Robert Half Executive Search held its virtual Lockdown Leaders Forum on 26 January 2021. Attended by CEOs and CFOs, Chief People Officers and HR Directors from a variety of industry sectors, the session was chaired by Leyla Tindall, Managing Director of Robert Half Executive Search.
Key speakers were Damian Reece, ex-Business Editor of the Daily Telegraph and now Managing Partner at reputation management consultancy Instinctif; and Dan Harris, Tax Partner at PwC, who advises companies on executive remuneration and reward strategies.
The main subject for discussion was how executive reward policies will change in the wake of recent shifts in society, including the impact of the Covid-19 pandemic, the growing importance of the environmental, sustainability and governance (ESG) agenda, and burgeoning awareness of the need for more fairness in business and society, including diversity and inclusion.
Is a reset needed for executive pay and remuneration?
As with so many other issues, Covid-19 has forced a change in approach as to how organisations’ pay and remuneration levels are set for executive teams, said Reece. External stakeholders and the general public are expecting to see change, particularly in how people across an organisation are rewarded, and what contributions they are incentivised to make.
As Forbes has said, “Business as usual is not going to cut it,” Reece added. Other media commentators have pointed out that this is the first recession when ESG has been in the mainstream, and that there is a new emphasis on ensuring employees, customers and society as a whole are prioritised first.
Going even further, Simon English, Senior City Correspondent at the Evening Standard, has written that: “CEO bonus tales are set to clash hard [in 2021] with rocketing unemployment and pay freezes for the rest of us and indeed with hungry children relying on footballers to come to their aid.”
While even the FT has written that the growing emphasis on responsibilities to staff and society will trump shareholder interests, financial targets continue to outweigh employee metrics in the UK’s largest businesses. Meanwhile, advocates of fairness argue that it actually leads to better long-term outcomes.
Two potential scenarios could emerge post-Covid-19, explained Dan Harris. One where companies simply focus on firefighting and survival, keeping remuneration policies the same as before, and one where they accept that we are in a changed world and companies need to adapt to new market conditions.
Those who choose to ‘tough it out and survive’ will face external pressure to reconsider salaries and benefits provided to executive teams, especially when they receive benefits that the rest of the workforce do not. Regulation, introduced over the past decade to change governance and pay policies, have not had a significant impact, but the voice of popular opinion could be more effective, Harris said.
Organisations that choose to accept and adapt could take a more innovative approach, he added. For example, executive teams could be given stock options instead of cash bonuses. But such actions could introduce the risk of losing senior leaders to private equity backed businesses or roles overseas, pushing the UK down a non-competitive route and unable to compete for senior talent.
Concerns about losing high performers are only too real, said Leyla Tindall, citing Robert Half’s recently published Salary Guide. Four in five respondents to a survey taken from 1500 executives said they were worried about losing top talent because of the impacts of Covid-19, with a third of these saying that this may happen because of salary reductions.
However, the same survey found that 25% of organisations had increased salaries for top performers, while the majority had continued to pay the same rates, she said. This shows that so far at least there has been far from a uniform response to changing conditions in different industries and that there is still uncertainty about the future.
The question is whether the changes being seen now, in how executive pay is calculated, will be permanent, or a temporary arrangement. “They are very much here to stay,” said Reece, “largely because businesses have been bailed out by the public to the tune of billions of pounds, and taxpayers will shoulder a huge financial burden as a result.”
“People will expect to see something in return,” he added. “Attitudes towards issues such as high executive pay will change, and so will how performance is managed.”
Harris agreed that permanent change is more likely than not, saying the pandemic has exposed the financial fragility of some organisations - as well as the different ways that all employees are rewarded versus the executive team.
Balancing risk with Innovation
Returning to the need for balance, Harris reiterated that new approaches will be needed to reflect the importance of the fairness agenda and pushing back too far on remuneration for the executive board. The pipeline of future leaders should not be neglected either, or organisations will run the risk of losing the next generation of senior directors.
Examples of innovative approaches include The Hut Group (THG), whose founder – Matt Moulding - made 74 employees millionaires with bonus payments at the end of 2020; and AO Group plc, which announced a value creation plan that would pay out awards from a £240M bonus pot depending on share price performance.
There are challenges for more traditional businesses that are not founder-led, said Harris. Nevertheless, they need to recognise that ESG issues are here to stay and that a failure to act will have an impact on shareholder value. Planning for remuneration policies should be part of a 5-year strategy and align with business objectives – executive pay does not have to be homogenised across industries as it has been for so long. Harris also advised that Remuneration Committees are taking a shorter term approach on bonus payments for the 2020 and 2021.
The pressure to change is not coming from politicians but from institutional investment firms such as Black Rock, said Reece. They don’t want to see lower financial returns, but they do want to see more sustainable, long-term planning. “It’s not right to assume that senior executives will flee the UK: many are embracing the change, driven by investors. Those that fail to change run the risk of losing access to capital markets.”
Transparent, open communications about how executive pay and remuneration is calculated - and why - will be even more important in the years ahead, Reece added. High pay for a job well done is not the problem, but payment for failure is.
If payment structures and disclosure regimes show that the right actions have been taken, in accordance with the actions demanded by investors, that will be a good first step. Then it is a matter of persuading media commentators and the public that salaries and bonuses being paid are fair.
“You’ve got to have a strong rationale,” agreed Harris. “This is especially important when you have taken government money to pay staff on furlough. Is it appropriate to keep that money, and do you need to take it?”
Sitting on government funds and loans while paying out bonuses for the executive team will be particularly difficult to justify, Reece added.
Finally, senior executives should consider their own records during the pandemic, and how they reacted or took high payments. It’s not just about this financial year or next, but about how this will impact personal reputations when looking for future roles. Pay has to reflect the reality that we are all in this together, and for the good and the health of a company, change has to begin at home.
- There has never been a more complex time for organisations faced with calculating pay and conditions for senior executives, given the board agenda of Brexit, the pandemic, ESG and the need for diversity.
- Change in the way executives are paid is happening today, but it’s a journey not a sprint. Given the current uncertainty in business, it may be worth considering temporary arrangements for this year and next.
- It’s important to avoid a race to the bottom by cutting back on executive salaries wholesale, but instead to find innovative solutions that reward performance in the areas demanded by investors, and that are more inclusive of employees and contractors.