At the recent Bloomberg BNA Conference on Revenue Recognition, a Deloitte partner observed that, to the extent that, in awarding compensation, companies use metrics that are keyed to revenue, the new revenue recognition standard could affect compensation or bonus plans because the ways of measuring and the timing of recognition of revenue change. He reminded attendees that, “‘when those plans were put into place, whatever they were, they overlap years. You then have the question of, ‘they set up some sort of benchmark and we’re going to pay someone a bonus based on how they do against this metric’— the problem is that metric was designed based on the old rules and you basically changed how you’re going to keep score.’” (See this article in Bloomberg BNA.)

How to address that problem? The speaker indicated that two approaches had surfaced so far: “One approach is to keep two sets of books, one under the new standard and another for purposes of the compensation plan or bonus arrangement…..The second approach is to change the comp plan or bonus arrangement. Neither approach is an ‘obvious’ solution and comes with challenges and complications. ‘Can you do that unilaterally—there’s probably some legal implications—can you just say this was the bogey we had set up and we’re going to change that because we changed the way we’re keeping score for revenue we’re going to change the plan—not obvious how you just go ahead and do that….I’ve come across this with a number of companies and it’s presented some real issues in terms of how do we deal with this.’” Delay in dealing with the issue, and in involving others outside of accounting, he suggested, will just make it more complex.

According to this article in Compliance Week, under the new standard, even determining comp incentives that reward real growth will require serious reconsideration. The new standard “reconceives business transactions as a series of performance obligations, with revenue recognized as each obligation within a transaction comes to pass,” with the result that revenue may be more volatile and less predictable. Accordingly, companies will need to reexamine definitions, calculations and targets in incentive plans and other performance-based compensatory agreements in light of the new standard, particularly multi-year metrics and targets.

Another commentator cited in the article cautioned companies to expect a “renewed focus” by proxy advisory firms and institutional investors on disclosures surrounding the determination of performance metrics and targets, particularly “on whether targeted performance levels are sufficiently rigorous.” Targets that are lowered to adjust for the new standard may appear to be simply changes made to make goals “more easily achievable,” requiring that companies provide more transparency and clear disclosure to explain the reasons underlying the decisions made. Companies may need to “develop an easy-to-understand disclosure process to manage investor and proxy adviser concerns and to explain revenue matters that require a more nuanced view of operations.”

Not only will performance goals be affected, one commentator observed, companies that have clawback provisions may also need to reexamine those to determine if they are implicated in any way. For example, companies electing to apply the new standard retrospectively (e.g., 2017 and 2016 revenues in addition to 2018) may want to ensure that clawbacks are not inadvertently triggered as a result. (See this PubCo post.)