Executive pay has attracted criticism in recent years from investors, lenders, industry bodies and the government. Businesses have faced calls to:
- decrease the gap between executive and workforce pay (chief executives earn more than 100 times the median worker in the UK);
- lessen the use of 'fat cat' termination payments, sometimes seen as rewards for failure;
- heed the Financial Conduct Authority's (FCA) conclusion that executive incentives in banks designed for short-term gain not long-term sustainability directly contributed to the 2008 crash;
- ensure alignment with shareholders, employees and society, not just shareholder profit;
- add to the enhanced governance on executive pay reporting and shareholder voting.
The Covid-19 crisis has seen many businesses doing the right thing, including pay cuts, bonus cancellation, charitable giving and incentive freezing.
The crisis also presents new lenses through which to view the issues, including:
- the value of a worker – when key workers are saving some organisations as much as executives;
- in whose pockets the salary saved by furlough payments ends up;
- how quickly systemic risks can alter established business models;
- greater public and investor scrutiny for bouncing back businesses that do not protect worker pay;
- investors insisting that boards share the pay cut pain and staff rail at a double standard;
- an acceleration of investment in purposeful business, ESG (environmental, social and governance) factors, and enhanced emphasis on business ethics.
The press is quick to call out those who misstep, such as those businesses that replace pay cuts with share schemes starting from the artificially low share price that will amount to a large pay rise when business bounces back. The FT's Moral Money section is running a 'Saints and Sinners' series that regularly draws attention to executive pay.
The Institute of Business Ethics commented that “well-resourced businesses that don’t make strenuous and sustained efforts to protect the incomes of their workers – especially the lowest paid – should not be surprised if they run into heavy flak”.
The public outcry on such issues may deepen further if the focus on social inequality remains after the crisis. Businesses trading out of near insolvency have tough decisions to make but most will depend more than ever on the goodwill of customers, remaining staff, suppliers and shareholders. They should perhaps tread carefully on executive pay. Those touting executive pay cuts and charitable giving may find these are hostages to fortune if they turn out to be short-lived cuts in the face of the mass unemployment that looms. Some commentators are already insisting that executives returning to normal pay as they edge back to business as usual, fundamentally put at risk the core reputation of their business itself, if done before staff do or before withdrawal from the government support scheme.
It is easier to cut salaries but much harder to determine how, if at all, to adjust equity awards. There will be changes to the yardsticks for performance measures. Purpose-led businesses are likely to be more vocal. All reviews of executive pay might do well to keep in view the connection with ways to increase general workforce pay. Remuneration committees will be asked to ensure that executive incentives are stretching and that reward for freak market conditions are equalised or clawed back. There will be no ‘one size fits all’ solution but there is a common thread of more simplicity for incentive design and for more clarity of communication, both on what is in place and on the overlap between pay and purpose.
William Granger is a partner at Wedlake Bell