April 15, 2021
April 15, 2021
Employee engagement and its flip side—burnout—are issues receiving national attention. Many companies expect that remote work will remain at high levels in the post-pandemic world, and surveys show that most employees whose jobs are able to be performed remotely want to incorporate some degree of remote work into their schedules on a more permanent basis.
That said, workers dislike the blurring of the work-life boundary that the past year and telework have generated. Employers are thus trying to balance encouraging employees to dial back the amount of time they spend doing work with preserving connectivity and motivation. For example, Citigroup recently announced that after the pandemic it expects to adopt a hybrid work schedule with only three days per week in the office for most employees and that it now bans internal video meetings on Fridays as part of an effort to “reset” working practices. It is clear that employee engagement is of utmost importance to effective human capital management.
Indeed, investors are expressing increased interest in companies’ employee engagement efforts. This focus is warranted because a disengaged workforce can lower productivity, lead to higher turnover, and ultimately affect a company’s profitability. Just as compensation committees began to tie executive compensation to diversity and inclusion metrics when investors asked for more information about company workforce diversity, the same trajectory should be expected with employee engagement: as investor focus moves in that direction, so too will executive compensation performance goals.
Currently, the absence of set market practices in linking executive pay to employee engagement goals and the repeal of the Section 162(m) qualified performance-based exception offer companies flexibility to tailor unique performance goals to their own employee populations.
To incorporate employee engagement performance goals into executive incentive-based compensation programs, compensation committees and management can employ the following practical how-to tips:
A compensation committee considering adopting employee engagement metrics should bear in mind the corporate governance implications of doing so in consultation with outside counsel. Below are some areas of impact boards should keep in mind:
Similarly, unintended consequences and litigation risks should be thought through prior to implementation. There may be collateral litigation risk, for example. Any time a company creates and compiles new metrics, there will be a paper trail at risk of discovery in future litigation. That should not stop a company from moving forward, but it does mean companies should review engagement data with care and follow up with employees and managers where appropriate to address areas of concern.
Adding an employee engagement component to executive compensation is a creative way for companies to monitor employee well-being and emphasize the importance of the broader workforce to the company’s overall strategy and performance. Doing so would be responsive to the desires of younger generations of employees to derive meaning from their work and, further, aligns the interests of the executive team with those of middle management who are faced with the day-to-day challenges of fostering employee engagement. We expect that employee engagement goals will be the next frontier in executive compensation performance metrics as much as diversity, equity, and inclusion metrics have come to be.
Robin Melman is a partner at Baker Botts. Her practice focuses on executive compensation issues and all matters considered by compensation committees. Christina Andersen is a special counsel at Baker Botts. Her practice focuses on advising clients on employment matters, including hiring and promotion practices, company culture, and diversity and inclusion.
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