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COVID-19: Pressure Points: Investment Association Guidance on executive pay and the impact of COVID-19 (UK)

28 April 2020 | UK
Legal Briefings – By Paul Ellerman and Mark Ife


The Investment Association (“IA”) has published guidance which sets out its expectations on how UK listed companies should reflect the impact of COVID-19 on executive pay.

The guidance does not favour any single measure above others so as to enable companies to be flexible in their approach, depending on what is appropriate in the circumstances.

Boards must justify levels of executive pay and ensure that executives’ experiences reflect those of shareholders, employees and other stakeholders, especially if a company has sought to raise additional capital from shareholders or has made use of Government support such as the Coronavirus Job Retention Scheme.

The IA is confident that shareholders will support those companies which propose temporary salary reductions for executives or which decide to freeze variable pay, for example where they need to raise additional capital.

Where dividend payments have been suspended or cancelled for FY2019, the IA considers that this should be reflected in executive pay, even suggesting that where bonuses have already been paid, Remuneration Committees should consider reducing any deferred shares related to FY2019 bonus awards through the application of discretion or malus provisions. Alternatively, reductions should in due course be made to FY2020 bonus outcomes.

Where 2020 LTIP awards have already been granted, the IA suggests that performance conditions and the size of grants do not need to be adjusted, but that Remuneration Committees should use their discretion to ensure a strong link between pay and performance and to avoid windfall gains on vesting. It also requests that the factors which will be considered by Remuneration Committees in exercising their discretion should be set out in the next Remuneration Report.

Where 2020 LTIP awards have not yet been granted, the IA suggests a number of possible approaches, depending on the circumstances of each company. This may include reducing LTIP grants to reflect the shareholder experience or, where there is a high level of uncertainty, setting performance conditions within 6 months of grant or delaying the grant for a period of up to six months (and, possibly, shortening the performance period to less than 3 years as a result).

Where a new remuneration policy is being put to shareholders, the IA does not consider that companies will need to rewrite their proposed policies if extensive shareholder consultation has already taken place, but cautions that where variable pay increases are proposed, Remuneration Committees should carefully consider whether such an increase continues to be appropriate. For those companies which have not yet consulted on new remuneration polices, the IA suggests that remuneration policies with substantial changes may not be appropriate if the company has been significantly impacted by COVID-19.


Remuneration Committees will no doubt welcome additional guidance from the Investment Association, and in particular that the IA acknowledges that there is not a “one size fits all” approach during these uncertain times.

There are competing pressures in relation to executive remuneration arising from the impact of COVID-19, reflecting the need to align executives with shareholders, and acknowledging pay sensitivities elsewhere in the company. Remuneration Committees will need to decide what is appropriate in the circumstances faced by their particular company, noting that some shareholders have been calling for executives to be “sharing the pain”. Remuneration Committees may wish to consider increased shareholder consultation in the decision-making process (although many shareholders will rely increasingly on the proxy advisors), and should be prepared to explain and justify the approach they take.

Remuneration Committees will be able to exercise discretions which have been built into incentive plans as a result of changes to the Corporate Governance Code to override the formulaic outcomes in plans so as to avoid any windfall gains. Whilst the suggestion of delaying incentive grants until there is more market certainty, and shortening vesting periods accordingly, may be a pragmatic approach, this flexibility will be unavailable for many companies. Plan rules and directors’ remuneration policies will need to be checked carefully to establish the scope of Remuneration Committees’ discretionary powers and to determine whether such variations to the normal timetable would be permissible.

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