Readers may be seeing a lot of talk about the possibility of a recession in the near future. Some articles, of course, reflect the writers’ political wishful thinking, but others make it sound more likely. As a financial prognosticator, I’m a very good lawyer. Takis Makridis, Art Meyers, and I discussed compensation planning and adjustments at our Hot Topics presentation at the NASPP Conference last year and again on our Hot Topics in Equity Compensation webcast in January (see transcript, subscription required). Therefore, I wanted to touch on some of the high points from Takis’ portion of the presentation.
Among the issues for companies to consider in advance are the following:
- What was the company’s experience during the last two downturns?
- Will turnover increase or decrease in a down‐market? How will outstanding (or future) equity awards assist or impair our ability to retain key employees?
- Should we shorten the performance measurement periods to enhance the reliability of our projections and/or prepare for volatility? Three years is the most commonly used performance measurement period. However, even under stable economic conditions, three years is a long time over which to predict the future. Some companies are using a one-year performance period followed by two additional years of vesting. Other companies have considered a longer performance horizon, anticipating that market ups and downs will even out over time and performance will be recoverable with longer-term stock price targets. Should we look more to relative performance measures?
- How will our compensation committee feel about value restoration in a financial downturn?
- Do we have cash and equity available to play offense in a downturn, or do we need to guard against poaching? It may be more difficult to persuade stockholders to approve an increase in the authorized share pool during a downturn. Are there going to be more share pool issues? Awards made or settled in cash can help extend the life of the authorized share pool but require a real cash outlay and could de-link compensation from stock price.
- To what extent are our awards insulated from financial downturns?
- The best time to be granting options is in a down market. Is this potentially a time to grant five-year awards or seven-year awards? Is there an appetite to do so?
See also the early slide in this webcast by Takis of Equity Methods here.