2020 remuneration decisions – what needs to be done before the year-end?
November 27, 2020
Whether or not you are a December year-end business, the unprecedented year that 2020 has become means that we think all businesses need to a have a good look at their remuneration policies and practices before heading into the New Year.
“Making good promises”
Did entry into “lockdown” cause you to make hard decisions regarding remuneration levels across the business? Were promises made to review the situation and do these need to be carried out and transparently communicated before year end?
“The power of gratitude”
Has your workforce really pulled together to deliver what your business needed (whether that was survival, adaptation or even strong performance)? Consider recognising this through an award across the business. For those who are finding cashflow tight, consider the use of additional holiday / time off as a reward – a simple but effective measure may be for every Friday in December to finish at lunchtime.
There will be an understandable pull to review performance conditions for both bonuses and “active” long term incentive plans. However, unless the owners and the managers of the business are the same, making such adjustments is likely to be frowned upon by shareholders (whether VC/PE backers or Institutional shareholders).
Interestingly, the Investment Association (“IA”) in its recently published note on shareholder expectations highlights that the preferred approach regarding annual bonus payments, where there is a disconnect between management/business performance and incentive metrics, is for the remuneration decision-makers to use their powers of discretion to make an award – and not to change the performance conditions themselves.
If this approach is used then engaging with owners/shareholders and communicating the reasons for using discretion will be crucial. Careful consideration will need to be given to using discretion if shareholder dividends have been delayed or cancelled during 2020.
We would agree with this approach – but make it very clear to those receiving a bonus that this is a “one-off” in order to prevent the impact of any 2021 bonus plan being undermined. We would also make sure that bonuses for management reflect the position for the wider workforce.
The position is trickier with LTIPs – particularly those which may be coming to the end of the performance period – and we would suggest holding fire on any decisions on these until early 2021.
“Maybe now isn’t the time for change….”
If you are a company that shares a formal remuneration policy for its management team with shareholders then, even if you were due to put in place a new policy, it may be sensible to wait until 2021 before making that change. It is likely to be acceptable to roll forward current policies for six to twelve months.
“…but then again, perhaps it is!”
Whether you have a formal remuneration policy or not, there should be scope to flex how bonuses and LTIPs awarded in 2021 are going to be structured.
Whilst we would hope that the financial uncertainties of 2020 do not roll far into 2021, now may be the absolutely right time to start thinking about using “non-financial” measures in your incentive structures.
If you would like further information about the points raised in this article or to discuss any questions you may have, please do contact Stuart James.