2020 has been a roller-coaster for remuneration committees. Six thoughts to take into 2021.
December 22, 2020
The roller-coaster that was 2020: The FTSE100 index entered 2020 at 7,542.40. By the start of the first lockdown in March, it had dropped to 4,993.90, a fall of nearly 34%. At the time of writing, the FTSE has risen to 6,572.18, up nearly 32% but still almost 13% below where it was at the start of the year. Talk about a roller-coaster ride!
In the midst of all the turmoil, remuneration committees have had to deal with the perennial triumvirate of attracting, retaining and motivating the talent needed to keep their businesses running successfully. All in the face of a virus, the likes of which have not been seen before and unanswerable questions like what effect will COVID have on our business, our suppliers, our markets, investors and life in general?
Have remuneration committees done a good job? It is probably too early to tell and, I suspect, the answer is likely to differ depending on which camp you are in or the sector in which your business operates. From where we sit, there is no doubt that remuneration committees have tried hard to do a good job. Some might say committees could do better but, even for the most experienced, the depth of the shock and the extent of change to working practices caused by COVID have not been experienced in recent history, if ever.
How did remuneration committees react? For many companies, the immediate concern was cost and cash retention. A common initial reaction was to cut executive salaries. In some cases, the majority of the workforce was furloughed, which would have made it difficult to justify maintaining senior executive pay at pre-COVID levels. Attention quickly turned to focus on incentives. Would/should bonus plans pay-out on the performance metrics set for 2020; what to do about long-term incentive awards and future plan design, as 2020 performance could influence outcomes until 2022? Some companies reduced or ditched bonuses plans, whilst others, realising that setting forward targets for three years was simply impossible, replaced their LTIPs with restricted share plans – with mixed reactions from shareholders and proxy advisers. Again, the action taken depended on the type of business and the sector it was in.
Looking back at our monthly Newsletters over the past year, articles about replacing LTIPs with restricted share plans and the effect of COVID on incentive plan design are among those which have resonated most with our readers. We had hoped (and expected) that the general economic situation would change investors’ ambivalent attitudes towards restricted shares. Instead, investor guidance has muddied, rather than cleared, the water.
Articles taking a high-level view of the process of designing remuneration policies for the “new normal” and about taking listed companies private are also high on the list. An indication, perhaps, of a recognition that COVID will have a long-term, possibly permanent, effect on the way business is conducted and a growing realisation that being listed is not necessarily a pre-requisite of success. There is currently no shortage of private equity cash for investment, much of it in the hands of investors interested in long-term sustainable value creation.
What lessons can remuneration committees take into 2021? COVID has not adversely affected all companies. Those which have been worst hit and survived will have learned some hard lessons. Hopefully, as a result, they will emerge stronger for the experience.
We offer the following six thoughts to take into 2021:
- In light of the effect COVID has had on the business, think carefully about current remuneration policies and practice; ensure they support current and planned business strategy and management culture; with the benefit of hindsight, what would you change and why?
- With some notable exceptions, it does not seem to be the case that there has been much (permanent) structural change to remuneration packages; this may be a step too far, even unnecessary, in many cases but remuneration policy should be reviewed in the round; look at total reward, with less emphasis on the individual elements thereof
- Think carefully about the function of incentives; setting targets, even in the short-term, will continue to be hard, so build-in flexibility, and a process for the remuneration committee to exercise discretion; are the right incentive structures in place and could restricted shares help solve a problem?
- The ESG star will continue to rise; have a clear view about how the business affects, and can improve its impact on, the environment and society and about the appropriate corporate governance framework for the business; assess the extent to which measurable and relevant ESG targets can be built-in to pay
- COVID has raised the importance of workforce wellbeing; keep open two-way communication channels with the workforce, so issues can be identified quickly
- Engage with investors and other stakeholders about remuneration proposals; present clearly the reasons, benefits and risks of proposals to enable shareholders to take an informed view in general meetings; engagement is a two-way street, clarity and consistency are requirements of investor guidance, too.
It seems COVID will be with us for some time to come but news of effective vaccines is welcome. We hope all our Newsletter readers stay safe and well, have a peaceful festive season and a happy and prosperous 2021.
Please contact Paul Norris to discuss or comment on anything contained in this article.