The COVID effect on executive incentives

In light of the deepening effect of COVID-19, here are some thoughts designed to help remuneration committees as they turn their minds to bonus awards for 2020 and performance metrics for both short- and long-term awards in 2021.

Annual bonus awards for 2020

Performance measures and targets for 2020 will have been set at the beginning of the year. Among the possible approaches to making bonus awards for 2020 are:

• Take no action to change metrics.
  This requires a strong “take the rough with the smooth” management culture and may or may not result in zero bonus. It is unlikely to be the right approach for all companies.
• Recast targets to take account of the COVID effect on the business.
  It may be too late to take this action, even if it were possible accurately to identify the impact of COVID on the full year’s results while the pandemic continues. It is, arguably, also the thin end of the wedge. What happens on the next occasion on which exceptional circumstances adversely affect corporate performance? Proxy advisers have warned that, whilst sympathetic to the effects of COVID, they will look closely at adjustments which result in higher than “target” payments under the original plan and will want an explanation of how adjusted awards reflect both executive and company performance. The QCA has announced it will publish revised remuneration guidance shortly.
• Exercise discretion.
  This can be a difficult area for remuneration committees but corporate governance guidance allows for the exercise of discretion and, properly framed and explained, this can be a powerful approach.

Bonus design for 2021

Remuneration committees making decisions about annual bonuses for 2021 will be making those decisions in light of their experience this year but also in the face of continuing uncertainty as an increasing proportion of the population is forced back into tighter COVID-related restrictions.

We recommend remuneration committees faced with decisions about 2021 awards consider the following:

• Availability and use of discretion.
• If the business is in a rebuilding phase, focus on building a team culture and select performance metrics accordingly.
• The appropriate bonus cycle for your business.
• The form in which bonus awards could be settled.

Long-term incentives

In our June 2020 Newsletter, we wrote: “Three-year rolling LTI cycles will be affected, possibly up to 2022, by 2020 performance. As a result, many companies have had (and will have) to re-think the design of their incentive programmes”.

In connection with future LTIP design, here are three key considerations for remuneration committees:

• Re-consider the metrics being used – even plans with “relative” performance conditions may not protect shareholders due to other factors.
• Consider carefully the purpose of the LTIP.
• Is it really practicable to set long term performance targets? If not, consider alternative plan structures.

Approach to future remuneration policy generally

• Think outside the box. Do not be afraid to move away from established policies. Your pre-existing remuneration policy, even of it was only introduced last year, may no longer be fit-for-purpose.
• Be mindful of the impact this year has had on the remuneration of the workforce at large.
• Do not be hamstrung by proxy advisers’ views.
• Whatever approach you adopt, share information with executive management and employees, engage with shareholders and explain clearly the actions you propose to take.

For more information or to discuss any points arising from this article, please contact Paul Norris.

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