Investment Association issues guidance on executive remuneration amid coronavirus (COVID-19)

Investment Association issues guidance on executive remuneration amid coronavirus (COVID-19)

The Investment Association (IA) has published guidance for UK listed companies on how remuneration committees should be reflecting the impact of coronavirus (COVID-19) on executive pay. The IA tackles a series of questions regarding, notably, the suspension or cancellation of dividend, the adjustment of performance conditions, and the grant of 2020 long term incentive plans (LTIPs).

In particular, the IA addresses:

• should a company that has suspended or cancelled a dividend in relation to fiscal year 2019 consider adjusting bonus outcomes for fiscal year 2019? The IA advises that 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

• should shareholders support performance conditions being adjusted to take account of coronavirus? IA members have stated that they do not expect remuneration committees to adjust performance conditions for annual bonuses or in-flight long-term incentive awards to account for the impact of coronavirus

• where companies have already granted 2020 LTIPs, what do shareholders expect from remuneration committees to ensure that a windfall gain will not be received by executives? Most IA members stated that where grants have already been made for December year-end companies and the share price fall is solely related to coronavirus, they do not expect an adjustment, but shareholders will expect committees to use their discretion to reduce vesting outcomes where windfall gains have been received

• 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 IA states that ‘there are concerns from companies and shareholders over the ability to set meaningful three-year targets at the current time and questions over the appropriate grant size given the share price reaction to COVID-19’ and that ‘it might be more appropriate to postpone the current LTIP grant’. The IA states that committees should explain the approach they take and should ‘be careful not to isolate executives from the impact of COVID-19 in a manner that is inconsistent with the approach taken to the general workforce’

• what are shareholders' expectations if a company seeks additional capital from shareholders or takes money from the government such as furloughing employees? The IA states that shareholders would expect any such action to be reflected in the executives’ remuneration outcomes, and that failure to do so may have significant reputational ramifications

• many companies will have their three-year remuneration policy up for a shareholder vote at the forthcoming AGM. How will shareholders consider proposals to change remuneration structures, including increases to variable pay opportunity? The IA states that for companies that are impacted by coronavirus and are yet to consult on a new remuneration policy, ‘it may not be appropriate to bring forward remuneration policies with substantial changes’ and ‘it may be more appropriate to wait until there is greater clarity on the future market environment before proposing significant changes to their policies’. For companies that have spent time consulting on their new remuneration polices to be put to shareholders this AGM season, the IA states that its members do not believe that these companies should be rewriting their remuneration policies at this time, but ‘if companies are seeking to propose variable pay increases in the current year, the Remuneration Committee should carefully consider if such an increase is appropriate in 2020’

Source: Executive Remuneration in UK listed companies Shareholder Expectations during the COVID-19 Pandemic

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