On 18 March, Pensions Investment Research Consultants (PIRC), an adviser to shareholders including the UK’s local authority pension funds, which oversee £300bn in assets, wrote to the company secretaries of 4,000 listed companies around the world calling on them to take a tough approach to executive pay in response to the extreme disruption caused by Covid-19. In its letter PIRC called on companies to suspend all payments to executives, other than basic salary, from 1 April until the end of the financial year.
In a similar vein, Sam Woods, the Deputy Governor and CEO of the Prudential Regulation Authority (PRA), wrote to seven of the largest UK banks on 31 March asking them not to pay bonuses to senior staff.
Deciding on whether to follow PIRC’s and the PRA’s advice is just one of a number of difficult decisions for remuneration committees in the coming months as many listed companies approach their annual reporting season and with it the grant and vesting of executive awards.
Although PIRC’s recommendation may be considered excessive by some companies, remuneration committees will inevitably need to carefully consider and decide whether to let in-flight awards vest or lapse in the ordinary course or whether to exercise any of the discretions available to them. They will have to balance two potentially conflicting objectives. On the one hand, the need to retain and incentivise key employees and executives to help steer companies through the difficult times. On the other hand, making sure executive pay is adequately aligned with that of the general workforce which is expected by the company’s stakeholders. For those companies experiencing pay cuts, furloughing and redundancies, remuneration committees will have a particularly difficult time in striking the right balance. Any decisions taken will undoubtedly be scrutinised by investors, proxy advisers and the media over the coming year.
Commenting on executive pay in the current climate, Chris Cummings, Chief Executive of the Investment Association, said:
“Executive pay should always be linked to long term company performance and take account of the shareholder experience, not just financial performance. If companies are stopping dividend payments, boards and remuneration committees should be considering how this impacts on executive pay both for the current year and also in relation to the year the dividend was for.”
Looking to the future, the granting of new awards will present remuneration committees with equally difficult issues. Should new awards be reduced to reflect a depressed share price so as to avoid windfall gains for the executives when the markets recover? If not, will the increased number of shares required to deliver the same value present dilution headroom issues? Many companies may find it difficult to simply switch to market purchase shares given the impact on cash reserves.
Setting new, forward-looking performance conditions when the markets are in a state of flux will be particularly challenging and may require a conservative reset or, alternatively, push some companies to consider alternative structures such as restricted share plans (i.e. awards subject only to continued employment).
We consider these issues and more in our detailed articles on Covid-19’s impact on remuneration decisions and share plans in our Remuneration and Share Plans Spring Update which you can subscribe to here.