In his International Mother Earth Day message, UN Secretary General, António Guterres, urged governments to turn the worldwide recovery from the Covid-19 pandemic into "a real opportunity to do things right for the future".
Although the comment was made in the context of climate change, the idea of "Building Back Better" - using this unique period to reflect on and question historic norms - has filtered into other areas of society and the field of executive pay is no exception. It is hard to escape the regular news stories of executives giving-up elements of their compensation packages to "share the pain" experienced by other stakeholders.
This is especially the case where members of the wider workforce have, themselves, suffered pay cuts and shareholders have seen dividends cancelled. It is also difficult for an executive to justify receiving substantial levels of pay when they have made use of the UK government's Coronavirus Job Retention Scheme (CJRS) for other employees. Undoubtedly, many companies are reducing pay for economic reasons, to retain much needed cash within the business. However, we are also witnessing a number of those that can afford to do so applying the pay given up in making charitable donations (often with a Covid-19 connection). In both cases, there is the sense that it is commercially and morally right for executives to reduce such high levels of pay. These significant moves might just be a necessary but temporary measure in unprecedent circumstances, but they could also be the trigger for a more permanent change in attitudes to both the levels and make-up of executive pay.
A Historic Problem
The remuneration received by some of the country's top executives has been the subject of scrutiny (and often criticism) for many years. From the accusations of "fat cattery" in the 1990s to the more recent changes in corporate governance and disclosure requirements, we have seen shareholders, employees and the public at large question whether the pay packages commanded by just a few executives can really be justified. The inequality in remuneration levels across a company's workforce has drawn particular attention with the press making much of "High Pay Day" being the date every January when, according to research by the High Pay Centre and the Chartered Institute of Personnel and Development, pay for the typical FTSE100 CEO is considered to exceed the amount received by an average UK worker in the entire year. For some time, the AGM season has seen shareholders (particularly institutional investors) in a number of companies express their disquiet over generous executive pay packages by casting their votes against remuneration reports and policies, incentive arrangements and the re-appointment of directors. Changes introduced by the new UK Corporate Governance Code have prompted listed companies to take meaningful steps to moderate levels of executive pay (particularly in terms of pension alignment), but it is fair to say that progress has been gradual. While Covid-19 is not the stimulus to change that anyone would have wished for, perhaps it will prove to be.
The Response to Covid-19
There is evidence that it is not simply a handful of companies that are taking action – a report by the High Pay Centre estimated that 37% of FTSE 100 firms had, at that point, made changes to their executive pay in response to the economic downturn caused by Covid-19. We have been monitoring the press for examples of the actions that different companies have taken and certain trends are emerging. For example, where executives agree to a reduction in salary, this is often set at 20% (e.g. Barratt, British Land, Burberry, EasyJet). In some cases, this will reflect the pay-cut that members of the wider workforce have to take; under the CJRS the government will contribute 80% of a furloughed worker's salary up to a cap of £2,500 per month. Also drawing parallels with the CJRS, the executive salary cuts will often be in place until the end of June (given the Chancellor's recently announced extension of the CJRS to October it will be interesting to see whether executive pay will follow suit). Executives in some companies have gone even further; an example of this is Monzo's CEO and co-founder, Tom Blomfield, who has given up 100% of his salary for a year.
These changes aren't limited to companies whose businesses are most severely affected by the lock-down. Even outside the beleaguered leisure, travel and hospitality sectors, executives are responding to the crisis by donating all or a portion of their salaries to charities and other causes involved in Covid-19 (BT, HSBC, Barclays among them). Other responses include cancelling the 2020 bonus (BBVA. Lloyds, Virgin), a cut in both salary and bonus (ITV, HSBC, Persimmon), reductions or waivers of long term incentive awards (Schroders) and substituting pay for shares in the company (Serinus Energy PLC, Biffa). In some cases, executives have agreed to a deferral rather than a complete waiver of their remuneration. Some non-executive directors are also choosing to waive or donate their fees. What is striking about many of these moves is that, in the main, they are steps that the executives are taking voluntarily by giving up salaries and bonuses that they would otherwise expect to receive.
Having said this, companies are under considerable pressure to review executive pay in light of the impact of Covid-19. The general public is likely to take a dim view of struggling companies continuing to pay executives generously. A spokesperson for the government department for Business, Energy and Industrial Strategy warned that they would “expect companies to act in a socially responsible way and exercise judgment and discretion when considering executive pay”.
At the end of April, the Investment Association (IA) (the trade body that represents UK investment managers) produced guidance on how they expect remuneration committees to reflect the impact of Covid-19 in executive pay particularly where dividends have been cancelled and/or members of the workforce have taken a pay cut. The IA stated that shareholders expect executive remuneration to be aligned with the experience of the company, its employees and its other stakeholders. It went on to say that its members would support those companies who have proposed temporary salary reductions for executives or decisions to freeze variable pay. Other institutional investor representatives have made similar comments.
One size will not fit all, as different sectors of the economy will be impacted in different ways and at different times. However, one clear theme is that investors are wary of executives giving up salary and bonuses on one hand but seeing windfall gains through the grant of share-based long-term incentives on the other. Along with other institutional investor representative bodies, the IA is not in favour of adjusting the performance conditions for existing, "in-flight", LTIP awards in response to Covid-19 and urges remuneration committees to use available discretions where necessary in order to retain a good link between pay and performance. Equally, where the company's share price is low due to Covid-19, remuneration committees have been urged to take care to ensure that new grant sizes remain appropriate (and are not slavishly linked to multiples of salary), performance conditions are set carefully and discretionary powers and malus provisions are used to avoid unexpectedly generous outcomes on vesting. The IA notes that some companies might choose to delay the grant of LTIP awards by up to 6 months until the economic outlook is a little clearer.