Executive reward and COVID-19 - remuneration committee update - January 2021
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Executive reward and COVID-19 – remuneration committee update January 2021
Executive reward and COVID-19 – remuneration committee update
older experien
keh ce
Sta
W
Annual
isk
or
bonus out-
al r
kfo
turns
ion
rce
Long-term
Targets and
Reputat
incentive
impact
metrics
Executive vesting
reward and
COVID-19 - key
decisions
tion
Incentive Salary
structures review
Inve
Overview by Stephen Cahill
cre
Executive
dis
sto
pensions
nd
rg
ida a
nt
u
nc
e me
Fair pay Judg
In the coming months, the majority of remuneration
committees will be finalising year end decisions in the context
of the unprecedented societal and economic impact of
COVID-19.
The impact of the pandemic varies widely by company and sector, and executive pay outcomes will
be closely scrutinised by investors, the media and society to ensure they reflect the shareholder
and employee experience.
Remuneration committees are expected to use judgment and demonstrate how decisions are fair, appropriate and consistent with
the approach taken in respect of the wider workforce. At the same time, committees will be looking to set reward frameworks which
incentivise leaders to deliver business resilience and recovery in the year ahead.
This document provides guidance for remuneration committees including:
• Latest market insights from 43 FTSE 350 companies with April to September year ends (published as at 31 December 2020),
and Deloitte’s pulse survey on senior management pay and COVID-19 (November 2020)
• Recent proxy and investor guidance issued ahead of the 2021 AGM season
• Key questions and considerations for remuneration committees when making year end decisions
Recent market insights – key takeaways
Significantly reduced annual bonus out-turns, in particular where government support has been used. Median
chief executive annual bonus out-turn of zero, with increased use of discretion to reduce payouts under non-financial
performance elements.
Continued restraint in salary for executive directors. Around two-thirds of companies freezing base salary
for chief executives, based on latest company disclosures.
Further commitments to reduce incumbent executive pensions, in line with rates available to the wider
workforce.
Increasing interest in alternative incentive structures such as restricted share plans. Investor and proxy
support remains mixed, with strong strategic rationale expected and focus on level of discount, performance
underpins and time horizons.
Very limited changes in respect of ‘in-flight’ incentive awards, in line with guidance issued by proxy agencies
and investors.
2
Executive reward and COVID-19 – remuneration committee update
older experien
keh ce
Sta
W
Annual
isk
or
bonus out-
al r
kfo
turns
ion
rce
Long-term
Targets and
Reputat
incentive
impact
metrics
Executive vesting
reward and
COVID-19 - key
decisions
tion
Incentive Salary
structures review
Inve
1. Incentive out-turns
cre
Executive
dis
sto
pensions
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rg
ida a
nt
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nc
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Fair pay Judg
Annual bonus out‑turns
Annual bonus out‑turns will be a primary area of focus for investors At the end of 2020, investors and proxy agencies issued clear
in the 2021 AGM season, and remuneration committees are guidance for remuneration committees when considering annual
expected to demonstrate how incentive outcomes reflect the wider bonus out‑turns at the financial year end, in particular in relation to
stakeholder and employee experience. companies using government support schemes, wider workforce
impact including staff redundancies, and where there has been
additional capital raising or suspended dividends.
Annual bonus out-turns – recent insights
The median bonus out‑turn for FTSE 350 companies with April to
September year ends (to date) is zero, compared to typical levels
of 65‑70% of maximum in recent years.
FTSE 350 chief executive (CEO) annual bonus out-turns – April to September financial year ends
CEO bonus out-turn (as % Share price movement Use of UK Job Retention Scheme (‘furlough’)
of maximum) (January to September 2020) excluding where fully repaid
Source: Bloomberg
100%
80% Median annual
Typically lower or zero bonus bonus pay-out 0%
60% pay-out where shareholder
experience significantly impacted
and/or government support taken.
