Wednesday, June 7, 2023

Managing the polycrisis era for executive pay

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The Covid-19 pandemic has set off an epidemic of talk about restraint in executive pay. And rightly so. As the crisis engulfed companies, their workers and the country, there was much discussion about “solidarity”, “social licence” and “sharing the pain”. 

As Richard Buxton, fund manager at Jupiter, said at the time: “A sensible board would be asking management . . . to make some sacrificial gestures in terms of pay.” And, to some extent, they did. Around half of FTSE 100 bosses had their salaries frozen, while a chunk of blue-chip companies cut, suspended or cancelled bonus payouts.

What now? The UK has moved swiftly from Covid crisis to energy crisis to cost of living crisis to fiscal crisis. Overlapping and interrelated shocks, both economic and otherwise, are likely to make the convoluted process of determining executive pay for corporate leaders even more tortured than usual.

Senior pay packets have recovered rather nicely from the bout of pandemic-induced austerity. PwC figures for last year’s season of annual general meetings show CEO pay up 23 per cent overall year on year to £3.9mn. Share prices and earnings had bounced back after the 2020 hit. The rise in pay was mainly down to bonuses: average payouts at 86 per cent of the maximum on offer were well above the pre-Covid average of just over 70 per cent. Either everyone has done a bang-up job, or the post-Covid boom in many sectors and easier targets at two-fifths of companies had a lot to do with it.

The turbulence of 2020 will still be keenly felt in next year’s annual general meetings, however, thanks to the mess that is long-term incentive plans. These three-year schemes offer up to a maximum multiple of salary, usually three to four times, in shares. Awards granted at the rock-bottom prices in the panicked days of the early pandemic could translate into egregiously-high absolute numbers on vesting next year.

The Investment Association, which represents British fund managers, has long warned about the potential for “windfall gains”. It generally prefers companies to cut awards at the time of issue where share prices have dropped sharply.

Most boards didn’t in 2020, putting the onus on remuneration committees to exercise discretion now. Previous controversies should focus minds: businesses exposed to commodities prices have encountered problems in the past. Notoriously, there was the proposed £110mn payout to Persimmon’s boss on targets set before the government’s Help to Buy programme boosted the housebuilders.

Prising apart managerial influence from a rising market or sheer good luck is a thankless task. That, combined with another year where setting sensible, long-term performance targets looks challenging, could and should prompt more companies to think about switching to grants of restricted stock: lower, longer-term rewards in shares that eliminate target-setting complexity and should function better in the volatility of repeated crises.

Meanwhile, those setting salaries and packages next year could also feel the echoes of Covid. “I think there is a difference,” says Roger Barker, director of corporate governance at the Institute of Directors. “The pandemic was seen as a truly exceptional situation. This is very challenging but it’s within the parameters of difficult situations for business in the past.”

Still, the IA this week suggested that boards should “ensure the executive experience is commensurate” with employees, shareholders, suppliers and customers, adding that the disproportionate impact of rising food and energy prices on lower-paid workers should mean “additional restraint” at senior levels.

“Learn from Kwasi’s mistakes,” says Buxton, referring to former UK chancellor Kwarteng’s tax cuts for the wealthiest in the “mini” Budget. “A cost of living crisis . . . is not the time to reward the C-suite with inordinate largesse.”

It isn’t. The lowest income households were, as it happens, quite well protected in the pandemic year, thanks to the £20 per week uplift to universal credit and the furlough programme. But they have suffered more since. Overall, median incomes this year and next are set to fall by the most, or close to it, on record, according to Resolution Foundation, with the poorest bearing the brunt.

If the pandemic notions of solidarity and alignment were genuine, rather than just a function of outright panic, then now is the time to show it.



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