Shareholders know they are unlikely to be in line for big returns as the repercussions of the COVID-19 pandemic play out, so companies need to show them executives are in the same boat.
If, for example, a company has decided to withhold investor dividends, it’s not the time to offer executives pay rises or bonuses – even if they are making all the right moves. Given the current backdrop, it’s unlikely there would be the scope to make such offers anyway.
So, how can businesses ensure their executives stay motivated in these troubled times? For a FTSE 250 chief executive, basic salary is usually only a relatively small percentage of the overall package which, like most things, has a recognised market value. Consequently, some form of performance-based bonus is a fairly ubiquitous element of executive remuneration at this level.
LTIPs and changing metrics
With cash in short supply, long-term incentive plans (LTIPs) are one way to ensure executives get their dues, without attracting shareholder attention of the wrong kind.
LTIPs, which usually last for at least three years, have the advantage of helping to incentivise talented individuals to stick around for at least a few years to reap their rewards.
They are generally based on financial metrics such as revenue and shareholder returns, which are likely to be highly volatile for the next few years. Yet knee-jerk reactions such as majorly downgrading performance targets could provoke investor wrath if – as some predict – this recession proves short lived.
The Investment Association suggests that one way around this is to delay setting the performance conditions of new LTIPs for up to six months to see how COVID-19 affects businesses.
Another option is to start looking at non-traditional ways to measure an executive’s performance. Shareholders want long-term stability and growth, and to achieve that companies need to hold on to their top talent – both at executive level and further down the line.
Employee engagement levels could therefore be one way to measure how successful an individual has been at guiding a business through turbulent times, as could results pertaining to sustainability and social responsibility. Such outcomes will undoubtedly be harder to measure in a meaningful way; it’s much more complicated than calculating a short-term bonus based on profits and share price performance over the past 12 months.
But with a few small changes, evaluation of even intangible benefits is possible. When it comes to employee engagement, for example, an annual survey that repeats the same questions year after year should provide a good picture of whether things are going in the right direction.
Getting to grips with such measures will not only prove useful for executive remuneration target setting, they should also provide strong material for reporting purposes with regards to evidencing employee insights, engagement and impact on business results in line with the 2018 UK Corporate Governance Code.
*This article was written for, and features in REBA, August 2020