COVID-19: WHY EXECUTIVE PAY MATTERS
As companies hunker down into survival mode, bracing themselves for COVID-19-inflicted economic shock, executive pay may be the last thing on most directors’ minds. However we believe that Boards and Remuneration Committees should be considering this issue.
Approached with care, executive remuneration could become a useful tool in the arsenal needed to help secure the survival of individual companies and the broader South African economy.
For business and the economy to emerge with some degree of intactness from this pandemic, it is absolutely crucial to limit job losses, maintain some level of consumer activity and keep a basic income flowing to as many members of the workforce as possible.
Government has recognised this with the contingency plans the President announced in his lockdown address on 23 March, and many business bodies and corporates are mobilising resources in response.
Executive remuneration should be part of the conversation for some important reasons.
Executive pay in South Africa comprises both guaranteed and variable pay. Guaranteed pay typically makes up around 30%-50% of an executive’s pay packet, while the remaining 50%-70% is variable pay linked to performance.
Cash streams are likely to come under tremendous pressure in the coming months, if they are not already. Conserving cash and balance sheets is going to be critical. Also, in the context of general worker and public economic distress paying bonuses and settling share awards is likely to be inflammatory.
Cutting all variable pay or letting high-performing executives go is probably not the solution. Apart from legal or contractual hurdles, companies need their executive talent to keep the lights on during the pandemic and to rebuild their businesses when it is over.
What companies could do, though, is rethink their executive remuneration models. First prize would be to achieve three goals at a single stroke: manage the variable cash component of executive pay, continue to reward top executive talent and free up some cash to keep paying the salaries of other levels of employees, thus avoiding or at least limiting, retrenchments.
How is this possible? Equity models along the lines of the US-style restricted stock model come to mind. Here, top executives may opt for some reduction in their guaranteed pay, and waiver their cash bonuses, and receive ‘restricted stock’ awards instead. These are share awards without explicit performance conditions that vest after three to five years.
We usually call these Forfeitable Shares in South Africa. While we normally encourage purchasing shares in the market to settle employee share awards, new shares could be issued to settle these awards to preserve cash. Employers could then use the cash savings to help keep their workforces – and the economy – intact for when the crisis is over.
This will need to be discussed with local institutional investors. In the sane, pre-COVID times, they were very focussed on having company performance conditions imposed on all forms of variable pay, with no ‘retention’ awards of cash or shares without explicit performance conditions. However, the US model is gaining traction, due to its greater simplicity and explicit alignment with medium- to long-term shareholder interests – share price growth and dividend payments, and this approach now looks compelling in these strange times.
The regulators could assist in this process by deeming the accounting costs of issuing these shares to be tax deductible for ‘approved plans’ in a similar manner to many developed countries such as the UK.
Granted, this cash reduction would call for some altruism on the part of executives, but in crunch times like these, altruism could well be what keeps the lights on in the South African economy.