MM&K News

MM&K’s 2020 Survey of PE, VC and Infrastructure pay will be essential reading for HR and reward professionals in the sector

We are seeing many PE and infrastructure fund management firms recruiting right now, suggesting that there are likely to be some interesting movements in compensation levels in this sector during 2020, particularly at the investment director, associate and analyst levels.

Access to reliable data will rarely be so important for HR and reward teams as it will be this year.

MM&K is again this year, for the 26th year in a row, running its annual Survey of PE, VC and Infrastructure Investment Managers’ compensation levels and practices. The Report comes out in early October and is available to purchase from then for participating firms only. All participants receive the Executive Summary of the Survey findings, but we charge a small fee to firms that wish to purchase the detailed report (which runs to 85 pages).

Last year was a successful year for our European Survey, with 44 houses participating and providing data on over 1,700 incumbents. Our sister survey in America had c. 100 participating firms.

The Survey is completed by the investment houses themselves and covers 47 investment and non-investment roles in a range of alternative asset management strategies, including:

Not only does the Survey go into great detail on salary, benefits, bonus and carry participation levels for each incumbent, it also gathers really useful information on bonus and carry design structures, performance metrics and staffing levels, as well as wider trends in the whole area of HR and reward in these industries.

All the signs are positive that this year will be another successful year for the Survey. We have already had circa ten new firms indicating to us that they will be participating in 2020 in addition to the 44 firms which participated last year.

Firms need to know what the market is doing if they are to attract and retain their best talent.

For further information about the survey and if your firm is interested in participating, please contact Nigel Mills or Margarita Skripina.

Risk of rise in rate of tax on carried interest and review of the capital gains tax system

Risk to Carried Interest

The Chancellor has recently requested the UK Office of Tax Simplification to review the capital gains tax system and the interaction of how gains are taxed compared to other types of income.

This has caused speculation in the market that carried interest payments received by fund managers and private equity executives may be subject to a significant tax hike to be announced in the Autumn or next Spring budget.  With a huge public borrowing of an estimated £322 billion because of COVID-19, it is thought that the Government could well raise taxes on carried interest payments to generate more revenue.

In return for managing a private equity fund and assisting in the making of investment decisions to maximise returns by the funds, fund managers (whether employed or self-employed) typically receive a share of the profits realised from the fund’s investments, known as “carried interest”.  The carried interest typically entitles the fund managers to between 15% to 20% of the fund’s overall profits after return of capital and a preferred return to investors in the fund.  This is in addition to any salary and bonus that a fund executive or profits that a self-employed fund manager receives.

Carried interest payments are currently taxed at a special capital gains tax rate of 28%, which, although higher than the normal capital gains tax rate of 20% (10% if entrepreneurs’ relief is available) is significantly lower than the income tax rate of 40% for higher rate taxpayers (for income between £50,000 to £150,000) and 45% for additional rate taxpayers (for income above £150,000).

Review of CGT

In response to the Chancellor’s request, the Office of Tax Simplification has, on 14 July, published an online survey and a call for evidence to seek views about capital gains tax.  They want to hear directly from individuals and businesses, professional advisers and representative bodies about the aspects of capital gains tax that they consider particularly complex and also welcome suggestions for improvements.  The call for evidence comes in two sections: the first section seeks high-level comments on the principles of capital gains tax by 10 August 2020, and the second section invites more detailed technical comments by 12 October 2020.  Further details in this regard including details of how to participate in the survey can be obtained from https://www.gov.uk/government/consultations/ots-capital-gains-tax-review-call-for-evidence-and-survey.

MM&K will be participating in the OTS survey. It will be sending both high level comments and detailed technical suggestions.  We will be keeping a close watch on the developments in this area and will report updates in our newsletter on a regular basis.

Our initial thoughts regarding the practical ways in which the Government may try and make changes to CGT can be found here.

For further information,  please contact JD Ghosh or Stuart James

The Government is reviewing Capital Gains Tax – just what might change?

