Managing the impact of COVID-19 on remuneration policies

By July 3, 2020August 2nd, 2020Article

The effect of COVID-19 on organisations remains visible. More enterprises announce and consider changes not only to executive pay, but to wider pay and/or work arrangements of employees. Due to COVID-19 ‘s broad impact on employee engagement and management, a number of stakeholders in most companies are currently considering and dealing with a range of performance management and rewarding issues.

As well as impacts on executive compensation, compensation decisions and conditions for the broader workforce are expected during the crisis, and shareholders and the general community will hope to see some continuity in these decisions. 

The political and environmental background for decision-making will be very critical, and companies will need to draw decisions rapidly with dramatically reduced preparation time, while ensuring that various stakeholder interests are balanced.

What do Australian businesses consider for the current performance year?

Over the past few years, external stakeholders’ emphasis has changed from a narrow emphasis on executive compensation to wider concerns of the workplace, followed by changing societal views on fairness and a social compensation debate. It is possible that this political and environmental dimension will only become more relevant as shareholders, policymakers, and the society examine how compensation and performance problems are addressed by businesses in relation to COVID-19 impacts.

Following are some of the issues that Australian Businesses must consider for the current performance year –

1. In year salary adjustments and salary reviews

Considering the precedent already set by certain firms (E.g. distressed firms such as airlines) and the aspirations of external stakeholders, companies would need to show that they have given due consideration to executive pay changes in the year.

Wage freezes for the wider workforce should be considered, however pay levels for genuinely critical roles and individuals (e.g., customer-facing roles, IT) should be treated differently. For example, Aldi’s UK store and distribution colleagues would earn a 10 percent bonus on working hours, demonstrating the importance of certain positions in the current climate.

2. Adjustment to performance targets 

Although it makes sense for remuneration committees to maintain sufficient power to make changes, decisions should usually be delayed until the end of the performance period when the situation and context may become clearer.

3. Payment of bonuses

For all companies, but especially those with a dramatically worsened outlook, reductions in the workforce or cash constraints, consideration should be given to whether paying bonuses is still appropriate. Some remuneration committees may wish to reassess the basis on which incentives are to be earned, including whether there is an emphasis on results.

For example, 

● All results for groups vs individual results 

● Behaviour, or effort, not financial results 

There could be consideration as to whether a larger proportion of their bonuses should be awarded in shares to preserve cash.

How have Australian businesses responded so far?

Most listed companies have yet to make public announcements about fixed pay reductions, freezes, or bonus pool reductions or cancellations. Approximately 15 percent of ASX 100 businesses have made public announcements as part of a wider response to COVID-19 market impacts with respect to improvements in their compensation and performance strategy for management, the general workforce, and even in some cases rewards for members of the board, with many beyond the ASX 100. predictably, the most important decisions were revealed in those sectors that were hit hardest, such as transportation, leisure, casino, and gaming.

Some of the key changes we have seen announced across the segments are –

1. Executives

Executives have been the first segment to have their pay impacted, in some cases, only the CEO.

Temporary compensation adjustments (15 ASX 100 companies announced intent to adjust executive salary)

● Most commonly 20% reduction in pay 

● Some businesses distinguished between the CEO and the direct reports, with a foregone (higher) proportion for the CEO

2. Broader workforce

Approaches in the wider workplace are not only about wages but also about changes in working practises and arrangements.

Salary Adjustments

  • Less prevalent wage changes for the larger workforce compared to executives (with workers more likely to be impacted by other interventions, such as temporary stand-down or redundancy)
  • Salary reduction can also be followed in some, but not in all cases. Usually less quantitative reduction than executives, between 10 to 20 per cent, by a commensurate reduction in hours.

Incentive arrangements

Limited revealed practises but we are aware that several organisations are reconsidering their FY20 incentive strategy. Outside the ASX 100, we have seen reports of various compensation strategies being implemented beyond standard requirements to represent the dedication of workers during the pandemic, both local and international.

For example, in Australia: Kogan is providing a $500 bonus to all staff, international

example: Aldi and Tesco UK are awarding a 10% bonus on hours worked for store and

distribution staff, Facebook are applying an ‘exceeds’ rating for their first six-month review of 2020 meaning workers will have a guaranteed six-month bonus, on top of a further $1,000 bonus to be awarded to staff.

3. Board Directors

13 ASX 100 firms have introduced cuts in Board fees (Chairs and NEDs). These are typically between 20 and 30 percent where disclosed, although there are examples of 50 and 100 percent ((ie, no fees for Board members for a specific period).

The duration of this reduction is most often either 3 months, the remainder of the financial year (~3 months for June year ends) and in some cases for an undisclosed period.

Remuneration and reward trends in 2020 are pointing toward companies adopting a more holistic approach to maximise program value while balancing various stakeholder interests. Identifying best practices and adapting to suit will be critical for companies to ensure each reward dollar is best optimised.

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