compensation.
Some companies are modifying those for executives or watching this compensation package’s value dip as the company’s value does, but many are not touching them, according to SEC filings.
When companies do cut executives’ pay in a crisis, attorneys said, they have to make sure they’re not running afoul of legally binding compensation agreements.
“Almost every executive agreement will say something like, ‘I will get $500,000 in base salary, and it can never be reduced, but only increased,’” Harders said. “So if the company wants to impose an across-the-board 20% decrease in salary, the executive has that contract.”
Harders said that in a time like the coronavirus, executives often understand that even though they have a contract, they should go ahead and apply the 20% across-the-board cut to their own salary, “because that’s fair, and it’s a messaging thing.”
But in the future, companies might want to consider placing a force majeure clause in executives’ contracts, which would allow companies to alter compensation during unforeseeable catastrophic circumstances.
“The force majeure clause may give the company the ability to do that without there being a negotiation,” Harders said.