Even in the modern age of political “opinion mining” and “soft leaking”, there has not yet been any overt steer from the Government as to what specifically it would like to do with the CGT regime (other than, presumably, for it to raise more revenue).

However, in the document setting out the situation, it has earmarked four particular “themes” for specific discussion. We use these to set out our thoughts as to where future changes could occur.

1. Allowances

Currently, each taxpayer receives an annual exemption of £12,300 against any personal gains made in a tax year. Relatively speaking, this is a modest amount per person and this is recognised by the OTS who indicate in the paper that the majority of CGT is actually paid by a “relatively small number of taxpayers”.

Based on these two inputs, we would think it very unlikely that the personal allowance would be removed or even reduced (although it may not be further increased in the short to medium term).

2. Exemptions and reliefs

This is an area that is likely to be eagerly studied by the OTS, as it may be more palatable (and logistically easier) to restrict access to certain reliefs and exemptions rather than changing the whole system. In respect of share incentives, the key consideration is whether Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) will be further eroded.

Given that there has always been a relief of this type available, it is likely that it will continue – although it would not be surprising if the qualifying conditions narrowed. However, there is likely to be more debate about whether shares acquired via EMI Options will also get this relief. The decision that is made on this will be an excellent bell-weather as to whether the purpose of any CGT reforms is to encourage enterprise or to raise taxes.

3. Capital Losses

It is likely that only a very few people will have sufficient assets (and transact in them frequently enough) for capital losses to be a particular issue. Whilst changes may occur here, they may again just be a narrowing of the rules which will have no or little effect on the majority of employment based share plans.

4. Tax rates

This is the area which is most likely to receive the most scrutiny and which would be the easiest for the Government to change from a practical perspective (as comparatively little new tax legislation would likely need to be introduced).

An idea which has waxed and waned in popularity is aligning the rates of income tax and capital gains tax to the higher income tax levels. Again, whilst a seemingly simple idea, we would hope that it is one that the wider economic departments within the Government would push back against.

In our view, there is surely no coincidence between the continued lowering of the CGT rates and the increase in entrepreneurship within the UK economy. A return to what would be seen as “prohibitive” levels of taxation on assets created by individuals through their own hard work would be unhelpfully detrimental at a time when keeping the economy moving forwards is of paramount importance.

What is more interesting in this area is that the OTS have specifically flagged the potential to introduce a distinction between “Short term” and “Long term” capital gains. This is a concept which has been running in the US for over 20 years and was the basis for the seemingly popular CGT “Taper Relief” legislation at the turn of the century in the UK.

It is considered very likely that such a change could be introduced following this review and would most likely follow the simple US system (which taxes gains on any asset held for less than one year at the higher income tax rates). Whilst onerous for anyone who acquires shares in a business that is unexpectedly purchased by a third party, such a change would likely leave the majority of employee and director share plans unaffected.

We will continue to keep our clients and contacts updated on any developments. However, if you would like further information about the issues raised in this article or to discuss any questions you may have, please contact Stuart James.

Specific details regarding the Government’s process for consultation can be found here in the second part of our article on carried interest.

Further update on COVID-19 and EMI

A new clause was added to the Finance Bill 2020 (which should shortly be section 107 of Finance Act 2020) in June, which provides a time-limited exception for EMI option holders who are unable to meet the necessary ‘working time’ requirements as a result of COVID-19. (See here for a discussion in our June Newsletter).

Just to recap, the legislation requires that, to qualify for the tax advantages associated with an EMI option, an employee must work at least 25 hours per week or if less, at least 75% of the employee’s working time for the company (or the group) granting the EMI option.  This is the ‘working time’ requirement.  If the option holder is unable to meet the ‘working time’ requirement at any time during the period in which the option holder holds the EMI option, a ‘disqualifying event’ occurs.  In that case, the option holder will lose the EMI tax advantages, unless the option is exercised within 90 days of the ‘disqualifying event’.

