November 4, 2022 Executive Compensation Resilience QuickTakes

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2022 Insights and Priorities for 2023: Six Key Topics for Compensation Committees

As companies finish the 2022 compensation season and prepare for 2023, we highlight top-of-mind topics for compensation committee members, questions to ask, and related resources.

1. Goal Setting Challenges

How do you set reasonable goals when there is so much uncertainty? Do you widen performance curves? Set shorter performance periods? Add non-financial goals as a balance to financials? Is there a role for relative goals? If goals go down year over year, what is a fair performance level for maximum payouts? What adjustments should be allowed? How should discretion be applied? How do you manage participant expectations and psyche when achievement levels are volatile? Some companies in struggling industries are looking back to goal-setting strategies used earlier in the pandemic.

2. Pay vs. Performance Disclosure

Which financial and other measures are most important to disclose? Which peer group should be selected to compare TSR against? Where do you place the new disclosure, and how (if at all) should you link it to your CD&A? How does your company plan to use supplemental tables? Have you sought out a valuation firm if you have market-based measures? What will the narrative need to say? This article provides an overview of the rule, potential implications, and next steps.

3. Declining Share Prices Creating Dilution and Share Availability Issues

Should grants be reduced to control the run rate? Should greater differentiation be applied? Should equity eligibility be lifted and equity replaced with cash at the lowest levels? Here’s a quick take on adjusting equity grant practices to respond to stock price volatility.

4. ESG Incentive Measures

Incentive real estate is valuable, so how do ESG metrics fit with other important metrics? What’s the best way to measure ESG in a scorecard (e.g., carved-out metric, individual performance), particularly with heightened investor expectations on the rigor of ESG incentive metrics? Our 2022 ESG report found that 70% of S&P 500 companies have adopted ESG metrics in incentives, a 23% increase from last year. Almost all (98%) incorporate ESG metrics into annual incentive plans, most commonly as part of a scorecard. ESG incentive metrics vary across industries but generally align with expected business priorities.

5. Retention, When Equity and Long-Term Incentives Have Limited Holding Power

Historically, retention actions have had mixed success, so what is the best approach – a special award tied to critical performance areas, pure time-based retention, or enhanced annual awards? What is the role of compensation in retention relative to other HR practices such as career opportunities, mentoring, etc.? Pay is not the only factor in retention—compensation committees can start by asking questions about the company’s overall employee value proposition.

6. The Expanding Role of The Compensation Committee

When is a broader Committee mandate on Human Capital Management right for you? What are the decision rights around this expanded mandate? How do you fit expanded topics into an already crowded calendar? The strategic opportunity for boards goes beyond the surface with deeper conversations that tie HCM topics to business strategies, allow boards to understand the company’s critical opportunities and challenges, and open the door for collective brainstorming on the most challenging talent issues.

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