Proxy advisory (PA) service companies offer research, advice or voting recommendation services to institutional investors.  They can wield immense power in shaping corporate policies, in particular in the US where two firms, ISS and Glass Lewis dominate the market. Through the development of their own published policies on what ‘good governance looks like’, PA companies are able to influence policy on a range of different issues from ethnic diversity on boards (through the express support of the Parker Review recommendations on board ethnic composition) and gender diversity at senior executive level as espoused in the Hampton-Alexander Review, through to executive remuneration being effectively reflected in company performance (“the Remuneration Performance Link”).

On 22 January 2021, Glass Lewis published its approach to executive compensation (executive directors/the management board) in the context of the Covid pandemic for the EMEA region; whilst not expressly changing its approach to executive pay, it provides some guidance on the application of its existing Remuneration Performance Link policy. Specifically it states:

“Strong linkages between pay and performance remain crucial despite market-wide disruptions and demonstrating this alignment to shareholders is all the more important………All companies, especially those seeking special support from governments or executing significant employment cuts, should consider the reputational risk associated with poor pay decisions, particularly quantum payouts. Even those companies who have managed to perform well during this time may face additional challenges in justifying high executive payouts to their shareholders.”

With that in mind, the guidance published on 22 January 2021 indicates that for 2020/2021 GL will focus on:

  • Dividends: where a dividend has been affected due to the pandemic, it would expect executive pay to have been affected also and the company’s dividend policy and payout ratio should be taken into account;
  • Employees: where there have been layoffs, furlough, redundancies or pay cuts, this should be addressed in the remuneration report, particularly explaining “…how such measures were taken in account by the Board when determining variable pay outcomes and salary adjustments for executives.” They expressly state that they would expect “consistency” between changes in the disbursements for employee pay and executive pay;
  • Stakeholder Perspectives: where a government agency, local investor association or other stakeholder, has publicly expressed concerns about payouts or pay policies, GL would expect a company “…to provide a direct and compelling explanation of how it has accounted for those perspectives.”;
  • Key Financials: in addition to the usual metrics, when assessing the implementation of any incentive plan, GL will also consider other key performance indicators (absolute and relative) including “…TSR [total shareholder return], EBITDA [earnings before tax etc], net profit [revenue less expenses]” and their historical year on year changes;
  • Equity Grants and Share Price (LTIP etc): greater scrutiny will be applied by GL to the determination of any LTIP grant value and the calculation of the number of shares to be granted. For example, if share price has dropped during the pandemic, specific consideration should be given to the potential for any ‘inflation’ in the value of the award post pandemic at the point of vesting. Any suggestion of a ‘windfall’ gain as a result, should be addressed by an adjustment in the award to mitigate that potential windfall;
  • CGLytics: GL does not only compare pay and company performance against the company’s KPIs; it also assessed against the GL ‘peer group’ as defined on their CGLytics platform. It confirms however that it will permit companies to provide their own disclosure on what any company would define as its own peer group, as long there is full disclosure and clear rationale for those proposed peers.

The 22 January 2021 guidance notes however that:

“…contingent macroeconomic situations, with short-term effects, should not represent a reason to amend the structure of a remuneration package or incentive plan.”

Whilst GL will maintain flexibility in accepting limited deviations from a remuneration policy, subject to appropriate safeguards in relation to target adjustments they expect overall lower outcomes on executive pay compared to the previous year for companies affected by the crisis although stating that they “…do not expect any adjustments to base salaries, [they] believe boards should exercise their discretion to suspend foreseen salary increases, where appropriate”.  Any concerns about remuneration adjustments would be considered mitigated if any advantageous effect is extended to below board level employees but “…any proposals to adjust equity plans for below-board employees” should be “accompanied by strong and specific rationale.

In making any assessment, the 22 January 2021 guidance makes it quite clear that thorough disclosure will be required to support the rationale for any adjustments including details of:

  • How incentive metrics were affected by the crisis;
  • What effect the proposed adjustment would have on the plan outcomes;
  • Why the adjustment is necessary; and
  • If no downward adjustment is to be made, the rationale for that decision.

It may go without saying but GL have stated expressly:

“..we do not expect companies to amend or deviate in any way from their regular remuneration policy if they have not suffered any negative impact from Covid in terms of financial and operational performance, shareholder returns and employee welfare.”

For any help and advice in relation to executive remuneration, please contact Linky Trott or any member of the Employment team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.

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