The UK Investment Association, along with the two major global proxy advisers, is one of the most influential governance advocates in the world. Its asset management members range from small, independent UK investment firms to Europe-wide and global players. Collectively, they manage over £7.7 trillion of assets on behalf of their clients in the UK and around the world. That is 13% of the £59 trillion global assets under management.
On 27 April 2020 it responded to remuneration committees of UK-listed companies and their advisers to provide shareholder expectations on how committees should be reflecting the impact of COVID-19 on executive pay.
Their response reflected what Guerdon Associates has been hearing from Australian proxy advisers and investors, so this article summarises IA’s response as a guide for Australian remuneration committees as they consider FY2020 executive incentive outcomes, and FY2021 executive pay policies. In summarising we are not necessarily advocating application of these guidelines. Remuneration committees should continue to act in the best interests of the company, even if these actions are contrary to these IA guidelines. In fact, because these guidelines could, in some cases, be contrary to what is in the company’s best interest, we are presenting them here so that remuneration committees are not caught by surprise, and respond accordingly. Where we cannot help ourselves in making an editorial comment, we indicate this with an underline as “GA comment”.
Should a Company that has suspended or cancelled a dividend in relation to FY2019 consider adjusting annual incentive outcomes?
Where dividend payments are suspended or cancelled, asset managers expect boards and remuneration committees to consider how this should be reflected in their approach to executive pay.
For some companies, annual incentive 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 incentive in such instances.
GA comment: Australian-listed entities with FYE prior to 30 June could disclose that malus or discretion will be considered prior to vesting, rather than being premature in a response to an incentive that, after all, has been earned on outcomes that presumably has positioned the company better (e.g. with cash reserves) to survive the pandemic than companies run by executives that did not deliver as well and received no or less incentive.
Alternatively, shareholders would expect this to be fully reflected in the FY2020 annual incentive outcomes.
GA comment: see below
Would shareholders support performance conditions being adjusted to take account of COVID-19?
IA members have stated that they do not expect remuneration committees to adjust performance conditions for annual incentives or in-flight long-term incentive awards to account for the impact of COVID-19.
GA comment: Some may consider a remuneration committee that sat on its hands as the world crumbled around them as being a tad complacent. A short term incentive is a payment for a period of 12 months or less. In some sales focussed companies, targets are set and paid for every 3 months. A fast changing COVID environment could be the setting for 6 monthly executive STI targets. It may differ from the prior year’s 12 month targets, but it may be a particularly intransigent asset manager or proxy adviser that would begrudge a company’s board and management being agile and responsive by setting shorter term targets. This may mean ditching the 12 month goal when facts change (BTW, it was not John Maynard Keynes who said if the facts change, he changes his mind…but the sentiment still remains), acknowledging the 1st 6 months’ STI has gone down the drain, but then focusing management on a 6 month outcome from thereon.
Where companies have already granted 2020 LTIPs (as is likely for December year-end companies), what do shareholders expect from remuneration committees to ensure that a windfall gain will not been received by executives?
The majority of IA members have stated that for December year-end companies that have already made grants, if the share price fall is solely related to COVID-19 market movements then they will accept that there does not need to be an adjustment to the grant size.
The IA considers it important for the remuneration committee to ensure that windfall gains will not be received on vesting. Shareholders will expect the committee to use their discretion to reduce vesting outcomes where windfall gains have been received.
Remuneration committees should set out in their next Remuneration Report the approach they will take and factors they will consider when judging if there has been a windfall gain from the LTIP grant.
Where companies expect to make LTIP grants in the coming months, what are shareholders expectations on long-term incentive grant sizes and performance conditions?
IA members believe that there are a number of options depending on the individual circumstances of the company:
1) Grant on the normal timeline setting performance conditions and grant size at the current time.
2) Grant on the normal timeline setting the grant size now but committing to set performance conditions within the next six months. GA comment: One proxy adviser has already indicated that this is not acceptable.
3) Delaying the grant to allow the committee to more fully assess the appropriate performance conditions and grant size. In such circumstances committees should aim to make the grant within six months of the normal grant date.
Shareholders will expect the committee to use their discretion to reduce vesting outcomes where windfall gains have been received.
Remuneration committees need to be pro-active in determining the appropriate LTIP award size in the current market environment given sustained share price falls. Making awards at maximum opportunity in cases where share prices have fallen substantially is to be discouraged. Committees should consider reducing LTIP grants to reflect the shareholder experience.
Remuneration committees will have to consider if the performance conditions for future LTIP grants are still appropriate in the current market environment. Shareholders want performance conditions to be appropriately stretching.
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. Where the performance period is shortened, grant sizes should be similarly reduced.
What are shareholders expectations if a company seeks additional capital from shareholders or takes money from the government such as furloughing employees?
Shareholders expect executive remuneration to be aligned with the experience of the company, its employees and its other stakeholders.
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.
COVID-19, and the measures taken to avert its wider spread, will result in many employees being furloughed or asked to take pay-cuts. Remuneration committees and management teams should be even more mindful of the wider employee context through this period.
Failure to do so may have significant reputational ramifications.
See the Investment Association’s full response HERE.© Guerdon Associates 2022 Back to all articles