Davis Polk's "COVID-19: Reductions in Executive Pay" and Simpson Thacher's "COVID-19 Considerations for Employee and Director Compensation Reductions" are must-reads for companies undertaking or contemplating executive pay changes in response to COVID-19. The instructive memos issue-spot and explain the multiple governance, legal, and disclosure implications associated with pay reductions, and suggest how companies can proactively address the issues to avoid or mitigate the risks of adverse unintended consequences - which can be significant.
Collective coverage includes:
- Board/committee approvals
- Potential contract implications such as "good cause" resignation triggers, constructive termination, and breach of employment contracts
- Impacts to base salary-linked pay components and benefits such as bonuses; LTIPs; severance; 401(k) plans; life, disability and retirement benefits
- Federal, state and local labor laws
- Stock ownership guidelines (often salary-based)
- Payroll deductions & tax withholdings
- CARES Act restrictions
- Current and future disclosures (including proxy statement)
- Tax implications associated with "make-up" payments
Also addressed are governance process and proxy advisor considerations associated with director pay reductions.
Among many other topical pay issues, DLA Piper's "Economic downturn: Key executive compensation issues for employers" reminds companies to evaluate the terms of their equity plans and award agreements to understand the impact of furloughs on equity award vesting provisions, which commonly include a "continuous service" (or like) requirement. The memo also addresses stock option repricing and option exchange programs for both private and public companies.
In that next (fiscal) year's proxy statement will cover the actions undertaken this year, diligencing all potential implications and ensuring proper process and record keeping on a real-time basis are critical.
Access additional resources on our Executive Pay and Compensation Committees pages. This post first appeared in the weekly Society Alert!