COVID-19 issues for remuneration committees

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Remuneration committees have a difficult balance to strike between retaining and incentivising senior executives to lead companies in this difficult time and ensuring pay outcomes are aligned with investors and wider stakeholders. Investor bodies such as the Investment Association (“IA”) and the Pensions and Lifetime Savings Association have now provided guidance to their members on how executive remuneration is to be dealt with during the COVID-19 pandemic.

Following on from its letter to FTSE 350 Chairs at the beginning of April, the IA published guidance on 27 April 2020 setting out shareholder expectations on how remuneration committees should be reflecting the impact of COVID-19 on executive pay. In summary:

  • Where dividends are being cancelled, remuneration committees should consider reducing awards already made for 2019.
  • Companies should not adjust existing performance conditions for COVID-19 but remuneration committees should use their discretion, in consultation with shareholders, to ensure a good link between pay and performance.
  • Remuneration committees should ensure that windfall gains are not received in the future as a result of granting 2020 awards based on a suppressed share price due to COVID-19.
  • Companies should consider if it is appropriate to make new grants in the current uncertainty, particularly given the difficulties in setting meaningful performance targets in the current climate.
  • Staff cost cutting measures including furloughing, pay cuts/ freezes, redundancies and seeking extra capital/government assistance should be reflected in executive pay outcomes and remuneration committees must be mindful of the wider employee context.
  • Remuneration policies already consulted on and due for approval in 2020 should not be adjusted but companies should consider whether any increase in variable pay which is proposed is appropriate. Substantial changes in any new remuneration policy may not be appropriate in the current circumstances.

As shareholder expectations are evolving, the IA expects to update its guidance as the ongoing impact of COVID-19 becomes clearer.

We are now in the ‘share awards’ season and the IA’s guidance is welcome but it does not cover all the issues that will be keeping remuneration committees awake at night. In addition to the IA’s Principles of Remuneration and its ongoing guidance, remuneration committees should always consider the following ahead of making new share awards:

  • The rules of the relevant share plan.
  • The Directors’ Remuneration Policy and the company’s remuneration strategy.
  • The company’s risk and solvency status.
  • The financial performance of the company and the proposed award holder.
  • Legal, regulatory and corporate governance requirements (including the Market Abuse Regulations and Listing Rules).

As a result of the COVID-19 pandemic and its potential economic impact, additional factors will also need to be considered ahead of making awards. As the full impact is currently unknown, the list below is non-exhaustive but captures the range of factors that remuneration committees ought to consider.

Prevailing share price – do the plan rules provide discretion to adjust how the number of shares under awards would ordinarily be calculated? Could this be exercised to mitigate against the risk of windfall gains arising as a result of a spike in share price that could arise when the pandemic ends?

Changes to workforce – the IA’s Principles of Remuneration are clear that executive remuneration should be reflective of the pay and conditions in the wider workforce. In addition to considering pay freezes, pay cuts and the introduction of reduced hours for employees, the timing and extent of redundancies (if any) should also be considered.

General UK economic outlook – this is likely to influence the general consensus (in terms of public opinion and political pressure) on executive pay and share awards. This should be balanced against the need to incentivise management during this challenging time.

For financial institutions – the regulators’ expectations and the need to preserve capital.

Approach of peers – how are other companies within the same peer group approaching executive pay and share awards? It would be prudent to understand the basis on which these decisions have been made to ensure that the company is electing the best course of action for their business.

Representative bodies - further guidance is expected from the IA and other investor bodies on how to manage the response to the crisis.

Remuneration committees should seek to achieve a sensible balance between incentivising and rewarding executive performance while ensuring executives’ experiences are consistent with those of shareholders, employees and other stakeholders. In these unprecedented times, the message should be loud and clear: we are all in this together.

If you would like to discuss any of the advice above, please contact one of our team (see key contacts). CMS are able support you in discussing the different strategies available to remuneration committees to determine what approach works best for your business.

Article co-authored by Aoife Fenlon.