The Investment Association publishes an addendum to its guidelines on executive compensation in the light of Covid-19
February 25, 2021
On Wednesday 24th February, the Investment Association published an update on its previous guidance seeking to update IA member expectations on how Remuneration Committees should be reflecting the impact of COVID-19 on executive pay.
The main thrust of the update was an addendum to the original guidance that it published in November 2020 which we reported upon in our November 2020 newsletter.
The Addendum stated that given the uncertainties arising from the current Lockdown and ongoing COVID-19 restrictions on the economy, the IA understands that this is impacting some Remuneration Committee’s ability to set long term performance targets. In response to this the IA added the following guidance:
“Remuneration Committees will have to consider if the performance conditions for future LTIP grants are still appropriate in the current market environment.… For companies who have been significantly impacted by the COVID-19 pandemic, Remuneration Committees may wish to make an LTIP grant at the usual time while delaying setting the performance conditions for these awards for a reasonable period of time (up to a maximum of six months), until the continued impact of COVID-19 on the business is clearer. If Committees decide to delay LTIP grants until further clarity is established, shareholders would still expect best practice to be a performance period of three years following grant. However, where this is not possible, committees may shorten the performance period by up to six months, contingent on the explanation provided by the committee and adequate post-vesting holding provisions being in place. Where the performance period is shortened, grant sizes should be similarly reduced. The company should publish the performance conditions as soon as possible after they have been set via an RNS.”
Basically, the IA is suggesting that it will not object to companies making LTIP grants at their normal time but delaying setting the performance conditions for these grants. And if companies choose to delay their LTIP grants, the IA would still expect to see a performance period of three years after the grant date (thus potentially delaying the eventual vesting of those grants beyond their typical vesting periods).
On the face of it, this seems unreasonable in our view. As most LTIP performance conditions relate to the underlying financial performance of the company, and in practice this can only be measured at financial year ends, surely there is no harm in delaying grants for say three or six months but still running the performance conditions alongside the company’s financial results for the third financial year after the grant date. Making LTIP awards with a note saying “we will tell you what the performance conditions will be later” would not provide much of an incentive and would lead to potential confusion and even distrust among the recipients.
We will be providing a further commentary on this new (and seemingly rather unhelpful) IA guidance in our next newsletter.
For further information, please contact Nigel Mills