40%
20%
0%
-20%
-40%
-60%
-80%
3Executive reward and COVID-19 – remuneration committee update
Proxy and investor guidance
‘Where a company has raised additional capital from shareholders, or has required Government support through the Job
Retention Scheme, taking government loans or used/using other similar Government schemes which offer direct support to
companies, shareholders would expect this to be reflected in the executives’ remuneration outcomes and generally would not
expect the payment of any annual bonuses for FY2020 or FY2020/21, unless there are truly exceptional circumstances.’
The Investment Association
‘Remuneration committees are expected to retain a level of discretion to ensure that remuneration outcomes for executive
directors align with company performance, as well as shareholder and employee experiences. Glass Lewis may recommend
that shareholders vote against the remuneration report where there is substantial misalignment in this regard in the past
fiscal year.’ Glass Lewis
‘Bonuses should reflect the wider employee experience. Companies may also consider whether a higher portion of the bonus
should be deferred into shares.’ The Investment Association
‘For the 2020 financial year, for those companies that have received support from government or shareholders (via additional
capital or suspended dividend) and staff redundancies were necessary, LGIM would not expect to find a bonus being paid.
The payment of a bonus may result in a vote against the remuneration report.’ Legal and General Investment Management
‘For some sectors, indirect government support such as business rate relief will have a significant positive impact on financial
performance. Remuneration committees should disclose how they have taken into account the impact of these government
measures on remuneration outcomes.’ The Investment Association
Use of discretion? Enhanced disclosure
In recent years, up to 10% of FTSE 350 companies have exercised Remuneration committees are expected to clearly articulate why
downward discretion to reduce annual bonus payments, where bonus payments are appropriate in the wider context, and we are
formulaic outcomes are considered to be misaligned with wider seeing significantly enhanced disclosures around the experience of
company performance and shareholder experience. In the context the company’s shareholders, workforce and wider stakeholders in
of COVID‑19 impact, where financial targets have not been met, we the directors’ remuneration report where bonuses are paid.
are seeing a higher level of downward discretion used in respect of
non‑financial (e.g. personal or strategic) performance metrics. Investors and proxy agencies have indicated that enhanced
disclosure is also expected where companies have made any
adjustments to performance measures as a result of exceptional
In the context of COVID‑19 impact, circumstances.
where financial targets have not
been met, we are seeing a higher Proxy and investor guidance
level of downward discretion used in ‘Enhanced disclosure is expected where companies
respect of non‑financial (e.g. personal have made adjustments to performance measures as a
result of exceptional circumstances, such as rent
or strategic) performance metrics, concessions or waivers. Members expect disclosure as
to what has been included/excluded and the rationale,
in particular where government especially since such items may be material to pay-out’.
support has been taken. The Investment Association
Upward discretion remains an extremely sensitive area, and is
unlikely to be commonly used. Where exceptional circumstances
have been identified, companies are expected to consult with
shareholders in advance and explain why any adjustment is
considered appropriate.
4Executive reward and COVID-19 – remuneration committee update
Questions for remuneration committees
• What government support has been received (Covid Corporate Financing Facility (CCFF), UK Job Retention Scheme)? Where
received, has government support been repaid?
• How has the dividend policy been impacted?
• What has been the impact on incentives throughout the organisation?
• Have there been redundancies linked to the impact of COVID-19?
• How has the remuneration committee taken account of any indirect government support measures such as business rate relief?
• Does the level of bonus deferral remain appropriate?
Long‑term incentive plans – vesting of awards
Over the coming year, remuneration committees will assess Investors and proxy agencies have been clear that they do not
performance in respect of awards made under long‑term incentive expect to see adjustments to performance conditions for in‑flight
plans (LTIPs) in 2018. While we are yet to see the full impact of LTIP awards. Where any adjustments are proposed, these should
COVID‑19 on long‑term incentive vesting levels, it is expected that be subject to shareholder consultation.
many in‑flight awards will be ‘underwater’ at the current time.
