Alvarez & Marsal urges firms to address executive compensation

30 March 2020 3 min. read

Volatility in the job market is already one of the major impacts to emerge from the early stages of the coronavirus, and this will be the case for the upper end of the market too – an issue which professional services firm Alvarez & Marsal thinks businesses should start addressing now.

One of the world’s leading restructuring consultancies, Alvarez & Marsal, is helping companies to bolster their futures amidst the global coronavirus crisis with advice on executive compensation. While the subject might strike as somewhat unsavory for much of the public, considering the current climate of mass job losses, such an environment will create opportunities for leading executives exactly when companies will require their top talent the most.

Such circumstances, says A&M, present significant challenges to companies from an executive compensation standpoint, with a difficult road ahead to retain and motivate their best executive talent. Two particular issues stem from the economic impact of measures being put in place around the world to counter the spread of the virus; business results in many cases falling far below estimates, and a marked reduction in the value of company stock.

Payouts then, under annual incentive schemes, will be negatively impacted, while many executives find themselves in a position where their longer-term incentive awards – which are most often provided in the form of stock or stock-based awards – are rapidly losing value or have already in A&M’s words become worthless. The firm reminds that such hits may not be related to the performance of the executives themselves, but down to the unexpected economic shock.

Alvarez & Marsal urges firms to address executive compensation

Whatever the case, A&M suggests that under such conditions many executives will struggle to find any motivating value in their existing compensation programmes, further noting that their employers may also be facing restructuring or bankruptcy. In the opinion of the firm, it is therefore imperative that organisations “find alternative methods to motivate and retain key executive talent,” warning that otherwise “they may not be able to fight through these times.”

Here, reassessing annual performance targets and resetting stock appreciation awards based on current, lower values are given as two potential measures for consideration, but most of the options available come with their own difficulties. As previously mentioned, one of those is issues is how the public might perceive and the press portray any changes to performance metrics, not to mention the message that such changes could convey to employees and investors.

Deeper financial issues may also arise when resetting existing awards or issue additional ones. For example, states A&M; “due to a depressed stock price, the ‘burn rate’ of shares authorised for awards may be too great, resulting in premature exhaustion of shares under the plan.  Furthermore, issuing additional awards will have the negative impact of diluting the interests of the other shareholders to a much greater extent than in healthy market conditions.”

There’s also another factor to keep in mind for companies which are considering newly issued  awards based on the current share prices, one perhaps overshadowed by the current gloom. Should a significant reversal in stock price occur due to economic recovery, such an approach could result in a huge, unintended windfall for the executives – which could well provide its own incentive for recently highly-stressed chiefs to depart for a quiet and comfortable retirement.