Covid-19: Investment Association guidance on executive remuneration in UK listed companies

On April 27, 2020, the Investment Association (IA) issued guidance setting out shareholder expectations on how UK listed companies should reflect the impact of Covid-19 on executive remuneration.

As a backdrop to the guidance, readers will be reminded that the IA wrote to FTSE 350 chairs on April 8, 2020 on a variety of corporate governance issues that companies should take into account during the current Covid-19 climate. The letter made reference to, inter alia, executive remuneration stressing that if companies are cancelling dividend payments or making changes to their workforce pay as a result of Covid-19, then the IA would be expecting this to be reflected in the Boards and Remuneration Committee’s attitudes to executive pay.

Whilst it is anticipated that the IA will update the guidance as the impact of the pandemic becomes clearer, we cover some of the main headline points of the guidance below.

Should companies adjust bonus outcomes for 2019?

In instances where dividend payments have been suspended or cancelled for FY2019, the guidance considers that this should be reflected in executive pay. The IA goes even further to suggest that where bonuses have already been paid, Remuneration Committees ought to consider the use of discretion or make provisions to reduce any deferred shares related to FY2019 bonus awards. Alternatively, reductions should be reflected in the FY2020 bonus outcomes.

Adjustment of performance conditions to take account of Covid-19

The IA makes it clear that it does not expect Remuneration Committees to adjust performance conditions for annual bonuses or long-term incentive awards to account for the impact of Covid-19, adding that Remuneration Committees can always use their discretion to ensure a good link between pay and performance.

How should companies ensure that windfall gain is not received by executives if 2020 awards have already been made?

Where 2020 long-term incentive plans (LTIPS) have already been granted, the IA’s guidance suggests that performance conditions and the size of grants do not need to be adjusted, but that Remuneration Committees should utilise their discretion to reduce vesting outcomes where windfall gains have been received. The IA explains that Remuneration Committees need to look at the market and share price response during the performance period in order to ensure that windfall gains do not arise when awards vest.

Where companies expect to make LTIP grants in the coming months, what are shareholders expectations on long-term incentive grant sizes and performance conditions?

The message from the IA is clear – Remunerations Committees should be considering if it is appropriate to make LTIP grants at the current time. The guidance suggests that companies may:

• grant as normal and set grant size and performance targets now;
• grant as normal setting grant size now, but setting performance conditions within the next six months; or
• delay the grant, but within an aim to grant within six months of the normal grant date.

What should companies do if they are seeking extra capital or furloughing employees?

Where a company seeks to raise additional capital from shareholders, or requires government support, including furloughing employees, shareholders would expect this to be reflected in the executives’ remuneration outcomes. Moreover, the IA sets out that if companies are asking employees to take a temporary pay cut, the same approach should apply to executives.

Should companies change remuneration structures if their remuneration policy is due for shareholder approval in 2020?

Companies who are due to seek shareholder approval for a new remuneration policy this year should carry on as planned. However, if a company is proposing to increase variable pay, it would be well advised to consider whether the increase is appropriate in light of the current circumstances.

Practical implications

Listed companies and their Remuneration Committees will welcome additional guidance from the IA in these difficult issues. What is clear at this moment in time is that the recommendations in the guidance will need to be strengthened as what companies are doing in practice in light of Covid-19 becomes clearer. For now, Remuneration Committees will have to navigate through the difficult exercise of aligning executives with shareholders, whilst at the same time acknowledging pay sensitivities elsewhere within the company.

For further information on the IA’s guidance please contact Russel Shear or any other member of our Corporate & Commercial team.

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