Executive pay has been a topic of much debate, and fascination, across many sectors and geographies, but in a crisis that is unlike anything society has seen before, how should remuneration committees be handling the top salaries of the business?
As the impact of the covid-19 pandemic was beginning to sink in during Q1, national newspapers were highly critical of celebrities and leaders of football clubs, with significant personal wealth, choosing to take advantage of government furlough payments, while not cutting pay of those in charge and their highest earners.
Many have backtracked since but there are still concerns some executives are reluctant to sacrifice their own pay at a time when their workforce is suffering.
Investment bank FinnCap said, in its Covid-19 Company Response Report, that of the two-thirds of Aim companies that have issued updates during the crisis:
- 43% have announced cost reduction programmes;
- 33% have announced cuts to capex budgets;
- but only 15% announced reductions in directors’ salaries.
Industry bodies the Investment Association (IA) and the Pensions and Lifetime Savings Association (PLSA) have issued guidance to their members in light of the coronavirus crisis to keep a watchful eye on how companies respond and to be prepared to hold directors to account if they believe they are not acting in the long-term interests of the company, its employees and shareholders.
The PLSA said: “Whilst we are pleased to acknowledge companies have generally acted responsibly in the face of the extraordinary challenges posed by the coronavirus, the guidance follows news that some firms nationwide are laying off or furloughing members of staff in a bid to manage their outgoings during the crisis while high-paid directors and chief executives maintain full pay and bonuses.
“Given the current crisis, the PLSA [calls on] investors [to] keep an eye on how firms in which they invest manage the pandemic and consider voting against directors who they believe did not behave appropriately towards their workforces this AGM season.”
Chris Cummings, chief executive of the IA, also commented: “Executive pay should always be linked to long-term company performance and take account of the shareholder experience, not just financial performance.
“If companies are stopping dividend payments, boards and remuneration committees should be considering how this impacts on executive pay both for the current year and also in relation to the year the dividend was for.”
Fund managers’ response
Responsibly invested fund managers are continuously engaging with the senior executives in charge of the companies they hold on executive pay, but many have reported a significant increase in discussions on this topic in light of the coronavirus impact.
What they are most concerned about is companies considering rewarding chief executives for managing businesses through this crisis, regardless of whether staff have been laid off or furloughed.
Masja Zandbergen, head of ESG integration at Robeco, said: “We have already come across the first companies that are floating the idea of topping up pay packages to keep executives incentivised this year.
“We will be very critical of this kind of behaviour, especially where employees face hardship, or where shareholders expect far lower returns.”
Richard Buxton, head of equities at Merian Global Investors also wrote in an article in The Times that his team is “wary” that the impacts of coronavirus on business might be treated as an “exceptional” issue for executive pay and that “remuneration committees will be encouraged to use their discretion to adjust it away when determining outcomes”.
“This would be a very poor conclusion,” he said.
“It is essential that we are all in this together, which involves executives feeling the pinch as much as the general population. We will give short shrift to pleas that managements’ experiences should be any different from those of their workforces and from those of our clients, whose savings have come under significant pressure.”
This is echoed by a number of senior figures in the investment management industry.
Judith MacKenzie, partner and head of fund managers at Downing, said although the team there is “always fairly hands on with governance and pay”, going into this crisis they have been in contact with all of their strategy holdings to discuss and “what the right thing is to do”
“The principle is if staff are being furloughed then the senior management should be taking a cut too. We should all be in this together and those that can sacrifice 20-30% pay for a few months, as they are already well-paid, should do so.”
Practising what they preach, the 20-odd partners at Downing have taken a 25% reduction in drawings for six months.
“This is not because the company can’t afford to pay it, it’s about preserving cash and not taking advantage of government grants. It shows we are all in this together,” explained MacKenzie.
Positive examples
She also highlighted two portfolio holdings; Synectics and Kainos Group.
“The board and the senior management at Synectics have all taken pay cuts. This is in a business with nearly £4m (€4.6m) of cash, and is profitable, but in our view they are doing the right thing.”
Digital services provider Kainos has also deferred pay increases until 2021 and bonus schemes have been curtailed.
Additionally, for a period of six months from 1 April 2020, the executive directors have elected to take no salary or bonus, and the remaining members of the executive team have reduced their compensation by 50% and the non-executive board members have reduced their fees by 20%.
Dr Paul Jourdan, chief executive of Amati Global Investors, also pointed to some examples of companies ‘doing the right thing’ in this crisis.
“I have seen a few cases where directors are taking pay cuts to support their companies.
“We think it is an appropriate thing to do when companies need cash for dividends or make payments, we applaud it. Directors are typically highly paid so they can afford to do it in these times.
One example he pointed to was Mattioli Woods’ chief executive and founder, Ian Mattioli, who has waived his basic salary until 20 June, to help protect the firm’s financial position amid these challenging and unprecedented times.
In addition, Mattioli Woods’ board members have agreed to reduce their basic salary or fees by 50% also until 30 June.
“The shares responded well to this announcement – Ian is a shareholder too,” Jourdan said.
“We tend to see it happening more where the directors are the biggest shareholders and these are the companies we like; where the founders are still in charge and are heavily invested, they tend to have better governance.”