Section 107 of the Finance Act 2020 is a welcome relief to existing holders of EMI options.  They will not suffer a ‘disqualifying event’ and, therefore, will not lose the tax advantages as a result of taking unpaid leave, being furloughed or working reduced hours because of COVID-19.

Modification in the Finance Bill 2021

On 21 July, the Government announced that legislation will be introduced in the Finance Bill 2021, which will modify section 107 of Finance Act 2020 so that the limited exception in respect of the EMI ‘working time’ requirement, as described above, will also apply to the grant of EMI options.

Accordingly, employers can issue new EMI share options between 19 March 2020 and 5 April 2021 to individuals who do not meet the ‘working time’ requirement as a result of taking unpaid leave, being furloughed or working reduced hours because of COVID-19.

Our comments

The extension of the limited exception to the ‘working time’ requirement to apply to the grant of EMI options is greatly welcomed.  The grant of tax-advantageous EMI options should assist in boosting the morale of key workers, who would not have otherwise qualified due to COVID-19.

However, further HMRC guidance would be needed as to how this would work retrospectively as the modification will only become law when Finance Bill 2021 receives Royal Assent.

For more information, please contact JD Ghosh.

2020 MM&K / GECN Global Research – ESG as a part of the performance measures

In 2019 MM&K, together with our partners in the GECN (Global Governance and Executive Compensation Group) researched global trends in Corporate Governance – investors’ perspective. The outcomes of this research are presented in the Executive Summary of the 2019 Report (click here to request a copy).

The GECN is a group of five independent advisory firms specialising in executive compensation and corporate governance www.gecn.com. GECN member firms have offices in Los Angeles, New York, London, Kiev, Geneva, Zurich, Singapore, Melbourne and Sidney. MM&K represents the GECN in the UK.

Following on from the 2019 research into important aspects of Corporate Governance, as perceived by investors, we are pleased to announce that, this year, we are researching if and how companies have integrated ESG metrics into the performance measures linked to their executive incentive plans. The 2020 Global Research will examine current trends set by companies from the leading indices of the USA, Canada, UK, Europe, Singapore and Australia, including S&P, FTSE, ASX, etc.

The 2020 Report will be published in late September. It will include an analysis of the types of ESG metrics adopted by each market’s leading companies. We will also examine which plans incorporate ESG metrics in their performance criteria – Short-term Incentive Plan, Long-term Incentive Plan, or both. So far, ESG performance measures appear to be more prevalent in Short-term Incentive Plans, even though, as ESG policies require long-term commitments and have long-term effects, it might, instinctively, be thought to have a place in companies’ long term remuneration strategies. The 2020 study will show if this trend is still ongoing.

For more information or to reserve your copy of the 2020 ESG Report, contact Margarita Skripina.

The first major E&P sector deal since the oil price fall in April has important pay implications for all sectors of the market

In our May Newsletter, we wrote: “The current state of the oil and gas industry points to a strategy of cost cutting, consolidation and collaboration. Conserving cash resources is the priority – for all firms but particularly for the small and mid-size players, whose balance sheets are not so strong as those of the large firms.”

Chevron’s agreed $13bn offer to acquire Noble Energy, announced on 20 July, is an example of an opportunistic oil major seizing the chance to acquire strategic, cash-generating assets without breaking the bank. This is the first significant corporate transaction in the sector since the oil price collapsed in April. We are sure it will not be the last.

At the time of writing, the market price of a barrel of Brent crude is about $44 and the West Texas Intermediate price per barrel is about $41. At these levels, the market price of oil is lower than the estimated break-even point for many E&P companies. North Sea operators, facing higher production costs than in many other areas, are more at risk than most.

The Chevron/Noble deal is interesting from another aspect, too. It strengthens Chevron’s position in natural gas, making Chevron a major gas player in the Eastern Mediterranean and the Middle East. It is part of a diversification strategy, which also strengthens Chevron’s position at home in the USA, where Noble has valuable on-shore assets.

