September 10, 2020

Executive remuneration: Is Covid-19 an opportunity for reform?

Source: Investment Week

Top executive salaries have been creeping up for decades. In the competitive corporate world, remuneration has become a key tool to attract and retain the best talent in the market and each new high-profile hire seems to come with an eye- watering package.

And yet, good corporate governance dictates that executive pay should reward the executive's part in achieving the success of the company and be aligned with the interests of shareholders and other stakeholders, including employees.

The global lockdown in response to Covid-19 has caused an economic crisis in which few businesses will go unscathed.

The full impact of the pandemic is yet to be seen, but job losses have already begun in the worst-hit sectors, including travel and retail, and the damage is likely to be felt more keenly as government support schemes draw to a close over the coming months.

In the current climate, the issue of executive pay has, yet again, come to the fore. Despite perennial pressure on companies to ensure that executives are not overcompensated and that failure is never rewarded, remuneration structures are too often complex and opaque.

Headlines were grabbed early in the Covid-19 crisis by announcements that executives would be giving up significant proportions of their salary for 2020 (in at least one case, by way of donation to NHS charities).

However, salary typically forms only a small part of a package including generous bonuses and share options.

Many senior executives are rewarded fairly for doing a job that is stressful, challenging and which demands a skill set (including sector expertise) that only a relatively small number of people possess.

The problem is that impenetrable pay structures often make it difficult for stakeholders to distinguish between those executives and others who are less able, with the result that deep suspicion surrounds the compensation of even the best of senior executives.

The extraordinary backdrop of this economic period surely offers the perfect opportunity for boards to re-visit remuneration and seek to bring transparency and simplicity to their management incentive packages.

This should require no legislation: the UK Corporate Governance Code and existing law and guidance already provides an adequate framework to ensure best practice.

The Code makes it clear that executive remuneration should be aligned with wider company pay policy and linked to successful delivery of the company's long-term strategy.

A transparent framework of reward not only allows shareholders to understand how, and why, executives are being remunerated, but is an important factor in creating a corporate culture in which all employees are incentivised and their loyalty increased.

Regulations introduced in 2019 require UK listed companies with over 250 employees to disclose in their annual remuneration report a single figure for the total remuneration awarded to their senior executives, together with supporting information regarding how that figure was calculated.

They must also explain the ratio gap between the average employee and the CEO and how this is consistent with the company's wider policies on reward, pay and progression for employees.

Such disclosures help companies to reflect upon whether senior pay is proportionate and to better communicate why substantial awards are justified.

With fallout from the Covid-19 pandemic only just beginning to make itself felt, public sensitivity around senior pay is likely to remain heightened.

Remuneration packages will be scrutinised closely, and significant reputational damage may occur if such packages are perceived to be unfair.

Now is the time for UK companies to revisit and reform their pay structures to ensure not only that they reward performance which promotes the long-term objectives and culture of the company, but that they do so clearly.

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