Executive Briefing – Weekly Update

This week saw the Government’s job retention (“furlough”) scheme open to applications, with the BBC reporting that 185,000 firms applied on the first day alone, impacting 1.3 million workers.  The week has also seen a number of listed companies announce reductions, waivers and cancellations of elements of executive remuneration in response to the Covid-19 crisis.

We have been encouraged by the flexibility companies have shown in adopting new technologies over recent weeks and, after some initial trial and error, the majority of our clients are now embracing virtual Remuneration Committee meetings and co-operating on projects remotely.  Following the end of the Easter break, many of our clients have been able to re-engage with their usual Spring workstreams.

While we are awaiting some further proxy guidance, institutional shareholder updates over the last week have been limited to views from individual houses.  These have generally been more cautious on executive pay, particularly expressing concern where bonuses are paid following suspension of dividends.

In the absence of much “new news” on executive remuneration, this briefing provides a short summary of the actions which companies have taken to date.

Reductions to Executive Directors’ base salaries

Around a quarter of companies in the FTSE 350 have made some temporary reduction to Executive Directors’ base salaries, either through a direct reduction/waiver or through committing a portion of salary to a charitable donation.  By way of comparison, equivalent research in the US suggests 15% of S&P 500 companies have made reductions to Executives’ pay.

The chart below shows the percentage of companies in the FTSE 100, FTSE 250 and FTSE SmallCap which have publicly announced such reductions, typically through an RNS announcement or in the Directors’ Remuneration Report.  We have not included press reports in the data below where this has not been officially verified, so these statistics will understate the position to some extent.

While there has been significant press attention around Executive Directors who have seen their base salaries reduced, it still remains the majority position not to have made an adjustment and many companies may be waiting to see a clearer picture of the impact of Covid-19 before making any decisions.

Where companies have announced a reduction in Executive Directors’ base salaries and disclosed the precise level of reduction, the majority position has been to reduce salaries by 20%.  This number has probably been chosen to reflect the headline reduction in salaries for furloughed employees (although many furloughed employees will actually see a greater level of reduction due to the cap, or a lower level of reduction due to a number of companies choosing to top up salaries).

A smaller number of companies have explicitly stated that they will also reduce Non-Executive Directors’ fees, most commonly by the same percentage as Executive Directors’ salaries.

Reductions, cancellations and deferral of variable pay for Executive Directors

15% of the FTSE 100, 10% of the FTSE 250 and 6% of the FTSE SmallCap have so far announced some action on variable pay as a result of Covid-19, either on the 2019 annual bonuses due to be paid during the lockdown, on bonus entitlements for 2020, or on long-term incentive awards due to vest or be granted.

It is likely this understates the true percentage of companies which would act, as (i) only December year-end companies have been impacted and since reported, and (ii) some companies will have underperformed and had nil bonuses for 2019 anyway.

Many companies will find it very difficult to set performance targets in the near future due to economic uncertainty. 

In our recent survey, more than half of respondent companies which had not yet set annual bonus targets informed us that they would be delaying the process this year due to the uncertainty around future performance.

A number of companies are discussing a potential move to awarding restricted shares (without performance conditions) in place of performance-based long-term incentives in 2020, to avoid the difficulty of setting robust performance targets.  There are still a number of hurdles to be crossed with shareholders before implementing such plans, but it will be interesting to see if the Covid-19 crisis accelerates the move towards restricted share awards at Board level in the UK. 

An alternative approach to removing performance conditions altogether is to vary the performance conditions away from absolute measures (which may be difficult to forecast) and towards relative measurement (primarily Total Shareholder Return).  Two companies yesterday announced that they would grant only the relative TSR half of their LTIP in 2020 and not the EPS half.  Other companies have favoured maintaining the award level but reviewing the performance conditions and/or target ranges.  Once targets have been set it would be very difficult to change them, so some companies may find it more appropriate to delay grants until the outlook is clearer.

While few companies have so far disclosed that they are delaying making long-term incentive awards, we expect to see this number increase when companies with March year-ends are due to make their awards; many companies with December year-ends had already made awards before the impact of Covid-19 was fully realised.

Of those which have so far granted long-term incentive awards during the lockdown, relatively few have scaled back grant levels to reflect a fall in share price, with some companies instead including wording that the ultimate vesting will be subject to Remuneration Committee discretion to avoid “windfall” gains.  While this will enable Remuneration Committees to act with the benefit of hindsight and knowing the longer-term impacts of Covid-19, there are likely to be difficult decisions to be made as to whether gains constitute a “windfall”.

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.

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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