As company profits dip, jobs are cut and pay is slashed – are boards suffering enough?
With the COVID-19 crisis continuing to impact businesses across Australia, the country’s sovereign wealth fund is urging the hardest-hit companies to listen closely to public opinion when setting executive pay, particularly cash bonuses.
As companies employ cost-containment strategies – from pay cuts to workforce reductions – to weather the crisis, Australia’s $162bn Future Fund advised organisations to exercise discretion in deciding on remuneration packages.
“Boards should not strip out the COVID-19 impact when assessing performance or apply ‘creative accounting’ to adjust for the impact of COVID-19,” the board at the sovereign wealth fund said.
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Leaders at the fund also pointed out how shareholders typically monitor executive pay decisions to ensure “outcomes accurately reflect performance” as well as broader executive targets.
Legitimate decisions to cut jobs or pay during this critical time need not be explicitly factored into executive pay outcomes, the board said.
However, companies should also consider applying a basic pub test: “some of the pain felt by staff below executive management ranks should also be applied to the remuneration outcomes of key management personnel,” the board said.
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While the fund may be “more flexible” in enforcing governance principles this year, it expects companies to show restraint on cash payouts, especially for businesses “where protecting cash levels is important”.
An alternative, the board suggested, would be to reward a greater portion of these bonuses in the form of equity.
“Management should not be disincentivised to act in the long-term interests of the company. However, company boards should understand that shareholders will likely expect moderation of remuneration outcomes in these cases,” the fund leaders said.
The board at Future Fund said they would not want to see managers “protected from the downside impact of COVID-19, but not restrained on the upside”.
Boards may instead seek to “adjust performance hurdles tied to financial performance in the [short-term incentive] scheme to allow greater vesting, but not adjust the (low) share price used to determine equity grant sizes and outcomes for the long-term incentive schemes,” they said.
