During the current coronavirus pandemic UK listed companies must ensure executive remuneration is reflective of the pay and conditions in the wider workforce, or risk harming public and shareholder perception of their brands, the Investment Association (IA) has warned
The trade body, whose 250 members manage £7.7 trillion of assets, has issued guidance on shareholder expectations on executive pay in light of Covid-19.
It stated that shareholders recognise that remuneration committees will need to continue to incentivise executive performance at a time where management teams are being asked to demonstrate significant leadership and resilience.
However, the IA said that companies must also make sure that executive remuneration is reflective of the pay and conditions in the wider workforce, many of whom may have been furloughed or asked to take pay-cuts, and warned that ‘failure to do so may have significant reputational ramifications’.
IA guidance also stated: ‘Where a company has sought to raise additional capital from shareholders, or has required government support such as furloughing employees, shareholders would expect this to be reflected in the executives’ remuneration outcomes.’
The guidance also said that where company dividend payments have been suspended or cancelled as a result of the impact of the coronavirus disruption to business, this should be reflected in their approach to executive pay.
For some companies, bonus outcomes will have been decided and may even have been paid before the dividend payment was cancelled. However, shareholders would expect remuneration committees to consider the use of discretion or malus provisions to correspondingly reduce any deferred shares related to the 2019 annual bonus in such instances.
Alternatively, shareholders would expect this to be fully reflected in the FY2020 bonus outcomes.
The IA guidance cautions against setting detailed long term three-year renumeration plans given current stock market volatility, and it also says some companies should consider whether they should postpone long-term incentive grants, or look very carefully at the size of such grants and the performance conditions attached.
Chris Cummings, IA chief executive, said: ‘Investment managers expect executive remuneration to be linked to long term company performance and aligned with the experience of its employees, stakeholders and shareholders.
‘During this exceptional period we expect companies to adopt an approach that is appropriate to their business and the specific impacts of Covid-19, being careful to ensure that executives and the general workforce are treated consistently.’
Separately, research from the High Pay Centre has found that at least 18% of FTSE 100 firms are using the UK government's furlough scheme, while 37% have cut executive pay and 33% are withdrawing or withholding dividend payments.
However, the think tank calculates only 13% have cut the bonuses and long-term incentive payments that comprise the biggest component of executive pay awards.
Investment Association guidance
How are UK-listed companies responding to the economic shutdown?