"Investors are looking to ensure that executive remuneration - both now and in the future - reflects the experience of the company's stakeholders, particularly its shareholders and the wider workforce," she said.
"Whilst investors are seeking to be flexible in their approach given the current economic uncertainty, it is clear that companies that have suspended or cancelled dividend payments or relied on government support as part of their Covid-19 response will need to ensure that this is reflected in their executive remuneration. The contractual terms of all variable pay awards should ensure that the remuneration committee has discretion to reflect this in eventual outcomes - with particular emphasis on ensuring that executives do not benefit from 'windfall' gains down the line that are not attributable to their individual efforts," she said.
The IA guidance sets out minimum expectations for every company but notes that corporate remuneration committees will need to respond flexibly, as the economic impact of the pandemic on each individual company will be different. Committees are urged to "sensitively balance" the need to sufficiently compensate executive performance at a time when management teams are being asked to demonstrate significant leadership and resilience with the impact of the pandemic on the company's employees, shareholders and other stakeholders.
Executive pay should "reflect the pay and conditions in the wider workforce" according to the guidance, with use of government support schemes or additional funding sought from shareholders coming with a commensurate reduction in executive pay. Shareholders also expect remuneration committees to consider the use of downward discretion or 'malus' provisions to reduce any deferred element of bonuses already awarded to executives where the company has had to suspend or cancel a shareholder dividend.
Companies due to vote on a new remuneration policy at this year's AGM should not rewrite these to reflect the events of the past few weeks, but remuneration committees may wish to consider whether variable pay increases remain appropriate in the circumstances. Companies yet to consult on a new remuneration policy should consider waiting until there is greater clarity on the future market environment before proposing major changes.
The guidance also contains proposals aimed at ensuring executives in long-term incentive plans (LTIPs) will not receive a 'windfall' bonus at the point that these shares vest due to substantial changes to share value driven by the pandemic. Where LTIP grants have not yet been made, remuneration committees should consider clawback provisions in the event of windfall gains, imposing performance conditions at a later date or delaying grants by up to six months while the market stabilises.
No changes need to be made to LTIPs already granted, although remuneration committees should monitor the market over the performance period to ensure the award remains appropriate. Companies will be expected to explain how they intend to deal with any windfall gains made by executives in next year's remuneration report.