Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
In the first quarter of 2020, COVID-19 began to spread across the globe, and created severe uncertainty within the global economy. During this time, the Blue Team at Fastenal Company (‘Fastenal’ or ‘Company’) set in motion an increase in the sourcing and vetting of additional suppliers for safety products. In addition, we prepared our teams and started discussions with customers regarding products and identifying alternative logistics assuming a more chaotic world.
In mid-March 2020, the executive leadership of Fastenal put in place expanded benefits for all employees due to potential COVID-19 impacts and established operating expense reductions within the business. These operating expense reductions were put in place to increase the organization’s agility, to fund the additional employee benefits, and to improve the ability to retain talent - our people. Included in these operating expense reductions was a decision to eliminate most leadership bonuses during the second quarter of 2020. This affected leadership groups deep into the organization and included a request to the Compensation Committee to explicitly cancel the executive bonus program for the second quarter of 2020.
On April 28, 2020, the Company disclosed its decision to suspend its performance bonus programs for employees in various positions during the second quarter (April through June) of 2020 and to suspend payments under the Company’s Incentive Plan for its named executive officers during the second quarter (April through June) of 2020.
During April and May 2020, the impacts of our early actions, and of the marketplace’s response, changed the severity of the financial impact. Accordingly, the Company has decided to rescind the suspension of performance bonuses for employees and Incentive Plan payments for named executive officers for the second quarter of 2020 and to reinstate these bonus programs and Incentive Plan payments for named executive officers for the second quarter of 2020. The leadership bonuses are generally linked to sales, gross profit, and earnings increases. As disclosed in our proxy statement for the annual meeting of shareholders that was held on April 25, 2020 (the ‘2020 Proxy Statement’), the incentive bonuses for executive officers are dependent upon an increase in earnings over the same quarter in the prior year, with a secondary bonus related to improvements in select assets, namely accounts receivable, inventories, and pick-up trucks, relative to the trailing 12-month net sales.
In addition, the Company also disclosed, on April 28, 2020, a reduction in certain director fees for May, June, and July (effectively their fees related to the same second quarter of 2020 for which performance bonuses and payments under the Company’s Incentive Plan were suspended). Given the reasons noted above, this decision has also been rescinded. Director fees will be paid in accordance with the plans made in December 2019 and previously disclosed in the 2020 Proxy Statement.