Impact of coronavirus on chemical suppliers and their annual incentive plans

The impact of the novel coronavirus pneumonia on the US and global economy is enormous. Despite the recent recovery in financial markets, the epidemic is affecting the financial and operating performance of Companies in all sectors. Some industries (e.g. oil and gas, hotels, airlines) have been particularly hard hit, and the viability of many chemical suppliers has been questioned. In response to this situation, many organizations have taken strategic actions to enhance financial stability and liquidity, including reducing operations, reducing costs and capital expenditure, reducing credit lines and reducing dividends. Interestingly, the chemical industry is not as seriously affected by the covid-19 as other industries.

To supplement public disclosure, which may not be necessary depending on the actions taken, meridian recently conducted a quick survey of more than 50 companies in the chemical industry. The survey asked about the current situation of layoffs, pay cuts and changes in the design of incentive plans caused by cowid - 19. The findings confirm that only a small number of chemical suppliers are considering covid-19 related layoffs, executive compensation cuts and recent incentive plan design changes.

2020 annual incentive plan (AIPS)

The depth and duration of covid-19 impact remain uncertain. Concerns about the second wave of the epidemic and its negative impact, as well as the potentially disappointing second and third quarter financial results, remain the top concerns of many. So far, few chemical suppliers have made or announced changes to the annual incentive plan. Our advice to customers is usually to take a "wait-and-see" approach without changing the performance indicators and / or targets in their AIPS, as there are still significant uncertainties. However, as companies begin to better understand the impact of covid-19 on their financial performance, we are increasingly discussing with companies and their compensation committees how to solve AIP in 2020 and have preliminary discussions on the design in 2021.

As we move into 2020, it becomes clear that for most companies, the AIP goals set a few months ago are in many cases obsolete. Among chemical suppliers, revenue based targets usually account for a large proportion, and participants may have thought that the revenue and other financial targets in 2020 could not be achieved, and expected that the bonus expenditure would be low or not paid. We have observed this in various chemical companies we have consulted and in the wider market. The committee is asking: what alternatives can we consider? The situation of different companies is very different, but we suggest to ask some specific questions before starting the interview:

■ are the original business plans and performance targets still credible?

■ can you afford the year-end bonus (of any amount)? If not sure today, when can you get more information?

What kind of bonus compensation measures best meet the expectations of investors?

■ what are the views of other stakeholders in the company?

What kind of company statement can best set employees' expectations for year-end bonus?

■ if considered appropriate, can certain components of the plan (such as safety and / or personal performance / other non-financial indicators) be used as a means of payment?

■ what discussions need to be held with external auditors on the current bonus yield?

There is no doubt that shareholders may expect a reduction in bonus pools for most companies this year, especially in the most affected sectors. Given this, concerns about retention and engagement may not be as important as they used to be. When considering potential alternatives, it may be helpful to draft potential CD & A disclosures early in the process to refine the rationale for any approach a company takes for the rest of the year. The considerations will vary according to the specific facts and circumstances of individual companies. We may see that the bonus method plays a different role in different sectors of the chemical industry according to the duration of the economic downturn caused by the pandemic.