Next AGM season in the second half of 2020 will be a test for COVID-19 remuneration reporting and all companies should be aare they may be targeted by investors and proxy advisors during this time over coperate remuneration, warns KPMG Australia Leadership, Performance and Reward partner Stephen Walmsley. Here he offers tips on what boards should and should not do on remuneration front over the next six months.
As the COVID-19 crisis wreaks havoc with the economy, directors, CEOs and senior leaders at a large number of ASX listed and big private companies have taken substantial pay cuts in order to comply with belt-tightening across the nation. But others who have not may find themselves targeted by activists come next AGM season, warns Walmsley.
“There are a number of companies that will have financial results that will qualify them for bonuses. I suspect that for those companies that are paying bonuses this year in terms of investors, it will be more important than ever to have really clear communication of what was done to earn those bonus amounts. I think any lack of clarity will be latched upon by investors and proxy advisors,” he told the AICD during an interview.
Cut director pay by up to a quarter
Executives and NEDs in Australia should consider taking pay cuts of up to 25 per cent, depending upon the size of workforce cuts, in order to conserve cash, or risk a backlash later on, he warns.
The powerful Investment Association (IA) in the UK has called for executive pay cuts. The IA which manages £7.7 trillion in pension and other assets said in a letter to the chairs of FTSE350 companies recently that: “If a company cancels dividend payments or makes significant changes to their workforce’s pay, IA members support boards and remuneration committees that demonstrate how this should be reflected in their approach to executive pay”.
In Australia, more than 25 major listed companies have announced significant cuts to executive pay, including those at News Corp, Qantas, Westpac, Myer, Premier Investments, Flight Centre, Virgin, Harvey Norman and Toll.
Smaller ASX listed firms that have made executive pay cuts include Helloworld Travel, Todd River Resources and Azure Minerals. More than a dozen large private companies including big accounting and law firms KPMG, PwC and MInterEllison are also sharing the pain.
Internationally, top corporates have done the same. These include more than 30 major companies including Boeing Co and hotel group Marriott International.
The time for boards to review remuneration policies and structures both for the 2020 financial year but also with a view to incentives for 2021 is right now, ahead of the end of the financial year on June 30, says Walmsley.
Companies should consider whether some or all rewards should be awarded in equity rather than cash this year. This might also help to pacify proxy advisers who might be critical of bonuses in a year of COVID19, Walmsley adds.
Many of Walmsley’s clients have altered their remuneration plans for the next four to six months. KPMG is generally advising clients to consider reducing pay for senior leaders as outlined below.
Action points for boards on remuneration for next AGM season
If your business IS standing down employees:
- Executives and NEDs should consider taking pay cuts of 10-25%, depending upon the size of workforce cuts.
- A number of companies have done this already and in extreme cases this has been to a level of 100%;Short-term incentives for FY20 should be scrapped. If not, any short-term incentives should be provided in equity to conserve cash; and
- Executives and others should be asked to take leave where company operations have been closed or reduced.
If your business IS NOT standing down staff but needs to conserve cash:
- NEDs and senior executives should take around 25 per cent of their salary in equity deferred for up to 18 months until the company comes out of the pandemic; and
- Remuneration reviews should be deferred for six months
“Where directors are going to find the biggest challenge is how do your chart your way through this? And obviously the directors that sit on multiple boards may have the extremes to deal with,” says Walmsley.
The benefits of cutting pay and deferring rewards into equity rather than cash include helping the business to retain talent and keep servicing customers, improving cashflow and reputation and spreading the load of the economic impact, says Walmsley.
“Obviously cashflow is important. It gives you the ability to then cross-subsidise workers. But part of this strategy is also reputational. If you've had to stand down a large number of workers, it's appropriate to cut pay for directors and executives in those circumstances.
”However, he sounds a note of caution against taking measures that are too extreme and running the risk of losing talented people. “The problem is the balance of keeping faith with your people which includes keeping faith with your executive team and treating them fairly. So that may be to take a pay cut, but it also might not.
”In industries that have been hit hardest, like travel and tourism, there have been major stand-downs of employees with directors and executives taking some level of pay cut. In some extreme cases like Premier Investments, where 10,000 staff have been stood down, senior leaders are not taking pay at all for a couple of months. In other cases, companies are looking to conserve cash.
Workload increases for directors
At a pressured time when many directors are working harder than ever, with extra board meetings and urgent important issues to deal with relating to the COVID-19 crisis, the reality is they are also receiving less pay and that situation may continue for some time, he adds.“The directors I'm talking to have said there have been a huge number of meetings. They are saying the workload has definitely gone up, whether they're formal board meetings or informal sessions [for] directors to receive updates on latest developments but also to then get their input into management strategies and plans.”
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