In a recent Deloitte pulse survey1, over 85% of FTSE 350 companies
In recent months, around one‑third of long‑term incentive awards confirmed that they would make no changes to ‘in flight’ long‑term
have lapsed at the end of the performance period, with median incentive awards. Where changes are anticipated, typically these
vesting of c.30% of maximum, which is lower than in recent years. are expected to be below executive director level, and subject
to existing provisions in place under the plan rules and grant
documentation.
Lower levels of long‑term incentive vesting expected, with very limited examples
of changes to ‘in flight’ awards at executive director level.
Lower LTIP vesting levels expected Limited changes to 'in-flight' LTIP awards
70%
Typically, any
changes to 'in-flight'
Typical FTSE 350 median awards will be
60%
LTIP vesting of c.40 - 65% made below
LTIP vesting as % of maximum award
of maximum in recent executive director
years level only.
50%
Potential
change to
'in flight'
40% awards 15%
30% No change 85%
20% Recent April to
September year Recent pulse survey
ends – median – c.85% of FTSE 350
vesting c.30% of companies would
10% expect to make no
maximum
changes to ‘in-flight’
awards
0%
1 Deloitte’s pulse survey on senior management pay and COVID-19 (November 2020)
5Executive reward and COVID-19 – remuneration committee update
Proxy and investor guidance
‘LGIM does not generally support retrospective changes to LTIP awards, therefore any proposed discretion to in‑flight awards
that are material – i.e. affect the outcome to the benefit of directors, should be subject to shareholder consultation and
support.’ Legal and General Investment Management
‘IA members have stated that they do not expect Remuneration Committees to adjust performance conditions for in‑flight
annual bonuses or long‑term incentive awards to account for the impact of COVID‑19. Members would ask companies to
confirm in their Remuneration Committee Chair’s statement that they have not adjusted performance targets during the year.
Shareholders would not expect LTIP grants to be cancelled and replaced with another long term incentive grant. In addition,
shareholders do not expect remuneration committees to compensate executives with higher variable remuneration
opportunity in 2021 for lower remuneration received in 2020 due to the pandemic.’ The Investment Association
6Executive reward and COVID-19 – remuneration committee update
older experien
keh ce
Sta
W
Annual
isk
or
bonus out-
al r
kfo
turns
ion
rce
Long-term
Targets and
Reputat
incentive
impact
metrics
Executive vesting
reward and
COVID-19 - key
decisions
tion
Incentive Salary
structures review
Inve
2. Base salary
cre
Executive
dis
sto
pensions
nd
rg
ida a
nt
u
nc
e me
Fair pay Judg
During 2020, over 55% of FTSE 100 and 40% of FTSE 250 been awarded, most commonly this has been c.2%, in line with
companies announced pay cuts for executive directors, including workforce increases. According to Deloitte’s recent pulse survey,
temporary reductions to base salary. In the coming months, we expect to see a higher rate of pay freezes for executive
remuneration committees will be considering salary levels for the directors in respect of 2021 when final year end decisions are
year ahead, and investors have indicated that they expect to see made (see below).
continued restraint in this area.
Where salary increases are awarded, we have seen examples of
In recent years, typically around 30% of executive directors companies awarding higher level of increases to the lowest paid
received no salary increase in any year. Where increases have workers, in particular those in ‘front line’ or key worker industries.
Proxy and investor guidance
‘Shareholders expect companies to show continued restraint. Increases to salary, if necessary, should be in line with
changes to the wider workforce. Investors will continue to look closely at how any increases to basic salary or variable pay
opportunity are justified and will expect remuneration committees to show restraint in relation to overall quantum.’
