Direct-to-Consumer Discretionary Company Case Study

A direct-to-consumer (DTC) discretionary company was significantly impacted by the Covid-19 pandemic. In addition to low revenue, the company encountered misalignment between the board and shareholders related to its executive compensation practices.

The ‘Say on Pay’ (SOP) vote had recently failed. The failure stemmed from disagreements between the board and shareholders, centered around the unbalanced use of discretion.

Shareholders raised concerns that discretionary adjustments were selectively used to boost payouts when performance fell short due to Covid-19. However, when performance later significantly exceeded targets due to low goal setting driven by uncertainty, negative discretion was not applied, leading to maximum bonus payments.

Other challenges included duplicative incentive measures over the same time period, less rigorous goal setting contributing to maximum bonus payouts, and short-term measurement within the long-term incentive plan.

In response, the company sought to restore shareholder confidence, resolve disagreements between the board and shareholders, and implement changes that would lead to a successful SOP vote in the future. 

Semler Brossy helped the client understand shareholder perspectives by providing a decision matrix that prioritized remediation efforts. Remediation efforts were ranked from least to most impactful on SOP response and by difficulty to implement. This framework provided an objective ground for management and the board to have a constructive conversation on how much they needed to do to respond to shareholder feedback.

In addition, Semler Brossy helped quantify the implications of proposed changes to their goal setting practices that were seen as less rigorous by shareholders. Using models and analyses, Semler Brossy demonstrated what the client’s programs could look like if they were more in line with market practices and showed alignment between upside in incentive plans and performance.  

Once decisions had been made about possible directions, Semler Brossy prepared and guided the committee chair and management for shareholder outreach. The outreach confirmed shareholder areas of concern and tested the possible program and practice changes. Armed with this information, the company was able to draft strong CD&A commentary demonstrating responsiveness to the previous SOP outcome.

With a new understanding of its issues and Semler Brossy’s recommendations, the company moved forward with the following changes:

1. Moved PSUs to a true 3-Year plan: To address concerns about goal setting and the annual PSU design, the company transitioned its PSUs back to a genuine 3-year plan. 
2. Implemented improved goal-setting practices, including negative discretion for bonus payouts: By conducting analyses informed by Street consensus and expectations, Semler Brossy was able to offer the board a structured and objective approach to setting incentive goals. Additionally, by introducing downward discretion, the client was able to address shareholder concerns around the balanced use of discretion that avoids high bonus payouts during a volatile macroeconomic environment.

After implementation, the company successfully passed its next ‘Say on Pay’ vote, indicating improved shareholder confidence in the company’s executive compensation practices.