Noble’s assets also include off-shore wells in western Africa. E&P companies looking to reposition their business models through energy transition and diversification can see opportunities to acquire gas assets on the African continent, where a number of recent discoveries have been made.

An increase in similar transactions might also help to allay concerns about a lack of private equity exit strategies. Private equity has made significant investments in North Sea and UKCS E&P companies and firms will be looking for exit opportunities.

A trend we have seen to be on the increase might help.

Corporate venture capital (CVC) investment – major industry players, not only in the energy sector but across the economy, establishing their own venture capital arms to invest in and nurture new and differentiating technologies, as part of their diversification and ESG strategies, is a way for financially strong companies to put their cash to good use. Some investments will be sold while others will be retained and may eventually become fully integrated within the wider, diversified group.

Global oil majors have certainly embraced CVC and if the Chevron/Noble deal is the tip of the iceberg (and assuming that the number of acquisitions and divestments in the oil and gas sector increases, as forecast) companies operating long-term incentive plans, as well as the plan participants, will want to be certain of their position in the event of a change in control or termination of employment. We are currently advising a world leader on remuneration strategies tailored for its global CVC teams.

In particular, the deal on exit for executives managing the venture capital backed businesses across the wider economy needs to be understood properly. There have been frequent occasions where a sale to a third party trade buyer has left management in a precarious position. Management teams will want to make sure they understand their position as it might be difficult (and may be impossible, in practice) to renegotiate at a later date. MM&K is working with the management teams, in a wide range of businesses, that may be ripe for acquisition.

MM&K advises extensively on directors’ and executives’ remuneration policy and practice across a wide range of sectors, including the oil and gas sector, and is a leading independent adviser on remuneration to PE and VC firms and their portfolio companies. We expect to see an increase in CVC activity as companies across the economy seek to diversify, develop new technologies and reduce their carbon footprint.

For further information or to discuss points or issues raised in this article, please contact Paul Norris or Nigel Mills.

Impact of COVID -19 on employee share schemes – HMRC bulletin

On 8 June 2020, HMRC published the Employment Related Securities Bulletin 35 which addresses certain issues concerning the impact of COVID -19 on employee share schemes.

A brief summary of the bulletin is set out below. Click here for the full bulletin.

Enterprise Management Incentives (EMIs)

With regard to EMI, the bulletin states that HMRC are considering the issues raised by stakeholders and they will provide updates as soon as it is possible. See EMI Update below.

With regard to agreed EMI valuations, HMRC acknowledges that COVID-19 may lead to situations where EMI options may not be granted within the 90-day normal validity period. Accordingly, HMRC have confirmed that, provided there have been no circumstances which would impact the valuation, then:

• where the 90 days expired on or after 1 March 2020, the valuation letter can be automatically treated as being extended by a period of 30 days; and

• any new EMI valuation agreement letter issued on or after 1 March 2020 will be valid for 120 days.

Save As You Earn (SAYE):

Under the existing rules, participants may miss contributions for up to a maximum of 12 months without the option lapsing or the cancellation of the savings contract. HMRC have confirmed that they will allow contributions to be postponed for a period exceeding the 12month payment holiday where the monthly contributions are missed because of employees being furloughed or being on unpaid leave due to COVID-19.

HMRC will update its specimen SAYE Prospectus from 10 June 2020 and its Employee Tax Advantaged Share Scheme User Manual to reflect the extension to the payment holiday, where the contributions are missed due to COVID-19. SAYE contracts do not need to be re-issued to take advantage of the extension.

The bulletin also states (with an illustration) that the maturity date of an option will be postponed by the total number of months missed, including those missed as a result of COVID-19.

The bulletin also confirms that, payments to furloughed employees pursuant to the Coronavirus Job Retention Scheme (CJRS) can constitute salary and SAYE contributions can continue to be deducted from such payments.

HMRC will also permit payments to be made via standing order for participants who are unable to make their monthly contributions from salary due to having to take unpaid leave as a result of COVID-19 but the deductions from salary would recommence at the earliest opportunity.