The Investment Association
FTSE 350 chief executive salary review –
April to September financial year ends (to date)
To date, around two-thirds of
% salary increase
20% companies are freezing base salary
for chief executives for FY20/21
10%
0%
Salary review – recent insights (Deloitte pulse survey)
Salary increase for FY21 – executive directors Salary increase for FY21 – general workforce
and executive committee
Yes 23%
Undecided
Undecided 34% Yes 48%
46%
No 31%
No 18%
Where a salary increase is expected to
be made, typically c.2%
7Executive reward and COVID-19 – remuneration committee update
Questions for remuneration committees
• What are the proposed salary adjustments for the wider workforce, including lowest paid workers?
• How have wider company stakeholders been impacted? Has government support been taken?
• Were any planned increases for executive directors previously disclosed to shareholders (e.g. glidepath on appointment)?
8Executive reward and COVID-19 – remuneration committee update
older experien
keh ce
Sta
W
Annual
isk
or
bonus out-
al r
kfo
turns
ion
rce
Long-term
Targets and
Reputat
incentive
impact
metrics
Executive vesting
reward and
COVID-19 - key
decisions
tion
Incentive Salary
structures review
Inve
3. Pension
cre
Executive
dis
sto
pensions
nd
rg
ida a
nt
u
nc
e me
Fair pay Judg
Executive pensions was a ‘hot topic’ of the 2020 AGM season, and During 2020, a number of companies suffered ‘low votes’ (less
we saw a significant shift in market practice following guidance than 80% in favour) following Institutional Shareholder Services
issued by the The Investment Association in September 2019, (ISS) recommendations to vote against the remuneration
which focussed on pension provisions for new executive director policy as a result of incumbent pensions, and ISS confirmed in
appointments, as well as incumbent executive directors on recent guidance that this will continue to be a vote driver in the
pensions of 25% of salary or more. coming year.
In respect of any new executive director appointments, nearly In November 2020, the The Investment Association issued further
all FTSE 350 companies have now committed that pension guidance ahead of the 2021 AGM season focussing on executive
contributions will be aligned with the rate available to the majority pensions of 15% of salary or more, and further movement is
of the workforce. For incumbent executive directors, around expected as more companies commit to align executive and
two‑thirds of FTSE 350 companies will have aligned pension workforce pensions by the end of 2022.
contributions with the wider workforce by the end of 2022, and
this trend is expected to continue in the coming year.
Following significant reductions to incumbent pensions of 25% of salary or more last
year, we expect to further commitments to reduce pensions in 2021.
Incumbent executive pensions – recent insights (April to September year ends)
Incumbent executive pensions – recent insights Reductions to incumbent executive pensions
(April to September year ends) (where not aligned with workforce rate)
40%
Aligned with Aligned with Increasing examples of commitments
workforce by workforce rate to reduce incumbent executive
35%
later date by end of 2022 pensions of 15% of salary or more.
(e.g. end of 2023) 33%
7%
Already 30%
aligned with
workforce 25%
rate
Some reduction 33% 20%
(remains above
workforce rate) 15%
9%
No reduction 10%
(remains above
workforce rate) 5%
18%
0%
9Executive reward and COVID-19 – remuneration committee update
Proxy and investor guidance
For companies with year‑ends starting on or after 31 December 2020: ‘Where the committee has not disclosed a credible action
plan to align executive director pension contributions with the majority of the workforce rate by the end of 2022, IVIS will Red
Top the remuneration report if the pension contribution received by an executive director is 15% of salary or more.’
The Investment Association
‘This update recognises pensions and post‑cessation shareholding requirements as potential vote drivers, as these issues have
come into prominence since the 2018 UK Corporate Governance Code came into force.’ Institutional Shareholder Services
‘While we expect that new executive directors be appointed on this level of pension contribution, we recognise that pension
rates for incumbents may need to be reduced over time. Nevertheless, we expect the remuneration committee to provide
additional disclosure regarding the committee’s commitment to reduce the pension contributions for incumbent executives by
the end of 2022.’ Glass Lewis
‘LGIM expects incumbent directors’ pension provisions to be aligned with what is offered to a majority of the workforce by
2023. LGIM will vote against the remuneration policy where there have been no changes proposed to address the disparity in
pension provisions.’ Legal and General Investment Management
Questions for remuneration committees
• Where incumbent pension will be reduced, how will this be structured and over what time? Phased reduction or ‘cliff’
reduction at the end of a specified time period?
