The Investment Association (the IA) has answered calls to set out how it expects remuneration committees to be addressing some of the difficult decisions they are currently facing on executive pay.
While this isn’t necessarily the IA’s last word on these issues – they flag that expectations may evolve as the impact of the pandemic becomes clearer – the over-riding message is unlikely to change. Remuneration committees must ensure that the executive experience is commensurate with that of shareholders, employees and other stakeholders. Any use of discretion by the remuneration committee should reflect appropriate engagement with shareholders and the rationale should be fully disclosed.
Against that backdrop, there are few surprises in the guidance but there is helpful clarity on some points as follows:
- Where a company has suspended or cancelled a dividend, that should be reflected in annual bonuses – either through downward discretion in the bonus itself or the application of malus for any deferred share award.
- COVID-19 is not a blanket reason to adjust performance conditions. While its words are very carefully couched, the IA does allow the possibility that in some circumstances the use of discretion by the remuneration committee may be appropriate. But it should only be used following appropriate shareholder engagement and the reasons for the adjustment must be disclosed.
- On potential windfall gains from long-term incentive plans (LTIPs) where grants have been made using a (historically) low share price, IA members accept that no adjustment is needed to the size of the grant if the share price fall is solely related to COVID-19 market movements. The territory is trickier where other factors are at play - and remuneration committees are being asked to assess potential gains at vesting to ensure that any longer term underperformance is not over rewarded. A “wait and see” approach that avoids any difficult decisions now.
- IA members accept that it is difficult for remuneration committees to grant LTIPs at the moment and set meaningful three-year targets and so accept that companies may do one of the following:
- Grant as usual (at the normal time and with performance conditions);
- Grant at the normal time but delay setting performance conditions until no later than six months following grant; and
- Delay the grant – but with an aim to grant within six months of the normal grant date.
- Companies that furlough employees or reduce / freeze workforce pay should ensure that executives are also taking corresponding reductions.
- Companies who are due to seek shareholder approval for a new remuneration policy this year should carry on as planned but should be mindful of the current environment in deciding whether to implement any proposed increases in variable pay.
The full note can be accessed below.