Share Incentive Plans (SIP):

The bulletin states that, like SAYE, payments to furloughed employees pursuant to CJRS can constitute salary and SIP contributions can continue to be deducted from these payments.

The bulletin confirms that participants will not be allowed to make-up missed deductions if they stop them due to COVID-19.

Company Share Option Plans (CSOP):

HMRC have confirmed that CSOP options granted to full time directors and/or qualifying employees at the time of grant before COVID-19 will continue to be qualifying CSOP options where such director or employee is furloughed because of COVID-19.

Deadline for registration of new schemes and filing of returns

The bulletin states that employers and agents should try to meet the 6 July 2020 deadline for registering new schemes and filing ERS annual returns.

However, if it is not possible to meet the 6 July deadline due to COVID-19, HMRC will consider COVID-19 as a reasonable excuse, provided employers and agents can demonstrate how they were affected by COVID-19 when making their appeal.

EMI Update

On 26 June 2020, a new clause 32 (Enterprise management incentives: disqualifying events) was added to Finance Bill 2020 in relation to the impact of COVID-19 to EMI plans.

This clause provides a time limited exception for EMI option holders who are unable to meet the necessary ‘working time’ requirements (see below) as a result of COVID-19. This exception will take effect from 19 March 2020 and come to an end of on 5 April 2021 (which can be extended to 5 April 2022, if required).

The legislation requires that to qualify for the tax advantages associated with an EMI option, an employee must work at least 25 hours per week or if less, at least 75% of the employee’s working time for the company (or the group) granting the EMI option. This is the ‘working time’ requirement. If the option holder is unable to meet the ‘working time’ requirement at any time during the period in which the option holder holds the EMI option, a ‘disqualifying event’ occurs. In that case, the option holder will lose the EMI tax advantages unless the option is exercised within 90 days of the ‘disqualifying event’.

The explanatory notes to the new clause states that the new clause ensures that:

• existing holders of EMI options do not suffer a disqualifying event and lose the tax advantages as a result of taking unpaid leave, being furloughed or working reduced hours because of COVID-19; and

• EMI option holders are not forced to exercise their option earlier than planned because of COVID-19.

Our view

In our view, HMRC have helpfully addressed some of the issues that have impacted the operation of tax-advantaged employee share schemes due to COVID-19, in particular, with regard to SAYE and SIP. The proposed changes to the EMI legislation through the Finance Bill should also alleviate some of the major concerns that COVID-19 has presented to EMI option holders.

However, it is conceivable that further issues will, and are likely to, emerge on the impact of the unprecedented pandemic on employee share schemes.  For example, the performance conditions attaching to certain EMI and CSOP options granted prior to COVID-19 may need to be substantially altered to give business efficacy post-COVID-19. Would HMRC view major alteration to the performance conditions a fundamental change to the option (and therefore, the grant of a new option)?

Further guidance on other aspects of the impact of COVID-19 on employee share schemes would be very welcome.

For further information,  please contact JD Ghosh or Stuart James

Brief Overview of Latest Trends in PE and VC Fund Managers’ Compensation

MM&K has recently conducted its annual Pulse Survey of the latest trends in the world of PE and VC Fund Managers’ pay and staffing levels. Perhaps not surprisingly, many firms were somewhat distracted by the Lockdown and the effect this was having on their staff and their working patterns.

Notwithstanding this, we were able to gather a reasonable amount of data, sufficient to make the following assessments:

1. Just one third of firms saw some increases in the bonus levels of their non partner investment professionals compared to 2019, and these increases tended to be not significant. For most firms, bonuses stayed pretty much at the same level for Investment directors, associates and analysts.

2. An even smaller percentage of firms saw any upward movement for partners.

3. 67% of firms indicated that they were expecting to increase the number of their associates and analysts during 2020, while half of firms were expecting to increase the numbers of their investment directors and junior partners.

4. These statistics are in contrast to the situation with administrative/support staff where only 15% of firms are expecting to increase their numbers.

