While the Coronavirus (COVID-19) is foremost a human tragedy, its threat has reached far beyond the world of health.

As the US Stock Market suffers significant losses due to COVID-19, it is possible that the immediate and long-term economic impact could be with us long after that health threat has passed. How do these events affect compensation management? What can or should be done to re-align corporate incentive plans to a new reality?

Financial Realities

In the ten weeks since the onset of COVID-19, over $1 trillion in global assets have been erased. The total human and financial damage the pandemic has caused is still unknown, but experts see three possible scenarios for the world economy:  a quick recovery, a global slowdown, or a recession. Given widespread shuttering and slowing of businesses in all sectors, fewer imported goods may drive up prices, missed sales goals may negatively impact net income, and potential layoffs and downsizing could trigger a downturn.

Corporate Compensation Impact

Corporate incentive plans are based on financial ratios built upon customer demand within reasonably healthy economies. These ratios can be offset or annulled by unforeseen catastrophic events, such as our current crisis. Some incentive plans are designed (in our opinion, wrongly) to make up for below-market salaries or base pay. (This can lead to higher executive turnover and instability within an organization.) Whatever the relationship between base pay and incentive pay, it is crucial to update both salary ranges and other incentive plans as circumstances change. 

Whatever the relationship between base pay and incentive pay, it is crucial to update both salary ranges and other incentive plans as circumstances change. 

Resetting Compensation Incentive Plans

 In our experience, many Human Resource Departments attempt to create salary ranges based on limited data, including unreliable employee surveys or anecdotal information. BalancedComp is here to help guide these processes based on compensation best practices to protect you and your employees. When considering your corporate incentive plans in light of this crisis, here are some possible action steps:

1. Re-evaluate corporate incentive plans as indicated by common sense on “acceptable and outstanding” levels for ROA, Net Income, Deposit Growth, and Capital Ratios when unpredictable events occur. Don’t be held back or adopt an inflexible posture by goals set at the beginning of the year absent the knowledge of current events.
   
2. Establish a threshold of a specific Net Income in order to initiate the annual bonus to protect the company.
3. Consider adding a weighted section to the bonus plan for the boards’ evaluation of predictors of long-term success, such as progress toward key projects and strategic initiatives.
4. Typically, average performance-to-peer should equate to the median short-term bonus payout for the CEO and executives.
5. Always factor in the performance of the peer group; it’s dangerous to overvalue incentive plans in order to achieve the average incentive level goal.

When COVID-19 moved from an isolated threat to a pandemic it’s likely our global and national economy also shifted into a new reality. We could be at the beginning of turbulent times in which it may be necessary to reconsider how we deliver our services and products, pricing models, and compensation packages. Managing compensation in relation to broader realities will help keep turnover to a minimum and be a key to surviving and thriving through challenging markets.

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