A 3-Step Roadmap to Adjusting Incentive Payouts

Over 20% of Fortune 100 companies adjusted bonus payouts using discretion in 2023, according to a recent Semler Brossy piece.

Why it matters: As companies evaluate 2023 performance, make sure your compensation committees understand the types of adjustments that find favor (or don’t) with investors.

Go deeper: The Semler team looked at 2023 proxies and found:

• Of the 22 companies that adjusted pay, 14 were downward modifications which doesn’t normally worry investors.
  
  
• Of the 8 companies that adjusted upward, 6 were in the LTI plan and 2 were in the annual incentive. Each had positive TSR in the adjustment year, which is key to being perceived more favorably by shareholders.
  
  
• The easiest rationale for adjustment is world events outside the executive’s control that had an unusual impact on the business. Company-specific factors like corporate transactions that didn’t go as expected, changes to the competitive landscape, or changes in interest rates are less common. 

Roadmap to success:

• Establish a framework before the performance cycle outlining items outside of management’s control that will be considered for adjustment. This helps identify which items warrant a robust discussion, not necessarily an adjustment.
  
  
  1. Common items include: macroeconomic factors, M&A activity, pay and performance misalignment, changes to long-term strategy and tax-related regulatory changes.
     
     
• Consider prior use of discretion. Look to see how frequently adjustments have been made and the consistency in the thought process.
  
  
• Thoroughly understand the circumstances. Conduct a case-by-case review of the facts to ensure they are unrelated to executive decision making.

The big picture. The compensation committee should consider both the actual performance of management and the overall shareholder experience over the course of the cycle when balancing these decisions.