Britain’s biggest companies risk “significant reputational ramifications” if they do not reduce executive pay after taking advantage of taxpayer support during the coronavirus pandemic, the City’s most influential shareholder body will warn on Monday.
Sky News has learnt that the Investment Association (IA) will unveil remuneration guidelines to blue-chip boards outlining how its members expect them to make pay decisions during what threatens to be an acutely contentious AGM season.
Although many companies have already announced substantial pay cuts and deferred share awards for senior executives, some – including the pharmaceutical group AstraZeneca – are proposing to press ahead with pay rises in 2020.
Multimillion pound pay awards are expected to provide a lightning rod for political anger over inequality as the UK economy struggles to find a way through the COVID-19 crisis.
“Remuneration committees need to be proactive in determining the appropriate LTIP [long-term incentive plan] award size in the current market environment given sustained share price falls,” the IA will say.
“Making awards at maximum opportunity in cases where share prices have fallen substantially is to be discouraged.
“Committees should consider reducing LTIP grants to reflect the shareholder experience.”
Last week, Sky News revealed research from the High Pay Centre thinktank showing that 18 members of the FTSE-100 which have disclosed their use of the Coronavirus Job Retention Scheme have handed their bosses £321m during the last five years.
In its guidelines to be published later on Monday, the IA will say that where companies have suspended or cancelled dividends because of the pandemic, their remuneration committees should “consider the use of discretion or malus provisions to correspondingly reduce any deferred shares related to the 2019 annual bonus”.
The lobbying group will also apply pressure to boards to ensure that executives do not land huge payouts in three years’ time because of share grants awarded at stock prices hammered by the coronavirus outbreak.
“It is important for the remuneration committee to confirm that they will look at the general market and share price response over the performance period to ensure that windfall gains will not be received on vesting,” a copy of its guidelines will say.
“Shareholders will expect the committee to use their discretion to reduce vesting outcomes where windfall gains have been received.”
It called on remuneration committees to set out in their next pay report “the approach they will take and factors they will consider when judging if there has been a windfall gain from the LTIP grant”.
“Shareholders would expect any longer-term individual share price underperformance to be accounted for.
“If, for instance, the share price was down 30% in the year prior to the COVID-19 market reaction, an appropriate scaling back should be applied.”
The warning highlights concerns among investors of a repeat of massive awards to bosses at companies such as Persimmon, the housebuilder, if share prices rebound strongly in the coming years.
The IA also raised questions about whether boards should be setting targets for three-year performance during the pandemic, suggesting that a six-month postponement might be appropriate.
Companies which have furloughed staff under the Coronavirus Job Retention Scheme should ensure that boardroom pay is “aligned with the experience of the company, its employees and its other stakeholders,” the IA guidelines will say.
“Where a company has sought to raise additional capital from shareholders, or has required Government support such as furloughing employees, shareholders would expect this to be reflected in the executives’ remuneration outcomes.
“Remuneration committees and management teams should be even more mindful of the wider employee context through this period.
“Failure to do so may have significant reputational ramifications.”
Many of the IA’s members, including Legal & General Investment Management and Schroders, have written separately to boards to set out their expectations on pay.
The IA added that companies that are planning to increase variable pay after votes on three-year pay policies should consider delaying them if their business is significantly impacted by COVID-19.
“For these companies, it may be more appropriate to wait until there is greater clarity on the future market environment before proposing significant changes to their policies,” it will say.