How the Covid-19 pandemic will impact remuneration structures

The Covid-19 pandemic and its consequences are testing companies like never before. The severity of its impact on business and economic activity is still evolving, and companies are focusing on new strategies and priorities for the months ahead.

Boards of directors have a critical role in helping their companies navigate complicated Covid-19 related issues. Matters such as environmental concerns and pay inequality have been pushed to the forefront by the pandemic, while talks of the ‘great reset’ have entered the public discourse. Our latest Executive Directors Practices and fees trends report takes a bit of a different turn, exploring some of the interesting topics that our clients are talking about in light of the pandemic and economic uncertainty. 

Globally, there is a general acceptance that 2020 is not a good year for executive pay. This is unsurprising, given the hard truths of employee pay-cuts, forced leave, retrenchments and the like. But the unavoidable reality is that most companies have been hit hard by the pandemic, and in a lot of cases, it is going to take a lot of extra effort and creative strategic thinking to recoup shareholder value, rebuild jobs, and in some cases, just to survive and stabilise.

This means that company strategy, and by extension remuneration strategy, is evolving, in some cases (temporarily or otherwise), completely shifting in a way many would argue makes existing incentive structures ineffective. 

In our report, we talk about a few scenarios that companies might find themselves in post-Covid, and explore what these might mean for remuneration strategy at an executive level. Turnaround incentives, incentives that shift to a focus on “safeguarding the value” rather than rewarding aggressive growth, and the more bespoke incentives that are possible in the unlisted environment are some of these. We also talk about creative retention strategies ? understanding that when the future potential value is wiped off the table, we quickly start to see key talent being poached.

Balancing act

There is a balance to be found between the interests of employees who are frustrated with low levels of (variable) pay at a time when they feel they are working harder than ever, and the interests of shareholders who have seen significant value destruction in the last few months. Executives may be content with variable remuneration, which rewards them based on overarching company goals and be willing to take the risk associated with the potential for higher returns. However, employees at other levels may have other needs, and prefer more certainty within their remuneration structures, in return for pay triggers that are more aligned with what they feel they can influence and have a direct impact on.

Discussions surrounding executive pay are always going to be controversial, and sensitive. Much of this has to do with income disparity, particularly in our country. It’s certainly a time when increased interrogation of executive pay arrangements will happen, and there will be questions regarding the bonuses and long-term incentives of executives in light of everything that has happened. Internal context is important, and directors should ensure that they carefully consider the wider context of employee remuneration, retrenchments, pay cuts and the like. 

What about bonuses?

What we are observing at our clients is that the question being asked is not ‘did you pay bonuses’ but more like ‘What was the context in which you paid bonuses?’ - feeding into the theme that it’s not just about protecting value for your shareholders, it’s also about protecting your employees, protecting the public, and acting responsibly and fairly. 

In terms of executive pay, there are those who believe that the crisis is a catalyst for change ?- and the change they are thinking of contemplates de-risking pay, and swapping out a higher potential for upside for a more certain, but lower quantum of variable pay. This, however, may not always work in practice, and what will potentially happen will instead be a proper interrogation of targets, a stringent application of maximums (i.e. no unlimited upside), and a continued demand for ‘pay for performance’ by shareholders. 

However, in our view, and based on feedback from institutional investors locally and overseas, there will definitely be an increase in the incorporation of ESG (environmental, social, governance) measures within pay structures. We are already seeing increased demand for pay to be responsible and fair, and this includes a wider contextual consideration of what is happening with employees within the organisation and responsibility to society.

Women's Month fad

Companies must ensure they are ready for the inevitable mandatory disclosure of the pay gaps by calculating these ahead of time, and ensuring that they have a well-thought-out, fair and ethical pay policy that presents an action plan for addressing any identified gaps.

There is also the gender pay gap, much talked about now in Women’s Month and then often sidelined thereafter.

The Global Gender Gap Index 2020 found that progress towards closing the gender pay gap has stalled. No country (including the top-ranked ones) has yet achieved gender parity in wages. In SA, we have a real problem with female representation at the top. Although 12 women were appointed as CEOs of listed companies between May 2019 and February 2020, of the total number of listed companies on the JSE in our analysis, only 6 percent (19 women) are female CEOs. 

In SA, as with most countries, there is a significant premium paid to CEOs compared to other executive directors, so this has a significant impact on the pay gap. And the bigger the company is, the more complex it tends to be, and this means a bigger CEO pay package. So, the problem is worse within the large-caps (45 percent) compared to small caps (25 percent). But it should be emphasised that it’s difficult to assess gaps meaningfully when you have so few data points for women. It's important for people to understand that the factors that feed into the gender pay gap are complex, sometimes nuanced.

That is not to say that identified gaps must not be fixed ? it is vital to understand the problem, and all companies should be doing this, and fixing discrepancies they find. But beyond this, further work needs to be done to recognise the systemic biases in society and organisations that give rise to these disparities, and to address them at their core. If this is not done, previous efforts to close the gender pay gap will be in vain.