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Our latest executive briefing covers recent guidance issued by Fidelity International and a short note on the use of climate-related factors in executive remuneration.
Fidelity issues Covid-19 guidance
Fidelity International has issued guidance for how it thinks that investee companies should approach their executive remuneration practices in the wake of the Covid-19 crisis. Many companies have taken immediate steps to restrain executive pay, such as temporary salary cuts (although these are now typically - but by no means always - ending after being in place for a 3-month period) or deferring bonus and share awards. Fidelity acknowledges those efforts and the difficult task for Remuneration Committees in trying to reward management fairly (considering their efforts in navigating through the crisis).
However, Fidelity believes that, due to the continuing uncertainty of a post-Covid economic recovery, companies should apply a “restrained approach” toward executive pay for the rest of this year. In particular, it has the following particular recommendations regarding executive pay in 2020:
- “Remuneration committees must remain mindful of ensuring that variable pay outcomes broadly reflect shareholders’ experience, and appropriate discretion should be applied when this is not reflected in formulaic outcomes.”
FIT comment: This approach is consistent with statements made by other investors and in particular the view of the Investment Association (see our briefing here). It also reflects the requirements of the UK Corporate Governance Code and would generally be considered a minimum expectation for Remuneration Committees.
- “We expect companies that have participated in taxpayer-supported employee furlough schemes to not pay bonuses (cash or otherwise) to executive directors and senior management for FY20.”
FIT comment: In calling for a prohibition on all bonuses (in whatever form), Fidelity, consistent with many other houses, is clearly encouraging a more extreme position than the requirements of the government funding arrangements. For example, the CLBILS (one of the main tax-payer backed loan schemes for large companies) allows payment of previously announced bonuses that are consistent with existing practice (see our earlier briefing on this here). We understand that similar requirements are being added to other government support arrangements, as mentioned by the Chancellor in his Summer Statement earlier this week. In reality, bonuses for FY20 will be judged with the benefit of hindsight and Remuneration Committees will need to consider all relevant factors when determining outcomes, including whether a company has received any form of government support but we can expect a number of shareholders to be critical of the payment of bonuses to Executive Directors where dividends have been cancelled and/ or any form of government support accepted.
- “We strongly encourage scaling back LTIP grants in monetary terms to account for any temporary fall in the share price. Companies that did not do this in 2020 should put a hard cap on the pay outcomes to prevent windfall gains.”
FIT comment: Most Remuneration Committees will already be mindful of the prevailing sensitivity regarding making LTIP grants when share prices are depressed (by Covid-19 or otherwise). As a rule of thumb, the Investment Association suggests scaling back the quantum of award where the share price is down by 30% or more from the pre-Covid-19 norm. However, the norm through this period has been to not scale-back where the share price had not fallen by these levels pre-Covid but to, instead, commit to consider whether there has been a windfall gain over the vesting period and then scale-back accordingly. These words have been used reasonably often and companies should note that the Investment Association is encouraging companies to then explain what they consider may consider a windfall in the next DRR which is published, rather than simply waiting 3 years to consider it.
It is currently unusual for companies to set a hard cap on LTIP outcomes, although many have committed to apply discretion where any windfall gains might be received by executives.
- “When evaluating pay outcomes, we will consider the consistency between company’s treatment between senior management and the general workforce. We expect senior management salaries to be frozen or rise only modestly next year and in any event, not beyond the workforce rate of increase.”
FIT comment: This statement is not surprising and reflects the approach taken on other executive pay issues, including prior to the arrival of Covid-19 (e.g. pension contribution rates). Remuneration Committees will be well aware that any decisions to increase salaries in 2021 will be assessed in the context of the treatment of the general workforce during 2020 (especially if employees were furloughed or made redundant).
- “Any ex-post adjustments to performance targets should be well-explained in the remuneration report and should respect the principles of shareholder alignment and consistent treatment with the broader workforce.”
FIT comment: Consistent with other major investors, the implication here is that adjustments to performance targets will only be possible once the ‘dust has settled’ and with a strong justification. Ex-post adjustment to performance targets is already area of intense investor scrutiny; although it was not directly Covid-related, Tesco recently lost a vote on its Remuneration Report, at least partly due to the adjustments it made to its TSR comparator group.
- “The Covid-19 crisis has highlighted the importance of appropriately reflecting stakeholder outcomes in executive pay. Looking ahead to FY21, we will be encouraging investee companies to incorporate appropriate non-financial and/or stakeholder-focused factors into their remuneration policies where they have not done so already and where sufficiently robust metrics can be identified.”
FIT comment: Those companies which are due to renew their policy in the 2021 AGM season will be beginning to consider what approach they will take. Some will have good reasons for moving ahead with and revising their policy in the normal manner, but some may not have the ‘bandwidth’ to consider policy amendments whilst juggling the inevitable challenges that Covid-19 is presenting. This will be a key judgement for Remuneration Committees and companies with a December year-end will need to consider this soon. Although not ideal, in some cases it may be preferable to delay a full revision of the policy, perhaps for a year, and roll-over the existing policy. However, current experience is that shareholders will not expect this to delay tackling the most pressing issues such as pension alignment or post-cessation ownership guidelines.
Climate-related factors in executive remuneration
The Climate Financial Risk Forum (CFRF) was set up in 2019 by the PRA and FCA in order to “build capacity and share best practice across financial regulators and industry to advance the sector’s responses to the financial risks from climate change”.
The CFRF recently issued guidance to help the financial industry address climate-related financial risks. This includes a number of recommendations for institutions regarding executive remuneration, including:
- Explaining how executive remuneration is linked to climate-related targets.
- Disclosure of targets and commitments on executive remuneration that the firm is deploying to actively contribute to achieving a net zero carbon economy by 2050.
- Reporting any adjustment to executive remuneration to reflect performance against specified climate change-related targets.
This guidance is focussed on financial services firms, but it is also consistent with recent guidance from a number of investor bodies and proxies (including ISS and the Investment Association) that are increasingly pushing for ESG factors in incentive plans.
If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.
Rory Cray
rory.cray@fit-rem.com
020 7034 1116
Darrell Hare
darrell.hare@fit-rem.com
020 7034 1113
Matt Higgins
matt.higgins@fit-rem.com
020 7034 1117
John Lee
john.lee@fit-rem.com
020 7034 1110
Sahul Patel
sahul.patel@fit-rem.com
020 7034 1778
Iain Scott
iain.scott@fit-rem.com
020 7034 1114
Katharine Turner
katharine.turner@fit-rem.com
020 7034 1115
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