Summary of the Investment Association’s shareholder expectations of executive pay during the COVID-19 pandemic

The IA issued its guidance today.  It can be found here.

They state that committees must strike a balance between “incentivising executive performance at a time where management teams are being asked to demonstrate significant leadership and resilience, and ensuring that the executive experience is commensurate with that of shareholders, employees and other stakeholders.”

It generally reflects a toughening of attitudes from shareholders, consistent with other recent feedback.

They cover the following points:

1. Should a Company that has suspended or cancelled a dividend in relation to FY2019 consider adjusting bonus outcomes for FY2019? Shareholders expect companies which already paid bonus outcomes to consider employing discretion or malus provisions to reduce any deferred shares related to the 2019 annual bonus. Alternatively, shareholders would expect this to be fully reflected in FY2020 bonus outcomes.
2. Would shareholders support the adjustment of performance conditions in response to COVID-19? IA members do not expect this for annual bonuses or in-flight LTIP awards. Where a committee considers that company performance/shareholder experience and executive remuneration are not commensurate, they should use their discretion to ensure they are, also engaging with shareholders and disclosing their reasoning.
3. How are Remuneration Committees expected to ensure that a windfall gain will not have been received on 2020 LTIP grants already made? The majority of their members are likely to support decisions by companies not to adjust grant multiples if the share price has only fallen post-covid and discretion has been reserved to adjust for windfall gains.  But they may not support where the share price had fallen beforehand.
4. What are shareholder expectations on long-term incentive grant sizes and performance conditions for grants being made in the next few months? Here there seems to be a toughening with suggestions for reduced quantum if performance conditions are revisited. It seeks to set a limit of 6 months on the deferral of any grants and for there to be reduced quantum.
5. What are shareholder expectations if a company seeks additional capital from shareholders or takes money from the government such as furloughing employees? Shareholders expect such actions to be reflected in executive remuneration outcomes. Remuneration Committees and management teams should be especially mindful of the wider employee context in this period: failure to do so might have significant reputational ramifications.
6. How will shareholders consider proposals to change remuneration structures, including increases to variable pay opportunity? Companies do not need to re-write their new remuneration policies. However, if they are proposing variable pay increases, they should consider if that is appropriate in 2020. It may not be appropriate for companies which have yet to consult on a new remuneration policy to propose substantial changes if they have been significantly impacted by COVID-19. It may be beneficial to wait for greater clarity. This latter point builds on guidance from Aviva suggesting a rollover of the current policy with a commitment to consider the position further a year later.

There is little of surprise in this guidance and we plan to cover further in our normal Friday briefing.

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.

This email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 1 Duke Street, London, W1U 3EA.