Executive Remuneration in a post-Covid world


Setting the scene - the UK Corporate Governance Code

All Premium-Listed companies in the UK must ‘comply or explain’ when it comes to the principles of the UK Corporate Governance Code (the “Code”). A number of others also adhere voluntarily to the Code. The Code obligation extends to remuneration policy, which should be transparently designed to promote long-term, sustainable success within the company and align to the company’s purpose and values.

The Code also asks remuneration committees to be ‘sensitive to pay and employment conditions elsewhere in the group’, taking into account the pay of the wider workforce before setting executive pay policy (or justifying the decision not to do so). While the Code does not specifically address the current pandemic, decisions taken in the area of executive remuneration should be made against this backdrop.

The latest from the Investment Association

In their publication ‘Shareholder Expectations during the COVID-19 Pandemic’, the Investment Association (“IA”) set out comprehensive guidance to assist Boards who are having to strike the difficult balance of incentivising ‘executive performance at a time where management teams are being asked to demonstrate significant leadership and resilience’.

In summary, the IA expects remuneration committees to take into account any impact of the pandemic on the general market, the company’s share price, dividend payments, and the company itself when considering bonus payments and LTIP awards. In its latest guidance, the IA does not expect performance conditions on existing awards to be altered as result of the adverse impact of the pandemic and it also expects that the size of any new awards, and the associated performance targets, will be considered carefully in the light of the current circumstances.

Where companies have furloughed staff or sought additional capital from shareholders, the IA repeats the obligations set out on the Code, and states that is expects executive pay in these cases to be ‘aligned with the experience of the company, its employees and its other stakeholders’ .

What about Financial Services?

Those in financial services will be well aware of the Regulators’ focus on culture and the importance of getting this right in firms. A firm’s approach to rewarding and managing people has been recognised by the FCA as one of the main drivers of culture and requires firms to consider the impact of its remuneration structure, for example, in terms of whether it rewards the correct behaviours amongst staff and promotes effective risk management.

Last year, in its August 2019 open letter to the chair of firms’ remuneration committees, the FCA highlighted that culture was a key cross-sector priority for the FCA. This focus has not lessened because of the pandemic. To the contrary, the FCA stated in July 2020 that they see “a risk that firms may deprioritise their focus on culture as they redirect resources in response to the immediate risks presented by current events and on a longer-term basis as a result of the crisis”, but that firms must continue to focus on maintaining a healthy culture during times of uncertainly as it can reduce the potential for harm, make firms more resilient and contribute to long-term success. We also consider that Regulators will expect firms to have considered how they will manage the impact of COVID-19 on bonus pools and individual remuneration.

Concerns regarding the impact of COVID-19 have not just been raised at a UK level. The European Central Bank (“ECB”) has issued an open letter requesting credit institutions to maintain enough capital to absorb potential losses and to support the real economy and the ECB notes the significant negative impact that an institution’s variable remuneration policy can have on its capital base. As a result of this, the ECB encourages Boards to adopt extreme moderation with regard to variable remuneration payments until 1 January 2021 at the earliest.

Reputational concerns

Remuneration committees should consider the overall optics of any of their decisions in relation to executive pay - how will they be viewed by the wider workforce, investors, shareholders and the outside world? Furloughing staff and taking advantage of Government support, whilst potentially also making redundancies, does not sit comfortably alongside material awards in the executive remuneration space.

Many organisations faced criticism after the economic crash in 2008 on the basis that they were bailed out by Government, but took insufficient steps to manage executive pay, and indeed paid out millions in executive bonuses.

At the other end of the spectrum we have seen press coverage of big remuneration concessions made by senior executives at some of organisations which have been very badly hit by the pandemic, e.g. Signet (which owns jewellers H Samuel and Ernest Jones) and airlines (such Virgin Atlantic).

Tricky issues

There are tricky issues aplenty for remuneration committees to consider in normal times, and the COVID-19 pandemic has only served to add to those issues. For example, the IA hinted at clawback and malus provisions being used on bonuses paid out before the full impact of the pandemic was seen, however no further guidance has been offered on this.

For companies that have granted LTIP awards this year, a future challenge for remuneration committees will be to consider whether participants enjoy ‘windfall gains’ as a result of rebounding share prices once the immediate impact of the pandemic subsides. The IA has made it clear that remuneration committees are expected to use their discretionary powers to protect against any such windfalls.

Perhaps the biggest challenge is getting the balance right. While the court of public opinion (and potentially investors) will deliver a harsh judgement on “hefty” executive pay packages, an issue which the IA touches on is that many executive teams have been working flat out during the pandemic. Against this backdrop, the message that their efforts will be rewarded with a reduction in remuneration is not very appealing. Further, if a similar “prudent” approach is not being taken across the relevant sector or industry, there will no doubt be a risk (perceived or actual) that executives will feel aggrieved or jump ship to a better deal. A balance needs to be struck to ensure that executives are sufficiently incentivised to stay and perform in a way that delivers long-term success, but which also is in tune with the culture and mood within the organisation and more widely.


There are no easy answers. The outcome will differ from company to company, depending on the sector and market. However, one common thread that should be universal is the need for transparency. It is best practice to disclose the approach being taken in respect of executive pay and to provide a transparent justification for this approach. In doing so, the risk of bad press and disgruntled executives and employees cannot be avoided, but at least the company is able to control the narrative.