THE IMMEDIATE AGENDA
The Covid-19 crisis has created many significant challenges for businesses. Admirably, most are pivoting rapidly to flexible working arrangements, improving their digital engagement with customers and adapting the mix of products or services offered.
Similarly, HR/Reward professionals and Remuneration Committees are having to be nimble in rewarding both top executives and the wider workforce in ways that are internally and externally defensible. Some of the key factors they will need to consider over the next three to nine months are as follows.
There is no playbook. Most incentive and reward structures are not designed to handle the level of performance volatility and stakeholder impact triggered by the Covid-19 crisis. Companies will need to take flexible approaches, potentially taking into account a wider set of factors and more use of discretion.
It’s a multi-speed world. The pandemic has impacted sectors and companies very differently. We expect to see the general level of incentive payments and salary increases to be down relative to last year; we also expect to see much greater variation between companies. And many businesses face dilemmas about how to deal with internal relativities fairly where the impact of the virus has varied between divisions or regions.
It’s a tough time to be a CEO. Investors will be scrutinising CEO reward particularly closely. The general principle articulated by shareholders and supported by most Boards and management teams is that the CEO and other disclosed executives should be treated no better than other staff. The consensus is that rewards should take into account furloughing, redundancies and government support as well as more predictable considerations like the shareholder experience.
In this context, investors are more likely to accept, for example, a bonus or salary increase for the CEO where this is part of an initiative that applies to most or all staff. By contrast, investors have made it very clear that 2018-20 long-term incentive targets for Executive Directors should NOT be adjusted. However, several clients are taking more flexible approaches for executives below the Board.
Performance focus. The pandemic has raised short- and long-term challenges and opportunities for businesses. This may imply a nimbler approach to selecting incentive targets: either tactical (conserving cash or maintaining market share), strategic (repositioning the business to take advantage of new opportunities or the weakness of competitors) or pragmatic (more use of relative measures or time-vested shares to mitigate unpredictability). Encouragingly, most investors are taking a reasonably flexible line on how future incentives are operated (in contrast to a harder line on in-flight plans).
THE 12-18 MONTH AGENDA
Getting motivation and engagement back on the agenda. Many Remuneration Committees are understandably keen to avoid significant ‘against’ say-on-pay votes. However, there is a danger that the governance becomes the only lens through which top pay is considered at the expense of ensuring it is retentive, motivating and aligned to business priorities. As and when we emerge from the current recession, some Committees may turn their attention to this issue.
A wider view of performance. We are already starting to see a significant uptick in the use of Environmental, Social and Governance (ESG) measures in executive incentives. This is now a requirement in France and Germany and many of our UK clients are planning to implement such measures in the coming two years. The approach varies by sector with traditionally ‘dirty’ industries and manufacturers focusing on environmental and safety factors, consumer companies looking at the customer experience and how environmental responsibility can be part of the customer value proposition, and almost all companies looking to reduce carbon emissions. Most companies are taking a low-risk approach with a weighting of up to 20% and are more likely to introduce ESG into the annual incentive rather than locking in three-year targets in the LTIP.
Rewarding home workers. Most sectors are expecting to see continued significant use of homeworking with 30% of Mercer survey respondents saying at least 50% of their workforce will be based mostly at home. What does this mean for the consistency and structure of reward?
- We are seeing some organisations look at simplifying their approach to salaries and removing any regional weightings they may have historically provided. Why pay London rates for a job that can be/is being done elsewhere? With some high-profile exceptions (e.g. Facebook) this is likely to be looking forward rather than taking anything away from current employees. However we do expect to see more variation in pay levels and increases, with pay bid up for scarce digital skills and stagnating in some areas where there is labour over-supply.
- With homeworking extending longer than many organisations initially expected, we anticipate a growing emphasis on equipment (technology and furniture) and physical wellbeing. As an employer, what do I need to provide for employees working from home (either significantly, partially, or full time)? How much should I contribute towards this versus what should the employee pay given that both employers and (most) employees are likely to enjoy net savings from home working?
- For most companies, office costs will be a top-three expense, and therefore lots of organisations are reviewing the size and locations of offices to see if they can be downsized, closed or relocated. Can current buildings be adapted or enhanced to facilitate more collaborative spaces that are adaptable to the changing numbers of heads on a day-to-day basis?
Peter’s comments really resonate with what we are experiencing at Nokia. At senior levels the definition of performance and alignment with shareholders’ experience is highly relevant. There seems to be a real sense from the investor community of taking
a more holistic view of performance, including an ESG metric, but in a positive way. At Nokia we view this as a way to make sure we remain relevant to our customers, particularly with metrics like carbon footprint, and supporting our customers to be more efficient and sustainable in the future.
On a wider workforce basis, the whole concept of going into the office and managing real estate costs is of course relevant. We see this bringing a multi-dimensional challenge – ensuring employee welfare and engagement while having the opportunity to employ people more flexibly. This is alongside the challenge of managing a wider variety of locations and the turbulence in local labour markets as geographic separation becomes less of an issue. Understanding how far Silicon Valley budgets will reshape labour rates in far-flung markets remains to be seen, but now that the big tech companies have clearly learned to adapt, the need ‘to be in the valley’ is not as singular as it once was. We are expecting it to become easier for the global players to hire where the real talent is (not just in Silicon Valley). Taking that financial firepower with a new, more geographically flexible operating model could well see some disruption in less obvious labour markets and locations.
We are also seeing a faster-changing world and the need to pay for current and emerging skills changing more quickly. The need to move from role-based pay to skill based pay, and benchmarking, is starting to build and the availability of AI offers opportunities to build market intelligence in different ways.
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