Here’s the intro from this Cooley Alert penned by Ali Murata and Michael Bergmann:
“As seasoned pilots know, a downward spiral often starts gradually, almost imperceptibly, unless you heed the early warning signs. If those signs are missed or ignored, trouble compounds. It’s often tough to know whether you’re really in a spiral until it starts to tighten, and at some point – sometimes seemingly suddenly – breaking free may no longer be possible.
So, you’re thinking, what does that have to do with the design and administration of executive compensation programs? Although the nexus is perhaps not immediately obvious, the hard lessons from the sky have something to teach us.
Unfortunately, unlike pilots with instruments tailored to reveal an incipient spiral, those responsible for making decisions about executive compensation programs don’t have specialized tools that can reliably identify external factors that could cause the program to misfire and fail to achieve its intended purpose.
Most commonly those external factors relate to the broader macroeconomic climate – for instance, the 2008 financial crisis or, more recently, the COVID-19 pandemic. The volatility caused by financial or geopolitical shocks can easily disrupt compensation programs, leading them to a spiral toward dysfunction – for example, because of unanticipated swings in equity value or the depletion of cash reserves.
So is a spiral for compensation programs tightening? No one knows of course. The only thing that’s certain is that something will happen, even if that something is simply not much of anything. That realization will cause its own reckoning.
The lesson for executive compensation programs is to be prepared for the uncertainty and whatever may (or may not) come out of it. The playbook for that preparation is becoming well-worn, but it’s worth reviewing, particularly with the incentive award season in full swing.
As a refresher, some levers to keep at the ready are briefly described below along with some related considerations brought to the fore by volatility and its attendant uncertainty. Which levers to pull, if any, is a balancing act because compensation decision-makers (be that the board, compensation committee or a manager) must always remain focused on providing properly calibrated incentives with appropriate performance metrics and a reasonable assessment of performance against those metrics after taking volatility impacts into account among all other relevant factors.
In a similar vein, compensation decision-makers need to be sensitive to how hard they pull on the levers to avoid overcorrection and ensure that the action is narrowly and otherwise appropriately tailored to the circumstances.”
Authored by
Broc Romanek