Do Responsible Special Awards Have to Be an Oxymoron? For boards, special awards can be a vital way to retain high-level talent in a competitive marketplace
Published April 17, 2023
Published April 17, 2023
When it comes to retaining executive management, boards face multiple hurdles: an active talent market, volatile stock prices, mixed financial performance and go-forward economic uncertainty.
As a result, boards have a growing interest in special equity awards to fend off recruiters and partially compensate executives for target pay that was not fully realized. Are special awards a good solution?
Tighter and more competitive candidate pools have led to higher executive pay. Meanwhile, poor market conditions have eroded much of the equity hold companies rely on to retain their existing talent. We analyzed S&P 500 companies from 2019 to 2021 and found that retention awards are increasing, notably since the start of COVID. Additionally, current board concerns over retention could mean the practice increases in 2023 and beyond.
Many clients ask if the retentive benefit of these special awards outweighs the potential criticism from investors and proxy advisors. Our experience suggests that effectively structured special awards can help retain talent under the right circumstances. Yet, they are not a panacea — and other recognition and rewards can often prove more meaningful. In determining whether a special equity award is the right decision, we encourage boards to consider the following questions.
Why is the company considering a special award? Is now the right time?
The rationale for special awards takes many forms. With a compelling narrative, these awards can make a difference. Boards may look to special awards to promote “stickiness,” maintain key managers through a strategic shift or leadership transition, recognize strong individual potential or defend against a strong talent market. Understanding the “why” behind the award can test the urgency of a special award, inform the award’s design or uncover whether another avenue can achieve the same goal.
It is essential for boards to step back and ask what makes this particular time or situation unique, and how special awards might make a real difference. Do investors find the criticality of the individual executive’s role apparent and worthy of a special award? Have the company’s communications supported this narrative to help investors understand the unique situation?
Also, the company’s recent performance and historical say-on-pay outcomes cannot be ignored. Investors have little patience for awards that look like forgiveness or increased pay without additional impact. Internally, companies should consider how special awards might support other changes contemplated for the pay program, strategy or organizational structure.
Does the existing compensation program have enough holding power to retain the executive(s)?
Sometimes, a poor performance year makes a management team question whether the plan works. We advise clients to review performance/payouts over a multiyear period before fearing the worst. Most companies provide new grants annually, which creates a strong retentive hold over time. Boards can assess past payouts and estimate future outcomes in outstanding incentive cycles (assuming targets are met or exceeded) to determine whether existing incentives might be sufficiently retentive. Often, making those potential opportunities more transparent and rallying executives around achieving these goals is enough to strengthen their commitment.
How will the company structure the special award (i.e., performance and vesting)?
A special award’s structure will often dictate its external reception. Investors and proxy advisors evaluate four design features in special awards: magnitude, performance requirements, vesting and forfeiture provisions. The supporting data below has been sourced from S&P 500 CEO special awards made since 2019.
Design feature
Suggested guardrails
Commentary from S&P 500 analysis
Magnitude
$3 to 5 million for CEOs $2 to 3 million for other NEOsLess than or equal to 1x annual equity value
– Awards too large in magnitude dwarf the motivation in regular awards and risk paying for nonperformance. – About half of the awards above $3 million received an “against” recommendation. – Larger awards and those above 1x a regular annual equity award had a higher likelihood of an “against” recommendation, whereas smaller awards more frequently received a “for” recommendation.
Performance requirements
At least 50% performance-based
– Stay awards are less favored than awards that require performance improvements. – A minority of awards were 100% time-based (17%). – Performance criteria should complement annual equity grants (e.g., different metrics or goals).
Vesting
Three-year+ vest
– Longer vesting increases retention beyond regular equity. – A majority of awards (83%) had three years of vesting or more. – Three years typically aligns with annual equity grant and signals stability externally.
Forfeiture provisions
Unvested portion forfeited
– Investors prefer that executives do not have access to full awards in cases of poor performance or voluntary departures. – Recent SEC regulations have been aimed at cutting down “golden handshakes.”
The award should be meaningful enough to retain the executive and fulfill the desired purpose but structured responsibly to minimize external criticism. For example, including longer-term vesting and performance criteria could make a larger award more palatable for investors and proxy advisors. Conversely, awards exceeding all or most suggested guardrails invite higher scrutiny. Ideally, the award design (e.g., performance criteria or vesting horizon) should build upon the annual program rather than mimic it. Finally, if a company’s performance has not improved, companies should have avenues to exit executives without excessive severance benefits.
Alternatively, companies can take actions within the scope of regular compensation programs to retain executives. For example, they can increase the core pay package in the current and future years or adjust the total compensation mix such that it’s more guaranteed by making it more cash-heavy or time-based. Companies can also shorten performance periods or apply different goal-setting strategies (e.g., wider performance ranges, dynamic/relative goals) to provide a greater chance of achieving some payout regardless of market conditions.
Of course, nonfinancial awards can be even more meaningful. For example, increasing the scope of an executive’s role — which frequently warrants a promotional benefit — can keep them committed.
Special awards can retain executives when designed effectively for the right situation. If companies have a compelling reason for a special award, they should make it count. Staying within the suggested guardrails of magnitude, performance, vesting and forfeiture increases the likelihood of external support. Boards should also exhaust all regular compensation actions and consider the internal and external operating environment before undertaking a special award. Lastly, special awards should be kept isolated, making them truly “special” rather than a perpetual practice.
Blair Jones has 30 years of executive compensation consulting experience. She has worked extensively across industries and has deep expertise in advising boards on company transitions, significant investor concerns, and an expanding human capital management mandate. Before joining Semler Brossy, Blair was the practice leader in Leadership Performance and Rewards at Sibson and an Associate Consultant at Bain & Company.
Blair holds the designations of Certified Benefits Professional (CBP), Certified Compensation Professional (CCP), and Certified Executive Compensation Professional (CECP). Blair has been named to the D100, NACD Directorship Magazine’s annual list of the most influential people in the boardroom for 10 consecutive years (2013–2022).
Of Interest
Named to the D100, NACD Directorship Magazine’s annual list of the most influential people in the boardroom community, including directors, corporate governance experts, regulators, and advisors, for eight consecutive years (2013–2020).
Sam has over five years of direct experience supporting Compensation Committees and Management across various compensation and governance-related issues. Sam works closely with clients in both public and private company settings across a diverse range of industries.
Sam holds a B.S. from the McIntire School of Commerce at the University of Virginia, with a double concentration in Finance and Marketing.
