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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 4 minutes read

Impact of COVID-19 on performance-based awards: what public companies in the US should consider

As global markets continue to react to the COVID-19 outbreak, many public companies are considering whether and how to adjust outstanding performance-based awards in light of the outbreak, as well as how to structure performance goals for new awards at this time of uncertainty.    

Overview of performance-based US public company compensation

Public companies typically use a mix of long- and short-term compensation in order to attract and retain employees that are well-suited to helping the company achieve its goals. 

Industry trends largely driven by institutional investors and proxy advisory firms continue to favor compensation programs that use “pay-for-performance” to align the interests of management and shareholders. 

Most public companies attempt to achieve a high level of pay-for-performance through setting financial goals in their long-term compensation awards, which typically span a three-year performance period. 

Such financial performance goals vary from company to company, depending upon the industry and other factors, but typically use a cash flow metric, a total or relative shareholder return metric or a combination of the two. 

Although such financial performance goals are commonly found in long-term awards, public companies are increasingly including such goals in their short-term compensation programs as well, such as annual bonuses. 

As a result, the effect of COVID-19 can drastically undermine the incentive and retentive value of performance-based compensation programs of US public companies using financial performance goals, particularly those tied to market performance.       

Considerations for outstanding awards

In light of the undermining effects of COVID-19 on performance-based compensation awards that were granted at a time when the novel coronavirus outbreak was unforeseeable, and the current uncertainty in the markets, many companies are considering adjusting the established performance criteria for such awards. 

As a threshold matter, a public company considering such action should review the terms of the applicable compensation plan to ensure that any such action is permissible, or whether consent of shareholders or employees is required. 

While most public company compensation plans reserve the discretion for the compensation committee to make adjustments, including to performance criteria for outstanding awards, such discretion is typically reserved for non-recurring corporate events. 

If performance goals are modified, public disclosure may be triggered. In some cases, a Form 8-K may be required to be filed to disclose changes made, and in any event companies will be required to describe and explain any such changes in their proxy statements. 

Consideration should also be given to how the use of such discretion will be viewed by institutional investors and proxy advisory firms. 

At this early stage, it is unlikely that institutional investors and proxy advisory firms will view adjusting the criteria for outstanding awards to account for the impact of COVID-19 as within the intent of the reserved discretion, particularly if an outstanding award has a performance period spanning multiple years during which market conditions may normalize.

Considering the foregoing, as well as the larger issues facing companies and boards of directors, at this point in time, we recommend that public companies adopt a “wait and see” approach with respect to outstanding awards and refrain from adjusting performance criteria. 

To the extent that the value of currently outstanding awards is materially diminished due to the effects of COVID-19, at the time of settlement of such awards, consideration should be given to the potential implementation of certain “make whole” strategies, such as increases to short-term compensation with qualitative and less formulaic criteria, or granting future awards covering a larger amount of shares or awards with greater weight given to service-based conditions such as continued employment, in each case subject to applicable disclosure, tax and other considerations.  

Considerations for new performance-based awards

For issuers that are currently setting performance-based targets and goals in connection with new grants of annual or long-term awards, consideration should be given to structuring such targets and goals to minimize the impact that COVID-19 may have on the awards. 

For example, due to the general decline in the stock market, rather than exclusively granting full-value awards such as performance stock units that may need to be increased in number in order to deliver the same potential economic value to the employee (thereby affecting share reserve and burn rate), public companies should consider granting appreciation awards such as stock options, which may be viewed as more desirable by employees. 

Additionally, public companies should consider including less formulaic, qualitative measures as a component of the overall performance goals in connection with new awards. 

In the alternative, public companies granting performance-based awards could delay the grants and setting of the applicable goals until there is some stability in the market.

Proxy advisory firms may not favor some of these changes, but we expect that their regular policies will be relaxed or amended in light of the current situation. 


Public companies that grant performance-based compensation that may be impacted by the effect of COVID-19 on global markets should be careful before taking any actions with respect to outstanding awards or setting performance goals for new awards. 

Although most public companies will adopt a “wait and see” approach with respect to their performance-based compensation at this stage of the epidemic, exploring mitigation strategies and viable alternatives with legal and financial advisors at an early stage is highly recommended and can avoid costly pitfalls.

As global markets continue to react to the COVID-19 outbreak, many public companies are considering whether and how to adjust outstanding performance-based awards in light of the outbreak, as well as how to structure performance goals for new awards at this time of uncertainty.


americas, covid-19, coronavirus, united states, executive compensation