- On November 11, 2016
Like many of you, we are still trying to process the results of Tuesday’s election. While it is still early, everyone will be speculating over the next days, weeks and months about what a Trump administration might mean for their business, their industry, the economy, spending, civil liberties, foreign policy and every other issue that even tangentially touches the federal government.
So, we might as well take our shot as well. Here goes.
It’s difficult to try to predict how Trump and his administration will affect the economy or foreign policy, let alone an issue as esoteric as executive compensation. Trump seems to lack any underlying macro principles that guide his policies and proposals. On one hand, he seems to be pro-free-market, yet on the other, his protectionism threatens free trade. On one hand, he’s against government waste, yet on the other, he wants to build a $100 billion fence across the desert. His policies seem to be driven by his own instincts, or what he believes the populace to need, or on certain rare occasions, a position that his advisors can convince him would be valuable to achieve the goal he is pursuing. It remains to be seen exactly how he will “make America great again”, but I suppose we can remain cautiously hopeful.
What about executive compensation?
Trump has expressed his dislike for the exponential growth in government regulation, and implied that he will work to roll back unnecessary government regulations. We can be hopeful that at the very least, no new regulations will be implemented to govern executive compensation or the disclosure thereof. It’s probably a stretch to believe that Team Trump-Ryan-McConnell will be interested in expending any political capital to roll back any of the current regulations governing executive compensation (such as the CEO Pay Ratio), given the limited political capital Trump starts out with, and the other higher priorities they have mentioned. However, it’s probably pretty safe to believe that no additional regulations will be likely for at least the next four or five years. (Note: given another meltdown in the financial markets, or banking scandal such as Wells Fargo, all bets are off.)
Trump has suggested changes to tax policy. If passed, his proposal regarding tax treatment of carried interest among private equity firms will have significant implications among partners and employees of PE firms. Also, any of his proposed reductions to marginal income tax rates may reduce the attractiveness of — and participation in — deferred compensation programs. Also, proposals to change tax treatment of repatriation of foreign-earned cash may have implications on company performance if such cash is redeployed into value-creating investments in people or other assets.
Industry-specific Performance Expectations
Other Trump policies and initiatives may have implications for certain industries:
- Trade policy may have considerable consequences on performance expectations for any company with significant exposure to foreign trade, especially those that may benefit from the provisions in the TPP
- Energy sector: redeploying government resources from clean/renewable energy sectors to fossil fuel sectors (especially coal) may have significant consequences for performance expectations (and incentive plan goal-setting) for companies in those sectors
- Companies and industries with exposure to government infrastructure spending (roads, bridges, airports, seaports, etc.) will benefit from any increases in spending on infrastructure projects
- Immigration: President-elect Trump’s stance on immigration has been widely publicized, and companies that rely heavily on foreign talent (technology firms?) for high-skill jobs may encounter greater challenges finding the talent they require, representing a potential drag on performance
Because of uncertainty regarding how, when and the magnitude of the effects of these policy issues, companies should pay close attention to how their target performance goal is established, and to how sensitive their performance results are to these outside influences. Establish performance ranges appropriately such that these external factors won’t automatically put your company above the top end (or below the bottom end) of your incentive plan performance and payout ranges.
We suspect that very little will change from a federal government regulatory perspective as it relates to Executive Compensation, at least in the next four years or so. The competitive marketplace and shareholder influences will both be more significant influencers of Executive Pay than the federal government. State, local and municipal governments may begin to try to influence executive pay practices (read our perspective on Portland’s excise tax proposal based on CEO Pay Ratios) through tax policies, but Washington DC will more than likely stay out of any new regulations.
Likewise, federal tax policy probably will have very little effect on executive compensation design, with the possible exception of compensation for executives in private equity.
Perhaps the most important implication to consider as you begin your 2017 planning is how to design your incentive plan payout curves. Regardless of how you establish your target and what assumptions are built into your 2017 budgets, consider increasing the width of your incentive plan performance range to accommodate any additional uncertainty for 2017. Consider reducing your minimum/threshold performance goal and increasing the goal for your maximum/superior level of performance. The increased range around your target will provide your incentive program with additional flexibility and ensure a greater likelihood of falling somewhere within the performance range.
Sheffield Barry is a Compensation and HR Consulting firm, providing customized advice to clients at an affordable price. We leverage technology to deliver data and analysis as efficiently as possible, so we can invest more time understanding our clients’ unique business issues to develop custom solutions and advice. For more information, please visit us at SheffieldBarry.com or email us at info@SheffieldBarry.com.