Seemingly overnight, the COVID-19 pandemic gripped the World, and many business forecasts and operating budgets were severely impacted. Before the end of the first quarter, incentive plan performance goals were suddenly deemed unattainable. While most companies are not currently considering adjusting in-cycle incentive plan performance goals, due either to concerns about external optics or a lack of sufficient context, assessing performance for the purposes of incentive plan payouts will be a deeply deliberated topic during year-end pay discussions. We expect that for many companies, incentive plan performance assessment is likely to include the application of backward-looking discretion, informed by a comprehensive review of a variety of quantitative and qualitative factors. This article provides an analytical approach to support the application of discretion.
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Do you think the effect of COVID-19 has destroyed your company’s 2020 bonus plan? Many companies are taking a “wait and see” approach to how they will ultimately evaluate the impact of the pandemic on incentive plan performance goals. When the time is right, that assessment is likely to include the application of backward-looking discretion, informed by a comprehensive review of a variety of quantitative and qualitative factors. However, many companies will likely be uncomfortable with both the ambiguity of an undefined and arbitrary “discretionary” review process, and the well-established negative connotations associated with the exercise of discretion in setting pay. As a result, many companies will be looking for well-reasoned, easily articulated approaches to applying discretion. This Client Alert offers one example of the analytical approach that companies may consider in evaluating 2020 performance while maintaining pre-COVID-19 performance frameworks.