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Article | Executive Pay Matters

COVID-19: How is it affecting executive and broad employee reward?

Executive Compensation|Total Rewards
COVID 19 Coronavirus

By Katie Johnston and Callum Mullins | March 23, 2020

The worldwide impact of COVID-19 has been acute both on the health of the global population and the global economy. In response, several companies have made changes to their compensation and benefit programs. See our top five tips of what you need to be thinking about as a reward professional at this time.

The worldwide impact of COVID-19 has been acute both on the health of the global population and the global economy. In response, several companies have made changes to their compensation and benefit programs to adapt to negative financial impact on the business operations and/or for the benefit of employees impacted by the virus. Examples of actions taken include:

  • Pay cuts or freezes to the executive team or broader employee population and offering of unpaid leave
  • Cutting pay packages for non-executive directors
  • Providing paid time-off for hourly associates diagnosed with coronavirus or required to quarantine
  • Paying hourly workers that cannot work due to office closures or remote work policies
  • Providing stipends to support work-from-home arrangements for impacted staff

As you work through this period of time we would encourage you to do the following:

Use guiding principles to drive your reward decisions:

  • Take a long-term perspective – we are less than one month into this impact and it is not yet clear if we will see recovery within the year or after a much longer time horizon so immediate and drastic action should be checked.
  • Maintain good governance and alignment with your reward philosophy – Many factors impact broad based and executive reward over the course of an annual cycle. Remuneration Committee and HR governance policies and practices should continue to apply so that decisions are not made in isolation in reaction to COVID-19 impact.
  • Be consistent and fair from bottom to top – While organisations debate broad employee reward actions, this logic should be applied consistently for executives as well. If wider business actions have had a negative impact on staff generally (e.g. redundancies, etc), investors may scrutinise decisions to treat executives more favourably.

Adapt your reward interventions to the nature of your industry

Reward priorities of each company very much reflect the nature of their operations, the profile of their staff, and typical income levels. For example, given the direct impact on business, a number of airlines have reduced pay, frozen hiring and/or required unpaid leave from employees. Some airlines’ CEOs have also taken voluntary pay cuts – e.g. Delta Airlines CEO has taken a 100% salary cut for six months while the CEO of Virgin Atlantic has taken a 20% cut for three months.

In the retail and restaurant industries a number of companies have adjusted leave policies for those diagnosed or quarantined by the virus – e.g. Amazon and Starbucks have expanded paid leave policies for hourly workers.

Tech companies are paying hourly workers even where they cannot work due to office closers or work from home policies – including Facebook, Google, Microsoft, Salesforce.com and Twitter.

We are seeing companies make bold public statements on this front and we anticipate that new reward and benefit interventions are likely as more cities/countries go into ‘lockdown’ similar to that seen in Italy and China. As an employer it is important that you keep up to date with changes in your own industry as transparent reporting will allow your employees to check if they are being treated favourably in comparison to industry peers.

We are collecting up to date data on all the disclosed global pay (both executive and broad-based) actions taken by organisations and will continue to update this in the coming weeks and months.

Consider shareholder experience and expectations

BlackRock is the first investor to confirm their expectations publicly on company action in response to COVID-19. They expect companies to continue to demonstrate strong governance and practices in responding to pandemic and related volatility while recognising there will be changes in annual meeting formats this year and human, as well as business, impacts. Michelle Edkins, BlackRock’s Global Head of Investment Stewardship, stated, “The concept of long-term sustainability would suggest that companies that come through this crisis and do well would be exactly the kinds of companies you would look to as role models” and that “Companies can still demonstrate that they have effective leadership. In times of crisis that becomes more apparent, not less apparent.”

We anticipate that over the course of the next few months, several investors and proxy voting agencies will release statements outlining their expectations for company response to COVID-19 and, in particular, their expectations as to reward interventions for the broader employee base and executives.

At the moment, other than company action to freeze or reduce executive pay in line with wider employee commitments, we have seen Remuneration Committees taking a ‘wait and see’ approach to making sweeping change across the executive pay space. See below for further insights on executive pay.

Support your Remuneration Committee surrounding the impact on executive pay:

  • Addressing in-year performance cycles – Although we expect many companies will likely pay bonuses at the lower end of the range, some companies may need to consider the application of discretion at year end. We don’t anticipate movement on this front until much later in the year and we anticipate that investor views on this topic will crystalise in the coming months and Remuneration Committees should likely wait for further insight before making changes.
  • Setting performance targets – Increased performance variability and a number of unknown externalities may necessitate consideration of a wider 2020 performance corridor that better captures the potential range of performance (for companies that have not yet finalized their incentive goals or are considering adjusting the original targets).
  • Grant size of long-term incentives post share price decrease: Due to the current economic uncertainty we have seen near unprecedented falls in share prices globally. In normal circumstances best practice following a significant drop in price (c.20% - 25%) is to consider decreasing the number of shares granted to participants to avoid ‘windfall gains’ in future post price recovery. In discussions with investors including ISS and the Investment Association we have been informed that these general rules continue to apply but shareholders will be more understanding if share price drop is solely due to the impact of COVID-19. It is much more likely that these investors will consider share price movement over the past 12 rather than one or two months in considering whether a drop should impact grant size. We see a number of alternatives amongst our clients:
    1. Make grants as usual but consider the need to apply discretion at vesting to ensure no windfall gains
    2. Make an upfront cut to award size (likely appropriate where share price has fallen more than 25% and impact has been on a downward trajectory since before COVID-19 impact)
    3. Make grants as usual with explicit flex: e.g. ability to lapse a significant portion of the award up to 12 months from grant dependent upon future share price movement or top up depending upon direction of travel
    4. Make grants as usual but delay disclosure of performance tests / targets
    5. Delay the grant entirely until further certainty is known – although it is unclear when this might be.
    There is also the possibility of capping future LTIP payments but we don’t anticipate that this would be majority practice.

Don’t forget the importance of employee communication

Alongside all of these reward interventions we are also encouraging clients to ramp up employee communications:

  1. Keep in touch regularly – the impact of self-isolation on both physical and mental well-being should be considered for your employees. Encourage people managers to use face-to-face video conferencing where at all possible and touch base every day.
  2. Be transparent – don’t wait to communicate messages. Let employees know swiftly where any changes are being made and/or anticipated. Be truthful where you don’t yet know the answer or outcome.
  3. Set your employees up for success. Provide employees with key messages to communicate to clients, partners, stakeholders, etc. so they can represent the company in a coherent and consistent fashion. Keep them interested and engaged by your own company vision and strategy so they don’t lose sight of the future business success.
  4. Step up your employee listening strategy: Our analysis shows that companies are maintaining or improving their employee listening strategies at this time. Response rates to surveys remain high and people want to connect. Content of your usual employees surveys may need to change in response to COVID-19 but we encourage you to reach out early and often. We have developed a special COVID-19 Pulse Survey for employees for this purpose and have also created a template for employee Virtual Focus Groups. Get in touch to learn more.

As we go through this period of uncertainty we will continue to monitor company reaction in the reward space to the impact of COVID-19. We plan to run pulse surveys on this topic regularly so look out for these invitations and results.

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Director, Executive Compensation & Rewards

Senior Associate, Executive Compensation

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