Consider Covid-19 impact before paying executive bonuses, says investment body

The IA, which represents 250 UK-based investment managers, released an updated version of its Principles for Remuneration (20 page / 397KB PDF) with accompanying guidance on the impact of Covid-19 (4 page / 231KB PDF) on executive remuneration.

The updated guidance relating to the coronavirus pandemic highlights that executive remuneration must be aligned with the experience of employees, stakeholders and shareholders and that executives should not be isolated from the impact of Covid-19 in a manner which is inconsistent with the approach taken in respect of the company’s general workforce.

The IA said where company performance and shareholder experience did not correspond to executive remuneration outcomes, the remuneration committee should use its discretion to ensure a good link between pay and performance. This would mean remuneration committees using their discretion to reduce variable pay to an appropriate level.

The guidance suggests that companies that have sought additional shareholder capital or used government support schemes, including the Coronavirus Job Retention Scheme, should reflect this in executive remuneration outcomes. It said companies in this position should not pay out annual bonuses for the 2020 financial year or, for companies that do not have a calendar financial year end, the 2020/21 financial year, unless there are truly exceptional circumstances.

Similarly, where the company has benefitted from indirect government financial support measures, such as the business rate relief in the retail, hospitality and leisure sectors, remuneration committees should disclose how they have taken into account the impact of these government measures on remuneration outcomes.

The IA said it did not expect remuneration committees to adjust performance conditions for ‘in-flight’ annual bonuses or long-term incentive awards to account for the impact of Covid-19. The updated guidance said companies should confirm in their remuneration committee chair's annual statement that they have not adjusted performance targets during the year.

Executive remuneration expert Lynette Jacobs of Pinsent Masons, the law firm behind Out-Law, said: “We have seen a near perfect storm during 2020: share price volatility, many companies needing to cut dividends, general expenditure and cash outlay, employees on furlough, companies needing to raise capital from shareholders and continued market uncertainty around national and local lockdowns.

“In order for remuneration committees to make meaningful decisions at this time it is more important than ever that they understand what the company's key shareholders are thinking,” Jacobs said.

Executive remuneration expert Fleur Benns of Pinsent Masons said: “The challenge for remuneration committees will be in determining what is an appropriate outcome in the circumstances. What is clear, however, is that windfall gains resulting from share awards being granted at a time when, due to the pandemic, share prices were substantially reduced will not be tolerated.”

The principles have also been amended to give clearer guidance on shareholder expectation where non-financial metrics such as environmental, social and governance factors are used to determine variable pay outcomes, and to confirm that where a bonus payment is made in excess of 100% of salary the expectation is that the entirety of the payment should be deferred into shares.

“While the focus has, unsurprisingly, been on the impact of the pandemic on executive remuneration, companies still need to be mindful of how their directors' remuneration policies operate in practice,” Jacobs said.

“For example, following on from the 2020 AGM season, the IA is now focusing on how companies are able to enforce their post-employment shareholding guidelines once a director has left the business and on ensuring that companies have a credible action plan in place to align the pension contributions of current directors to those for the majority of the workforce by the end of 2022,” Jacobs said.

Jacobs said companies should consider both short and long-term variable pay outcomes in 2021 carefully, in the light of the UK Corporate Governance Code requirements for remuneration committees to set out in the annual report what engagement has taken place with shareholders and the impact this has had on remuneration policy and outcomes.

The IA principles also said companies must be able to explain to shareholders how and why the remuneration committee considers such outcomes reflect the performance of the company and the wider shareholder and employee experience. Where this is not the case, the remuneration committee should engage with shareholders on how using its discretion to reduce variable pay outcomes would be a fairer reflection of the wider corporate environment.