• What pension contribution is available to the wider workforce?
10Executive reward and COVID-19 – remuneration committee update
older experien
keh ce
Sta
W
Annual
isk
or
bonus out-
al r
kfo
turns
ion
rce
Long-term
Targets and
Reputat
incentive
impact
metrics
Executive vesting
reward and
COVID-19 - key
decisions
tion
Incentive Salary
structures review
Inve
4. Incentive plans
cre
Executive
dis
sto
pensions
nd
rg
ida a
nt
u
nc
e me
Fair pay Judg
Annual bonus plan – structure and metrics
When setting performance metrics and targets for the 2021 Where companies are facing significant business uncertainty and
financial year, remuneration committees are likely to consider challenge in setting performance targets, we have seen examples
whether existing measures and weightings remain appropriate of annual bonus plans being split into two six month performance
for the year ahead. Based on recent April to September year end measurement periods. While this can increase complexity,
disclosures, a number of companies are re‑balancing measures investors have accepted this approach to date, albeit remuneration
to reflect business priorities, subject to flexibility under the committees are expected to use judgment and discretion at the
remuneration policy. end of the year to ensure outcomes appropriately reflect the
stakeholder experience over the year as a whole.
Recent investor guidance has emphasised the importance of ensuring that
non‑financial metrics remain robust and quantifiable, and we expect to see enhanced
investor focus in this area over the coming year.
Proxy and investor guidance
‘Shareholders expect that financial metrics will comprise the significant majority of the overall bonus. [..] Companies should
demonstrate how personal objectives are linked to long‑term value creation and should not be for actions which could be
classed as ‘doing the day job.’ The Investment Association
‘Achieving a threshold level of financial performance should be a pre‑requisite for the delivery of any bonus including the
delivery of personal/strategic performance objectives (the exception being in a turnaround situation). LGIM may vote against
if the weighting on personal/strategic measures is high and the measures are not meaningful/quantifiable or sufficiently
explained.’ Legal and General Investment Management
Questions for remuneration committees
• What are the key performance indicators for business sustainability and success in the coming year?
• How do targets align with market consensus forecasts?
11Executive reward and COVID-19 – remuneration committee update
Long-term incentive plans – considering your approach
Increase in companies considering alternative incentive
structures such as restricted shares. Investors and proxy
agencies have been clear that any changes in approach should
Framework and approach continue to be supported by a clear strategic rationale and
meet specified criteria around award levels, performance
underpins and time horizons. (see page 13).
Where companies have suffered
significant share price falls, there
are examples of companies
Grant size reducing the LTIP award level at Recent pulse survey
– c.12% of FTSE 350
grant to reflect the shareholder companies will adjust
LTIP value at grant
experience.
Some companies changing performance metrics or weightings
Choosing performance metrics (e.g. use of relative TSR), subject to remuneration policy.
‘Committees will have to consider the appropriate
performance metrics and stretch of targets. This may
lead to a reduction in the performance target range or
Setting performance targets a wider performance range. [..] It will be important for
committees to disclose the process it has been through to
set the targets including the use of internal budgets and
consensus estimates.’ The Investment Association
Many companies will commit to use discretion and judgement
at the end of the vesting period, to ensure that remuneration
outcomes reflect the wider stakeholder experience and
Vesting – judgment and discretion – executives have not benefited from ‘windfall gains’.
windfall gains?
Remuneration committees should ensure that plan
documentation allows use of the discretion at vesting, and
explain their approach in the directors’ remuneration report.
12Executive reward and COVID-19 – remuneration committee update
Proxy and investor guidance
‘Remuneration committees need to be pro‑active in determining the appropriate LTIP award size given sustained share price
falls. Making awards at maximum opportunity in cases where share prices have fallen substantially is to be discouraged.