Another example is housebuilder Redrow where 80% of staff have been furloughed as construction workers struggle to comply with social distancing rules on site.
The company has also sought access to the £300m Covid Corporate Financing Facility and is negotiations with banks over securing another £100m loan.
However, Jourdan pointed out that the chief executive and board members had their pay slashed by 20% and it has also cut dividends.
“It is appropriate for directors to take a 20% cut when they are furloughing a lot of staff.
“It should be voluntary, it shouldn’t need to be imposed; it shows the characters of the directors of the company – it confirms whether they have a genuine interest in the company or are just a hired hand.”
He also highlighted Rentokil where the chief executive and senior management have cut their pay by 35%, to align with furloughed staff.
Jourdan added this saving is being put to good use: “This is a global business, they have staff in emerging markets who are out of work without government furlough payments. The management has set up a fund for employees there to help support them at this time – the CEO donated the remainder of his salary to that fund. This is people behaving responsibly and we hope society remembers and recognises they have done this.”
City Hive founder and chief executive Bev Shah said attitudes like these will be viewed positively: “If it means safeguarding the livelihoods of all your staff in the medium term it is likely you will boost morale, increase productivity and survive the recession that is likely to follow this crisis.
“At which point it will be justified to consider that bonus.
“This approach aligns executive interests with their employees, their clients and shareholders. In this unprecedented time, we need to all pull together.”
Dr Hans-Christoph Hirt, head of EOS at Federated Hermes, agreed: “CEOs and senior execs need to recognise these are unprecedented times and need to make these gestures.
“Coronavirus is affecting our clients in many ways; it is affecting them as investors, as a member of a workforce, as a customer and as a citizen.
“We are encouraging companies to ensure the safety and wellbeing of their workforce, as well as suppliers, and then they need to look after stakeholders.”
‘Future social licence’
How companies behave now will have an long-lasting impact on their reputation and therefore financial performance.
Buxton explained: “How boards act in relation to executive pay will offer broader cultural insights for employees, investors and wider society, which could have a meaningful impact on their future social licence to operate.
“How boards react today will have a meaningful effect on how their companies will recover.
“A focus on near-term company survival is imperative, but tactics such as price-gouging, aggressive treatment of the workforce and cutting health and safety budgets to improve cost management and short-term cashflow will likely damage a company’s relationship with its customers, ability to recruit talent and to maintain regulatory support.”
The arguments for rewarding bosses for the extra work and stress at this time clearly wear thin with most.
Jourdan rightly highlighted there are only a certain number of people that have the experience and tenacity to lead big firms in what is “increasingly complex situation with ever-changing regulation, particularly in financial services”.
But he also said: “The different between right and wrong management makes a massive difference to the business, more than their pay does.
“We think the sweet spot is those that invest in the business, they are concerned about the company’s reputation and it doing well. When you lose that connection things go badly wrong.”
The long-term
Working through the current crisis means company leaders have been very much focused on the short-term, encountering challenges day-to-day.
But investment commentators have, as ever, pointed to progress over the long-term as being paramount.
While most agree there should be no adjustments upwards to pay packages, Downing’s MacKenzie said she has no issue with companies incentivising out of this over the long term.
“It would be wrong to award options – that would be opportunistic. We think share-matching schemes are better as it encourages the board to increase the share price and we like those that are a bit more innovative.
“Managements are largely taking salaries down, trying to incentivise those to stick at it over the long term.”
She also added that in these unprecedented times shareholders should be pro-active: “It is time for shareholders to speak up. Don’t wait for AGMS to voice views on remuneration, they should all be in touch with the boards now and air their views. Everyone has a responsibility to do this now.”
Buxton also agreed pay conversations should be focusing on the long term: “Management teams and boards should lift their horizons to the long term and focus on making decisions that will create enduring value at companies. If the best, albeit imperfect, measure of this value creation is the long-term value of the company, then the best way of aligning incentives is for executives to be granted shares that vest over a prolonged period.
“If this period is properly aligned, it should reflect through-the-cycle value and remove the need annually to debate the outcomes of schemes that are never going to be able to capture every aspect of a company’s performance. Some have introduced such restricted share schemes, others have put forward what appear to us more like de-risked long-term incentive plans, which we have voted against.”
Hans said echoed the sentiment boards should consider issues carefully before making alterations to pay now.
“We need to take full stock of what happens over a year.
“Its important to have a long term incentive plan – we don’t really want boards to change those. At the moment, it may not look right but it might in a few months’ time.
He also added next year’s AGM season will likely bring to the fore decisions on pay that could be perceived negatively.
“So far, there haven’t been too many bad examples, but I suspect that will come next year. The debate will be; share prices are down, targets haven’t been met, staff have been furloughed but they still want to give the CEO a bonus to managing through tough times. We won’t be feeling sorry for them, they should be more concerned about their staff.”
Turning to the investment management space, where there have been few discussions over exec pay in this crisis, City Hive’s Shah commented: “The Southampton football team have agreed to differ 10% of their salary to ensure non-playing lower paid workers get fully paid at their club.
“Our most senior executives should be doing something similar and not be thinking about how they reward themselves for a job well done, but instead looking to protect their lowest paid staff who enabled them to deliver.
“I hope the usual suspects with profile in our industry do the right thing if it comes down to it.”
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