As COVID-19 reverberates through the real estate and construction industries, impacted companies should revisit their employee compensation programs to preserve cash and drive performance while maintaining legal compliance. This is particularly true for companies normally dependent on high rents in cities, where commercial tenants are trading brick-and-mortar office space for work-from-home arrangements, and freeing up employees—unshackled by any commuting concerns—to relocate in pursuit of lower housing costs.
In Episode 10 of Pillsbury’s Industry Insights podcast, Pillsbury partners Jessica Lutrin and Joel Simon discuss employee compensation in a COVID-19-shaped world, particularly when it comes to preserving cash and incentivizing employees.
Cash Preservation Considerations
In this environment, companies concerned with present liquidity and future cash flow have looked to cut the cost of human capital. For example, we have seen companies engage in:
- furloughs and layoffs, in the form of both voluntary “window programs” and involuntary terminations;
- compensation deferrals;
- hiring freezes; and
- various forms of “shared sacrifice” programs, such as salary reductions.
Companies seeking to reduce their workforce would be well advised to secure a general release of claims from exiting employees in exchange for severance. This release can also reinforce or introduce restrictive covenants (e.g., non-competition, non-solicitation and non-disclosure clauses, as applicable) and secure the assignment of company intellectual property. When implementing a so-called “window program,” i.e., a voluntary termination program coupled with an exit package, companies should ensure that protected classes of employees are not disproportionately impacted. Additionally, any compensation deferrals will necessarily require vetting under the complex requirements of Section 409A of the Internal Revenue Code.
Retaining and Incentivizing Employees
Properly retaining and incentivizing employees is essential, with or without an international pandemic. However, companies in the current environment should ensure employees are properly motivated notwithstanding the devaluation of employee equity awards and the need to preserve cash. This can be accomplished in a variety of ways.
- Equity: Companies may seek to restore value to employee equity via option repricing programs or similar arrangements. This approach involves complicated tax, accounting and tender offer considerations which should be analyzed with company counsel. Alternatively, companies may bite the dilution-bullet and make additional equity grants to key employees subject to vesting requirements that are tailored to the current economic climate.
- Performance Metrics: Be it cash or equity grants, performance metrics should be meaningful and achievable. Companies might consider including environmental, social and governance (ESG) metrics, particularly when economic performance may be difficult to measure relative to traditional benchmarks.