Executive pay - a dilemma in challenging times

Decisions on executive pay are notoriously difficult. Public scrutiny is ‘always on’ and boards also need to take heed of stakeholder and shareholder expectations. That’s in the good times and in tough times it’s probably no surprise that sensitivity and scrutiny are heightened. Currently boards are having to balance appropriate reward with the impact that this pandemic has had on organisational performance and the threat of an approaching recession. This sets risk high especially for an organisation’s brand and reputation.

An important test for many boards will be the way they approach executive pay and incentives. This will be key to ensure they safe guard reputation, maintain a healthy organisational culture, keep workers motivated and retain key talent.

A good place to start is aligning your approach to remuneration with the organisation’s values and culture. This includes setting, documenting and communicating remuneration principles and policies. In the current environment it also means careful thought about how COVID-19 has impacted the organisation and ensure that treatment of pay is consistent throughout the organisation. Clarity is essential.

For some organisations it may be too early for the board to re-set targets and performance goals given the current uncertainty, for others the time to review and update is now. This includes considering any existing incentive schemes and assessing whether they are still appropriate for the organisation’s financial position, for example it may be better to provide equity incentives instead of cash incentives to help preserve cash and focus on recovery.

Boards should also consider how remuneration decisions align with other key areas including talent retention and maintaining a sound employer brand in the market. It’s vital that boards consider public expectations and perception, especially if the organisation has applied for public funding support through the wage subsidy or other schemes.

What about director fees?

In addition to considering executive pay, some boards have already reviewed and reduced director fees in response to the financially constrained operating environment and to share in cost saving efforts. If not already considered and the organisation is having to take significant measures to reduce costs (eg reducing the size of the workforce), the board should review director fees and consider if a reduction is warranted. Again it’s a balancing act as many directors are spending much more time steering the organisation through these times, but not doing so can run the risk of being seen as tone deaf by stakeholders.

The IoD Director Fees Survey Report due out in August will provide insights on the impact of COVID-19 on director fees and related issues.

Five questions for boards to consider

1. What impact has COVID-19 had on the business, including performance to date and future outlook?
2. How will your board (or committee) determine changes to remuneration? (eg what principles and framework will you use to guide decisions?)
3. What approach is the board taking to board fees and how does it align with decisions on executive/employee pay?
4. What are the key expectations of stakeholders and employees regarding remuneration?
5. What steps are in place to ensure that any proposed changes are communicated effectively?

Further resources

• IoD: On the money? Board accountability for executive pay and expenses
• ASIC: Board oversight of executive variable pay decisions during the COVID-19 pandemic
• KPMG UK: COVID-19: Leadership in executive pay
• Mercer: The Post-Hayne playbook for executive remuneration