Committees should consider reducing LTIP grants to reflect the shareholder experience.’ The Investment Association
‘Where a company has experienced a significant fall in the share price (>20%) since the last award was made, a reduction in
the size of the new award is expected to ensure there is no prospect of a reward for failure. Where this has not happened and
the committee has not provided an undertaking to reduce awards when they vest, LGIM will vote against the remuneration
report.’ Legal and General Investment Management
Questions for remuneration committees
• How do LTIP awards reflect the shareholder experience and what powers exist for the committee to exercise judgement and
discretion at the end of the vesting period?
• What are the key performance indicators for business sustainability and success over the performance period?
• How do targets align with market consensus forecasts?
Long‑term incentive plans – alternative models?
According to Deloitte’s recent pulse survey, around 10% of FTSE 350 companies are
considering introducing a restricted share plan in the coming year.
Around 5% of FTSE 350 companies now operate a restricted share design parameters, such as a 50% discount to existing LTIP grant
plan, and we have seen increasing interest in alternative incentive levels, five year time horizons and use of performance underpins.
arrangements such as restricted shares and other deferred share
models in recent years. According to Deloitte’s recent pulse survey, In recent guidance, the Investment Association stated that ‘the
a further 10% of FTSE 350 companies are considering introducing inability to set meaningful performance targets is not a reason in
a restricted share plan in the coming year. itself to move to a restricted share model’, and it is expected that
investors and proxy agencies will carefully scrutinise the strategic
While we have seen examples of companies receiving high levels rationale of any change in incentive structures in the coming year,
of shareholder support for restricted share plans in the last year, as well as historical payouts under long‑term incentive plans.
it remains mixed where there is a deviation from the ‘accepted’
Proxy and investor guidance
‘Shareholders will still consider the strategic rationale for the implementation of alternative incentive schemes such as
restricted shares. The inability to set meaningful performance targets is not a reason in itself to move to a restricted
share model.
As with other long‑term incentives, committees should consider whether the size of restricted share awards is appropriate
where share prices have fallen and would otherwise risk windfall gains on vesting. This should be considered in addition to
the usual discount rate of at least 50% from the LTIP grant level.’ The Investment Association
13Executive reward and COVID-19 – remuneration committee update
Contacts
Stephen Cahill Mitul Shah Helen Beck
020 7303 8801 020 7007 2368 020 7007 8055
scahill@deloitte.co.uk mitulshah@deloitte.co.uk hebeck@deloitte.co.uk
William Cohen Sally Cooper John Cotton
020 7007 2952 020 7007 2809 020 7007 2345
wacohen@deloitte.co.uk sgcooper@deloitte.co.uk jdcotton@deloitte.co.uk
Clare Edwards Anita Grant Juliet Halfhead
020 7007 1997 0118 322 2861 0121 695 5684
clareedwards@deloitte.co.uk anigrant@deloitte.co.uk jhalfhead@deloitte.co.uk
Patricia Bradley Emily Buzzoni David Cullington
020 7007 0124 020 7007 2710 020 7007 0899
patbradley@deloitte.co.uk ebuzzoni@deloitte.co.uk dcullington@deloitte.co.uk
Christophe Dufaye James Harris Iqbal Jit
020 7303 7536 020 7007 8818 020 7303 4101
cdufaye@deloitte.co.uk jamesharris@deloitte.co.uk ijit@deloitte.co.uk
Katie Kenny Dennis Patrickson Ali Sidat
020 7007 2162 020 7007 1996 020 7007 2818
katkenny@deloitte.co.uk dpatrickson@ deloitte.co.uk asidat@deloitte.co.uk
Alison Barton
Head of Insights
020 7007 4285
alibarton@deloitte.co.uk
14This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London EC4A 3HQ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NSE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms. © 2021 Deloitte LLP. All rights reserved. Designed by CoRe Creative Services. RITM0621915
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