For all the firms that participated in this pulse survey, they did so after scale of the Covid-19 pandemic was pretty well known.

From our 2019 survey, 54% of PE and VC firms pay their annual bonuses either in December or January, whilst another 31% pay them in February or March. From what we have heard in the industry, for those firms that did not pay their bonuses until March, many of them did decide to scale back their bonuses because of Covid-19. So we are not that surprised by the bonus statistics shown above.

One important reason for the scaling back of bonuses was the recognition by firms that they were going to need to recruit more staff, particularly at the associate and analyst levels, to help deal with the additional workload that the Covid pandemic was going to bring in. This additional workload that was becoming evident, was being driven by two factors, one relating to the need to monitor more closely and provide extra support to their existing portfolio businesses, the other to the need to research, identify, carry out due diligence and execute new deal opportunities that were expected to be coming up (albeit later in the year) at potentially attractive prices.

There is no question that the first of these factors started to happen some time ago, during March. However, the jury is out in respect of when and if the Covid pandemic will result in lots of new deal opportunities coming through at attractively low prices. Some new deals are happening at the moment, but not that many and certainly less than in 2019. We expect that Q3 will remain pretty quiet with Q4 seeing some opportunistic buying by those houses that are willing to take perhaps a bigger risk than normal. Much of course will depend on whether the easing of lockdown in western Europe continues successfully, without any new spikes and with increasing confidence returning to markets and to the deal doers.

We have not (yet) seen much evidence of firms going out into the market to recruit a whole raft of associates and analysts. If this is going to happen, we believe it is most likely to do so towards the end of Q3 when there will hopefully be much greater clarity about the long term effects on businesses and the economy generally of this ghastly virus and when the new deal opportunities really start to appear.

And of course, if it does happen, it will be interesting to see what effect this would have on the pay levels for these more junior investment professionals.

The 2020 MM&K/Holt European PE and VC Compensation Survey Report, which is supported by PEI Media, should shed some light on this question, as well as on many others, when it is published later this year, in October.

For further information about the issues raised in this article or to discuss any questions you may have, please contact Nigel Mills or Margarita Skripina.

Why the next “people conversation” you have is likely to be the most important one yet

The recent summer solstice reminds us that the year is half way through and for those involved in managing people, this is likely to be the time for a half year or even full year review. However, even if it isn’t, now is still the time to have these conversations.

Given all of the recent challenges offered to businesses, it may be tempting to think that not enough has happened to warrant a conversation, or that the wider circumstances in the economy means that any meaningful assessment of someone’s performance is not possible or even appropriate.

However, as with many situations, what might be considered a challenge is actually an opportunity. Here are three thoughts regarding why taking the time to have some sort of “review” with your team over the next month will be important to your business:

1. Connection
Even for those people who spend all their days in Zoom meetings, there is a fundamental difference between a business call, often where interaction is stilted and often involves multiple parties, and a video (or even regular phone call) focused on that person and how they are doing.

Making your team member feel connected to you (and by proxy the wider organisation) can help them deal with feelings of self-isolation or stress – feelings they may not even realise they are having as they move towards whatever the “new normal” may be for them.

Honest conversations, built on trust, are the best way to raise early warning flags that someone might be struggling or could be struggling soon. Given that the cost of prevention is always cheaper than the cost of treatment or rectification (both in terms of productivity and money) making this connection is essential.

2. Loyalty to Leadership
Simply put, the more loyal a person feels towards someone or something, the harder they will work and the more effort they will give. Showing leadership and understanding in times of uncertainty is a sure-fire way to increase loyalty.

3. Performance
There are two ways in which a review of someone’s performance will be critical to the business now.

Firstly, it should afford you the ability to see whether some important work skills like adaptability, resilience and innovation are being displayed. It is likely that these types of skills will be the most valuable in moving any business out of its current situation and into smoother waters. Even if your current people-management system does not allow for it, reviewing against these skills sets should be done.

