« January 2020 | Main | August 2020 »

2 posts from July 2020

28 July 2020

The impact of COVID-19 on executive pay

by Gemma Carr Director, PwC United Kingdom

Email +44 (0)7808 035813

Our recent poll shows almost two thirds of Heads of Reward expect executive reward to change as a result of COVID-19. But opinions differ on the extent of this change.

The coronavirus (COVID-19) pandemic has highlighted a number of widely known challenges with the current structure of executive pay.

Operational restrictions and financial challenges, the widespread use of direct government support such as the Coronavirus Job Retention Scheme, as well as increasing UK unemployment rates, have amplified the debate on the quantum of executive reward.

We recently asked Heads of Reward to choose the most likely scenario for executive reward following the COVID-19 pandemic from what we saw as three key possibilities:

Scenario 1 - 2020 is a one-off year. Executive pay returns to ‘normal’ as the economy emerges from the impact of the pandemic. After some noise at 2021 AGMs on incentive outcomes based on this unique period, there is little change to the structure or implementation of pay.

Scenario 2 - The pandemic has a lasting downwards impact on the quantum of executive pay. Pensions have already been reduced, incentive outcomes for 2020 are set to be lower, and there is continued scrutiny of the pay levels of new hires for at least the next few years. This perfect storm becomes the ultimate bit of ammunition for those who have been fighting for a long-term reduction to executive pay levels in the UK.

Scenario 3 - COVID-19 triggers a radical overhaul of executive pay. Cash bonuses may be inappropriate as companies seek to preserve liquidity over the next period. The challenge of setting three year targets amidst economic uncertainty renders traditional long-term financial metrics obsolete, such as EPS, ROCE. Companies turn to alternative structures and measures, such as restricted stock plans or performance on grant (for example with an ESG underpin), to remove the need for long-term target setting.

More than 60% of the Heads of Reward expect change, either through a decline in an executive pay quantum (Scenario 2) or through a more radical restructuring (Scenario 3).

In our view, it is unlikely that the impact of COVID-19 on UK business, let alone executive pay, will be limited to the next 12 months, and there is every possibility that the quantum of pay, at least for the next few years, is curbed. While a complete overhaul of executive pay is unlikely, we would say that recent events add voice to a chorus saying the complexity, irrelevance and quantum of executive pay have gone too far. It is possible that more companies will look more broadly across their options with regards to their executive long-term incentives. Two possible options stand out:

  • Introduction of restricted stock plans (RSPs) or performance on grant plans - the pandemic has created significant uncertainty over long-term business performance. RSPs and performance on grant plans avoid the challenge of setting long-term stretch targets under performance measures in the current environment. The successful introduction of RSPs at 2020 AGMs by two FTSE 100 companies and a number of FTSE All Share companies may give confidence to some remuneration committees to consider an RSP or performance on grant plan for 2021 - below Board, if not at Board, level. For Board-level RSPs, shareholders would need to be consulted over the length of the vesting period, the use of underpins, and the discount applied to the quantum of awards to reflect the greater certainty of RSPs and performance on grant.
  • Reform of performance measures - a less radical approach may be to amend the performance measures used in existing performance share plans. Many directors' remuneration policies allow this, subject to consultation with shareholders. We may see a greater reliance on relative measures to avoid the challenge of setting targets for absolute measures. Alternatively, this could be the catalyst for more widespread introduction of Environmental, Social and Governance (ESG) metrics that certain shareholders have called for in recent guidance.

We’ll explore how executive pay could change in our upcoming thought leadership on this topic to be released later this summer. If you’d like to discuss this topic further, get in touch with us using the details below.

Capture

by Gemma Carr Director, PwC United Kingdom

Email +44 (0)7808 035813

16 July 2020

How COVID-19 will reset traditional workplace rules

by Peter Brown Co-Leader, Global People and Organisation

Email +44 (0)7789 003712

by Christopher Box EMEA HR Consulting Lead

Email +44 (0)7808 106841

Back in February, as the COVID-19 pandemic took hold in Italy and Spain, it was still business as usual for most of us in the UK. The vast majority of the UK workforce continued to commute – in our cars, on our bikes, by foot or by public transport.

Little more than a month later, our working culture was blown out of the water by the lockdown. Almost overnight, companies had entire workforces of hundreds, or even thousands, of staff suddenly working on laptops and dialling into virtual meetings from various corners of their homes. Some of these companies had previously paid no more than lip service to flexible working policies.

Lessons from COVID-19

For many CEOs and boardroom executives it was a revelation that the shift didn’t cause the sky to fall in. While many sectors including travel, hospitality and retail have been severely disrupted, many other businesses have been able to run as usual – some with more efficiency and with greater productivity.

This doesn’t mean we will all switch to working from home when this is over, particularly as many people prefer and benefit from an office environment. We must also be aware that the version of home working we’re experiencing now is hardly normal – it often includes children and partners being home and creating a more disruptive atmosphere than usual.

Nonetheless, the fact that businesses have been able to carry on shows a way forward for organisations in the face of disruption and skills shortages. Giving people more freedom and flexibility about how they work can help organisations adapt to disruption, as well as tap into new skills and talent that previously weren’t accessible. Ultimately, it can even help address social and regional inequality across the UK.

The penny has now dropped for many in the C-suite. Having employees present in the office doesn’t necessarily correlate to productivity, wellbeing, diversity and inclusion in the workforce. This is a significant shift from the old input model (of time spent in the office) to one driven by output (what the employee actually delivers).

There’s also growing evidence that more flexible ways of working create greater workplace diversity and inclusion. Opportunities are opened up to people with different backgrounds and life situations, those with disabilities and those previously excluded from the traditional workplace by their social situation or geographical location.

A catalyst for change

Disruption – whether because of economics, technology, climate change or employee health – is a fact of life for businesses today. Research shows that corporate longevity is growing shorter and shorter and, at the current rate of churn, three-quarters of today’s S&P 500 companies will be replaced by 2027. Those companies that don’t pivot and think about their workforce and skills in a more flexible way will struggle to survive.

The increasing squeeze on skills worldwide is another driver for change. In our 2019 CEO survey, conducted before the UK was impacted by COVID-19, 74% of CEOs said they were concerned about the availability of key skills and the impact it would have on growth. Today, that shortage of people with the right skills and adaptability could hamper companies’ ability to thrive as the economy recovers. Organisations would do well to start to think more radically about how they can upskill and widen the talent pool.

What this pandemic has shown us is that, despite traditional governance models, organisations can adapt when they need to. Many have done in a few weeks what would have previously taken six months or longer. This positive change can continue if companies seize the opportunity.

In Part 2 of this blog, we will look at how organisations can use upskilling as a driver for greater social equality and positive change.

by Christopher Box EMEA HR Consulting Lead

Email +44 (0)7808 106841

by Peter Brown Co-Leader, Global People and Organisation

Email +44 (0)7789 003712