Glass Lewis - Approach to Executive Compensation in the Context of the COVID-19 Pandemic (EMEA region)

Glass Lewis has issued guidance on the intended application of its existing policy approach to executive remuneration at companies in the EMEA region, in the context of the COVID-19 pandemic.

This includes commentary on areas of heightened focus when considering pay for performance alignment for FY20/21; considerations in respect of adjustments to incentive plans; and Glass Lewis’ holistic approach to pay outcomes.

The full guidance can be read here. A summary of key areas is provided below:
 

Pay for performance alignment

For fiscal year 2020/21, Glass Lewis will heighten their focus on the following areas when considering pay for performance alignment:

• Dividends - Where a company cancelled, reduced or has not resumed the payment of dividends due to the ongoing crisis, to save liquidity and/or ensure the grant of government aids, we would expect executive pay to be somewhat affected. In this context, a company’s dividend policy and payout ratio would be taken into account. Furthermore, forward-looking decisions should also take into account the experience of shareholders and employees.
• Employees - Where a company had to undertake significant layoffs, furloughs or cuts in workforce salaries, we would expect this to be addressed in the remuneration report; in particular, we believe companies should explain how such measures were taken into account by the board when determining variable pay outcomes and salary adjustments for executives. In this context, we believe there should be consistency between changes in the yearly disbursements for employee pay and executive pay.
• Stakeholder Perspectives - Where relevant stakeholders, such as government agencies or local investor associations, publicly express concerns regarding a company’s proposed payouts or pay policies, we believe it is incumbent on the company in question to provide a direct and compelling explanation of how it has accounted for those perspectives. As with all relevant rationales, we will only consider information that is included in public disclosures prepared for shareholder review.
• Key Financials - In addition to performance of the metrics included in the incentive plans, we may observe results against the company’s other KPIs, including absolute and relative TSR, EBITDA, net profit, and historical year-on-year changes thereof. Public disclosure of recent guidance adjustments issued to the markets will be taken into account.
• Equity Grants and Share Price - When assessing the appropriateness of long-term incentive equity grants, we will scrutinise a company’s disclosure around the determination of the grant value and the calculation of the number of shares to be granted. In particular, where share price has been significantly affected and has not at least partially recovered to pre-pandemic levels, we would expect a company to explicitly address the potential inflation of the final value of the award upon vesting, considering a scenario in which share price would have fully recovered – or increased according to pre-pandemic estimates - at the time of vesting. Should the potential for windfall gains on grants appear significant in terms of absolute and relative pay outcomes, we would expect a board to adjust the grant value accordingly, and/or implement adjustments to other elements of executives’ pay in order to mitigate this effect.
   

Adjustments to plans and safeguards

Glass Lewis is generally opposed to discretionary adjustments to the terms of incentive plans, but will assess one-off deviations from a remuneration policy on a case-by-case basis, maintaining some flexibility in certain areas, should appropriate safeguards be in place.
For example:

• Target Adjustments - While continuing to oppose the adjustment of targets for ongoing plans, we believe the adjustment of targets for awards yet to be granted, aimed at reflecting an adjustment to the strategic goal communicated to the market for the relevant metric/s, to be generally reasonable. Nonetheless, considering the downward adjustment of the guidance communicated to investors and the impact of the pandemic on the financial and operational results of the company, we believe the board should somewhat limit future payouts deriving from the adjusted targets. In other words, we believe over-performance should be avoided and the adjustment of targets should not be aimed at guaranteeing a full and unaltered vesting opportunity when compared to prior years.
• Non-Financial Metrics & COVID-Specific Metrics - Should an annual bonus scheme already be partially based on the achievement of non-financial (individual or collective) goals set annually by the board, we would generally support the selection of a relevant and objective COVID related target for this fiscal year or the next. However, we believe the use of this metric should not be aimed at ensuring full vesting and the relevant category of non-financial metrics should not be introduced ad-hoc to the bonus scheme.
• Long-Term Incentive Performance Period - Should a board resolve to exclude fiscal year 2020 from the calculation of the final level of performance target achievement for outstanding long-term awards, we believe the value of the affected grant should be reduced proportionally.
   

Holistic view of pay outcomes / base salaries

Ultimately, when assessing a board’s decisions on executive remuneration for 2020/21, Glass Lewis will look at year-on year variations in total pay and expect overall lower outcomes than in the previous year for all companies that has been affected by the crisis. This holistic view implies that our concerns about artificially higher outcomes deriving from one incentive element may be mitigated by lower outcomes on another element, as long as the final year-on-year variation in total remuneration appears adequate.

Although we do not expect any adjustments to base salaries, we believe boards should exercise their discretion to suspend foreseen salary increases, where appropriate. Additionally, while we recognise the forfeiture of a portion of base salary for a period of time represents a positive signal to the market, we find that this token may not be enough to guarantee an appropriate pay-for-performance connection at heavily affected companies.
 

Expectations for unaffected companies

In line with the principle of pay-for-performance, we do not expect companies to amend or deviate in any way from their regular remuneration policy if they have not suffered any negative impact from COVID in terms of financial and operational performance, shareholder returns and employee welfare.