Conversely, a well planned and executed conversation with your team member may start to show that they are displaying “limited thinking”. Again, early identification of a potential issue can lead to early interventions which are always beneficial for people development and cost savings.

For further information about the issues raised in this article or to discuss any questions you may have, please contact Stuart James.

Designing remuneration policy for the “new normal”

All of us have had to make major adjustments to our lives over the past three months. Boards of directors and their remuneration committees are no exception. Many companies have been required to make transformational changes to their operations and their remuneration policies, and may yet have to make more.

Here are five key agenda items for remuneration committees as companies navigate their way to a successful transition to the “new normal”, whatever that might look like for them:

1. Incentives

In many cases, corporate objectives and related performance targets, set before lock-down for both annual bonus and LTIs, will not be achievable. The Investment Association recently published guidance on the way investors expect companies to deal with this. However, their approach may not work for everyone.

Some have commented that the current, economic situation, highlights the importance of relative performance, particularly TSR. We do not share this view.

Remuneration committees and investors should be concerned about the ability of relative TSR comparisons to produce maximum vesting for management, despite lower returns to shareholders. Mitigation, based on the underlying financial performance of the company determined at the discretion of the committee, may do little to avert criticism if it is perceived, at a time when executive pay is likely to be subject to even closer scrutiny, that executives have not shared the pain with investors.

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, paying particular attention to:

• funding and
• performance measures  /  targets.

MM&K has written about the emergence (and benefits) of restricted share plans as a way of retaining executive talent and aligning their interests with those of their shareholders over time.   We expect this trend to quicken.

2. Use of discretion

In our experience, remuneration committees are sometimes wary about exercising discretion, on the grounds that they will be damned if they do and damned if they don’t. However, we expect to see greater use of discretion, particularly in relation to annual bonus, as committees battle with the difficulty of identifying performance targets and need to find some basis on which to set incentive awards.

But the exercise of discretion requires care. More than ever, committees need to be in touch with remuneration policies for the wider workforce, whose incentives may be formulaic.  It may be hard for the committee to justify a maximum bonus award for top executives after exercising discretion to adjust for missed objectives if, in the wider workforce, bonus awards are reduced owing to missed targets.

Proxy agencies oppose discretion. This is not likely to change but there is pressure to reduce their influence, which should reduce the dependence placed on their views by some committees. Therefore, committees need support to develop clear policies which they can justify to stakeholders. Early engagement to present well thought-through proposals to investors has never been more important.

3. Diversity/fairness

A stronger focus on diversity and inequality, apart from disclosure requirements, is likely to create heightened attention on the CEO pay ratio, which will require committees to balance carefully:

• performance and competitiveness
• ESG priorities and
• customer, employee and shareholder expectations

as part of their assessment of the justifiability of the company’s remuneration policy and practice.

Committees may also be asked to pay interim bonuses to retain key executives. Such awards must be considered on their individual merits. However, committees might consider the quid pro quo of a commitment to repay the award if the executive resigns before the end of the financial year to which the bonus relates.

4. Reviews

Remuneration data for 2019 may be unreliable in relation to 2020 and, possibly, 2021. Committees will need to work with their HR departments and external advisers to reach decisions about the positioning of remuneration for the next year or two.

It may, therefore, be prudent to make an early start on the 2020 review.

5. Working practices

Mass scale working from home has transformed working practices, aided by technology. It will be interesting to see its effect on pay policies; lower pay as a trade-off for a better lifestyle or higher pay because there are fewer people to do the work?

Lower employee numbers are likely to increase focus on diversity and impact on training, recruitment and culture. Unless the “new normal” is the same as the “old normal” (which is looking increasingly doubtful), companies will need their remuneration, recruitment, diversity and ESG policies to come together to manage the future.

With thanks to our friends at Johnson Associates Inc. in New York, whose observations about pay in the financial services sector, in which they are specialists, provided the inspiration for this article. For further information or if you would like to discuss any of the points or issues raised, please contact Paul Norris.