As we reported on Tuesday, the Investment Association has outlined its expectations of companies on issues including climate change, diversity, and executive pay, ahead of the 2021 AGM season. Its key message is investment managers will be ‘turning up the pressure’ on companies to improve ethnic diversity on their board, to report on climate-related risks and to demonstrate they are taking a circumspect approach to executive pay in the coming months - and it is executive pay that we want to look at now. The IA has previously cautioned firms to treat their executives in line with the rest of the workforce and remain mindful of the pandemic’s impact on society. In this latest guidance the IA underscores that message, warning firms not to compensate executives for reduced pay as a result of the pandemic by adjusting this year’s remuneration through ‘catch up’ awards or disproportionate salary increases. Let's hear more on what that means in practice from rewards specialist James Sullivan-Tailyour. He joined me by video-link and I put it to James that the IA's main message on pay restraint hasn't changed so, query, does this open the way for shares to be used to reward staff instead of cash?
James Sullivan Tailyour: “Well, you are absolutely right that the main messages of the Investment Association's guidance on executive pay haven't changed. So the key theme is that they're expecting companies to show pay restraint and that the pain that may be being felt by employees at large is also being shared by directors and senior individuals within the organisation and nothing has changed in that respect in terms of the IA’s guidance. In terms of your second question about whether shares might be used in lieu of cash payments, be they salary or bonus, I think companies need to be very careful here. The Investment Association is certainly not supportive of companies who use increased share payments as compensation for reduced bonus outcomes. So it's not a case that shares can be used to compensate for losses elsewhere. As I said earlier, the Investment Association expects directors and senior managers to be sharing the pain, but there are ways in which shares can be a useful tool for remunerating employees when cash is tight with an organisation and we have seen a number of companies put in place cash conservation schemes which effectively ask employees to agree to voluntarily defer or waive a portion of their salary, their cash salary, in return for a grant, in value terms, of an equivalent number of shares, or maybe an equivalent number of shares with a little additional top up to sweeten the deal as it were and shareholders have generally been supportive of those types of measures. I think it would be worth saying that any measure of that nature that was limited to the most highly paid individuals within an organisation would receive less support, but provided it is applied organisation-wide and shareholders can understand the rationale for that scheme, which is to conserve cash at a time when finances are tight, it is certainly an option that companies can consider and something that shareholders and the Investment Association would, in principle, support.”
James mentioned this idea of using shares as a way of remunerating employees when cash is tight and we can expand on that because it is an area we are currently advising on and it does remain an option notwithstanding this latest IA guidance. Share plans specialist Lynette Jacobs told me this approach can be applied across all sectors:
Lynette Jacobs: “Share plans can play a role whichever sector a company is in. So for example, in sectors which have not done so well over the period, they can be used now by companies to make payments of parts of salary. So offering or requiring employees to defer a part of their salary for a period of time and instead be made an award of shares. So the share option can be used and it can be equivalent in value to the amount of salary that the employee is being asked, or requested, to forego for the time being, the idea being that that share option will then be exercisable following a specified period and the value of those shares at that time will then be received by the employee instead of the company having had to pay out the salary at the current time. For companies that have either done well, having been in the fortunate position to do well during this period, or perhaps companies that have been through a bad time but see that things are starting to get better – the furlough is over, redundancies that had to be made have now been made – companies can use, sometimes, the UK tax advantaged share incentive all-employee plan to make a free share award, or otherwise just make a free share award. It doesn't have to be that large, just something to say, you know, hello, we're all back, we’re really pleased that you're with us, we all want to do well going forward and here is an award of free shares. Again, that can be tied into a requirement to remain with the company prepared a time or, alternatively, it can be something where the shares are there for the employee more or less as soon as the award has been made. Another area that companies can look at, whether they are companies which have been badly affected or come through quite well, is to pay some of a bonus, perhaps where the bonus was already paid in shares, then a higher percentage of that bonus, or where hasn't previously been paid to shares to make that payment in shares. Again, these are all ways that a company can use so that it doesn't need to put its hand in its pocket at the moment immediately to make a payment of cash.”
This issue is one of a number which Lynette and the share plans team have covered in detail in their articles and guides. You can find all of those, and the latest developments, on the Outlaw website.