Compensation Solutions for a Down Market

Shore up incentives in a down market, recession, or period of general uncertainty.

Equity compensation is used to attract, retain, and motivate key talent to drive the organization’s strategy. When equity grants lose their value or a series of performance targets becomes unachievable, problems arise:

  • It becomes easier for competitors to assemble cheaper buyout packages.
  • Executives with high net worth may choose to sit out the recession.
  • Top talent stays but feels untethered to the strategy and doesn’t deliver the way it needs to.

Meanwhile, corporate governance realities are starker than ever. In an economy under the shadow of COVID-19, there’s rising sentiment that executives should “share the pain” with shareholders. It’s time for bold and decisive compensation action. But it needs to occur through a governance lens that considers the shareholder base.

How We Help

We help HR executives identify and resolve crumbling incentives—something that can happen during down markets or anytime the organization’s strategy is disrupted, prompting a pivot to a new direction. Our capabilities span the entire journey, from upfront considerations to proxy disclosures.

Assess the merit of adopting a relative performance metric
Restore lost value to underwater PSUs
Complete an option exchange program
Support post-termination exercise window extensions for terminated employees
Model share pools and support preservation strategies
Modernize participant communications
Analyze and evaluate buyout package strategies

Assess the merit of adopting a relative performance metric

Relative metrics aim to provide insulation against exogenous shocks such as pandemics, supply shocks, runaway inflation, or geopolitical instability. We help companies evaluate and implement a relative metric by doing the following:

  • Compare and contrast relative total shareholder return (rTSR) and a series of relative financial metrics (e.g., relative EPS growth or relative revenue growth)
  • Conduct back-testing to gauge how different metrics would have fared historically had they been used
  • Evaluate comparison group possibilities using descriptive, correlation, and beta analytics
  • Aggregate proxy data to glean peer group trends

For more on our approach, please see our award design services.

Restore lost value to underwater PSUs

For most companies, performance goals set in the past few years are appearing utterly unachievable. To restore incentives while taking shareholders into consideration, we develop a menu of value restoration strategies, including:

  • Resetting (reducing) performance targets
  • Liberally exercising discretion on existing targets
  • Adding an additional “kicker” provision based on a relative metric
  • Replacing the current performance metric with a more appropriate one, such as a relative metric. As part of this, we:

— Test the pros and cons of each approach by modeling pay and cost scenarios

— Compile market and other data to support decision-making

— Collaborate with legal counsel, proxy solicitors, and the board’s consultant to drive implementation

— Perform all the valuation and accounting required under ASC 718, including support to the external audit team

Complete an option exchange program

Highly popularized during the prior recession, option exchanges allow employees to surrender eligible underwater options for a lesser quantity of at-the-money options, RSUs, or cash. An option exchange can be structured in diverse ways to meet the varying needs of employees, proxy solicitors, and financial reporting.

We assist through all stages of an option exchange by doing the following:

  • Walk through key decision vectors—including eligible options, replacement award features, banding methodologies, and appetite for incremental accounting cost
  • Compile market data on design trends, shareholder approval percentages, participation rates, and other information relevant to decision-making
  • Model alternative scenarios to develop exchange ratios (bands) and flex incremental cost levels
  • Complete all aspects of the valuation pre and post-tender offer, as well as the downstream accounting and disclosure

Support post-termination exercise window extensions for terminated employees

As reductions in force and involuntary terminations take place, many companies wish to extend the standard option post-termination exercise window so the terminated employee has more time to monetize their vested stock options. We provide the following support:

  • Education on the pillars of modification accounting, including disclosure requirements and how the modification gives rise to additional accounting cost
  • Pro forma valuation modeling to refine the terms of the modification
  • ASC 718 valuation at the time of the modification, to measure incremental cost

Model share pools and support preservation strategies

Declining share prices raise the risk of running out of shares. Scenario-based modeling provides advanced visibility, while creative award design can create a bridge until a share pool request gains shareholder approval. We can assist in the following ways:

  • Review existing share burn models or create new ones to enhance robustness and allow flexing across alternative stock price scenarios
  • Assist in the ISS modeling underlying a share pool request
  • Model and propose alternative design solutions to bridge the LTIP until additional shares come through. A few strategies include:

— A hybrid equity/cash program limited either by participant level or by how much of an award can be settled in equity

— Conditional equity awards that begin as cash but convert to equity upon obtaining shareholder approval

Modernize participant communications

More than ever, crisp, clear, and plain-English communication is critical so that equity participants understand and value their incentives. We assist in all facets of participant communications. For instance, we:

  • Design brochures and FAQs that explain the incentive programs, offer practical illustrations, and fuse exemplary design with jargon-free clarity
  • Produce recurring rewards statements to help participants stay abreast of their unvested equity values
  • Provide strategic messaging support on how to boost the perceived value of equity incentives

Analyze and evaluate buyout package strategies

Periods of economic turbulence create opportunities for companies to acquire top talent at “bargain” prices because the value of unvested equity may be depressed. We help companies, and occasionally executives, quantify the value of unvested holdings to determine the attractiveness of a buyout package.

We can assist in the following ways:

  • Compile and summarize all vested and unvested equity awards
  • Apply alternative valuation lenses to create a value spectrum under different frameworks toward valuation. These lenses typically include:

— Strict GAAP-based valuation

— Adjusted GAAP valuation

— Intrinsic value valuation

— Scenario-based valuation

  • Refine and support negotiation strategies
  • Participate in executive negotiations

We welcome a chance to discuss your needs, either formally or informally.