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US Securities and Corporate Governance

Executive Compensation

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U.S. Companies Assess Ripple Impact of COVID-19 on their Business and Incentive Plan Metrics

As we near the end of second quarter 2020, companies are evaluating the ripple effect COVID-19 has had and will likely continue to have on their businesses as a result of worker layoffs, shelter-in-place orders, employee health and safety matters, supply chain and counterparty risk issues and decreased product demand, among other things.

One key area of focus for many companies and compensation committees will be assessing the impact of COVID-19 on incentive plan performance award targets, many of which were set in February before the pandemic hit the United States and may now be unattainable. Most companies will want to keep their executive and management teams striving for potentially new and adjusted goals that the new environment requires. How to go about reflecting and rewarding key employees for performance around these changes becomes challenging when awards for the performance period have already been granted.

Some companies have viewed their performance awards as long-term in nature and have maintained existing performance targets in spite of changed circumstances. Others see a need for changes. The approaches will depend on each company’s particular compensation philosophy and structure, the amounts and types of awards that have been granted, the extent and manner in which the business and existing targets have been affected, and other motivating criteria at issue.

On approach that companies have considered in connection with their annual awards is to adjust the performance targets based on currently available information so as to reflect changing expectations. This approach is relatively straightforward. A

U.S. emerging trends in Form 8-K filings disclosing COVID-19-driven compensation changes

Companies filed a flurry of Form 8-K filings last week announcing voluntary executive officer compensation reductions driven by the COVID-19 pandemic.  While some companies disclosed the compensation changes under Item 7.01 or 8.01 on Form 8-K and others simply issued a press release, we saw an uptick in the number of companies making the disclosure under Item 5.02(e) of Form 8-K, which is triggered when a company enters into, adopts or materially amends a material compensatory plan or arrangement with the principal executive officer, principal financial officer or named executive officer.

Among companies making the disclosure under Item 5.02(e) of Form 8-K (Ford , Nordstrom , Lands’ End and Briggs & Stratton, among others), the executives generally reduced their compensation by at least 20% (and in some cases, 50% or 100%), seemingly taking the position that salary decreases of 20% or more were generally viewed as material amendments to the executives’ compensation arrangement (in parallel to the view that salary increases of 20% or more would generally would be viewed as material), although it is difficult to predict how long the reductions will continue and the true impact on the executives’ overall compensation.

Companies relying on Item 7.01 or 8.01 or a stand-alone press release likely were comfortable that based on their specific facts and circumstances, either that the decrease was not material to the executives’ compensation arrangements or, in the case where employment agreements were in place, perhaps by analogy to SEC CDI 117.13, that

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