What a difference a year makes. In late 2021, the stock market was setting new highs daily, consumers were spending freely, and the economy was so hot it led to high inflation. You probably were optimistic about your company’s prospects for continued growth – and, with it, your ability to prosper under the terms of your executive compensation package.
The economic outlook for 2023 is not nearly as rosy. Both the World Bank and Fannie Mae, among many others, say that a recession is likely, as central banks have raised interest rates to offset inflation, the U.S. housing market weakens, and high energy prices take a toll. The stock market is already in bear territory. If you were counting on variable compensation in 2023 such as bonuses, equity, or stock options, a recession is especially bad news.
“Executive cash bonuses are typically driven by company performance metrics, like hitting certain targets for revenue, net income, and EBITDA,” says Robin Melman, an attorney and partner at Baker Botts in New York City who advises companies, boards of directors, compensation committees, CEOs, and management teams on executive compensation matters. “If those performance metrics are not capable of being met during a recession, there could be zero payout.” Since the typical executive bonus can range from 30% to 100% of salary, missing these targets could mean a huge hit to your 2023 pay.
A stock market downturn will have its own impact on your total compensation, for several reasons. If your bonus is tied to shareholder return, that’s one more bonus target that could be hard to meet. If you have stock options, lower market values may have pushed the options below the strike price of your contract, eliminating (at least temporarily) your ability to prosper from selling them.
Some private companies have postponed their scheduled IPOs indefinitely until market conditions improve, putting executives’ hopes of stock-options gains in 2023 on hold. “Best-case scenario, will those pre-IPO packages end up being worth the same amount, just on a delayed timeline? Or will those executive compensation packages be worth anything at all?” asks Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan.
Of course, your personal investments in publicly traded stocks – perhaps in your own employer – may have already lost considerable value. The S&P 500 is down nearly 20% from its peak at the start of 2022, while the Nasdaq is down roughly 30%. “A lot of executives with holdings are already feeling that, with more losses possible,” says Jesse Meschuk, a senior advisor with Exequity, an executive compensation consulting firm.
Indeed, things do look a little bleak for your executive compensation, and you have every right to be worried, concerned, and frustrated if you feel trapped in a plan that’s not likely to yield much in 2023. While the average person might not shed a tear over executive compensation, someone who might be more sympathetic is your board.
“Boards really want to know about what’s keeping up their executive team at night. If you’re distracted because your comp is likely to be half of what it was compared to last year because of targets that have become impossible to achieve due to market conditions, they would want to know,” says Melman, especially since the same incentives and motivations likely apply to your staff as well, leading to reduced workplace satisfaction and morale.
“It’s one thing for there to be reduced or no bonus for poor performance or management missteps. It’s another if there’s just a depressed economic environment in which it becomes impossible to meet goals,” Melman says. With respect for the company’s own financial situation, this could be a good time for leaders to raise these concerns, and their impact on morale, to the CEO or the board.
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How to Re-Negotiate Your Executive Compensation Package in a Recession
“There is no one-size-fits-all approach to negotiating and setting an executive compensation plan,” says Linda Shaffer, chief people and operations officer (CPOO) at Checkr, an HR background SAAS company. She sets the company’s executive compensation. “In general, this process typically involves a combination of annual reviews, as well as periodic discussions about performance and compensation.” Recent economic shifts could trigger such a talk.
Who you should have this discussion with depends on your level in your organization: The CEO generally will negotiate with the board, other C-suite executives will talk with the CEO, and lower-level executives will talk with their respective C-suite leaders.
While your ultimate goal may be to reset your compensation terms, approach the talk with the mindset that you’re having a conversation, not a negotiation, Melman advises. “You should be looking for a win-win. And after all, it’s not a true negotiation unless you have another offer you could fall back on” – something that could be difficult in a severe recession.
(If you’re at a public company, you also have one more group to convince beyond your boss and the board, and that’s your shareholders. Since public companies must release certain executive compensation data publicly, shareholders would see any changes to your plan. “There needs to be a good rationale for why past performance criteria for bonuses will change or no longer apply. Shareholder reaction can be negative, and potentially result in a negative say-on-pay advisory vote, if they see actions as insulating management’s compensation against the negative of missed performance goals,” Melman says.)
Given that traditional performance metrics for bonuses could be difficult if not impossible to meet during a recession, suggest some new recession-specific incentives to add to your comp plan. For example, bonuses for cutting costs, increasing employee engagement, contributing to tangible DEI goals, or generating more revenue. “If executives can demonstrate their value in these ways, they build a stronger case for retaining or increasing their compensation,” says Shaffer.
Get creative to propose incentives for meaningful goals that rise to the occasion. An example from 2020’s pandemic-driven recession: Businesses such as cruise lines and hotels “had to shut down and couldn’t bring in any revenue,” Meschuk recalls. “One executive performance metric they added was trying to keep employees healthy during this time.”
If the economy struggles as predicted in 2023, cash flow could tighten at your organization. It may become challenging for your company to pay your full annual bonus even if you do hit the metrics. Meschuk suggests re-negotiating your bonus terms from a 2023 reward to a (larger) retention bonus, paid several years later when economic conditions improve.
You also can suggest non-cash incentives such as additional company stock or stock options, or phantom stock packages that earn you a percentage of future company profits even if you don’t own actual shares. Or request non-financial rewards such as more vacation time to make up for your reduced variable compensation.