2021 is both an exciting and difficult time when it comes to executive remuneration. In this year’s executive directors report, PWC shows that COVID has tilted many rigid remuneration structures towards more flexible and discretionary rewards systems in JSE listed companies.
Furthermore, the report looks at the ever-growing integration of ESG thinking into C-suite remuneration and finds that responsible and ethical governance are key factors in the “new equation” for calculating executive reward. This in in line with the June media release from the South African Reward Association, who suggest that “Covid-19 brought about a far greater moral approach to executive pay and incentives.”
Remuneration committees (RemCos) have had to make difficult choices in 2021. The South African Reserve Bank’s Guidance Note 4/2020 urged companies to avoid paying c-suite bonuses and instead conserve capital, particularly where middle and lower level employees were impacted by pandemic-related cutbacks. While this seems to intuitively make sense, many executives objectively met performance targets and, in terms of their short and long-term remuneration contracts, were owed bonuses for exceptional work in exceptional circumstances. This is where tough conversations had to happen around how best to navigate what appeared to be a catch-22 for Remco’s.
Short and Long-Term Incentive Trends
Noting that most companies don’t disclose the extent to which discretion played a part in business decisions, PWC highlights the following trends emerging:
Non-payment or deferral of Short-Term Incentives (STI)
Use of different performance conditions to qualify for an incentive
Introduction of STI deferral mechanism/settlement of a portion of the STI in shares
Delaying the setting of performance targets
Suspension of the implementation of a revised STI plan
Postponing the making of LTI awards and setting performance targets
Business-as-usual LTI awards
Implementing broader performance ranges and/or reducing thresholds
Adjusting existing performance targets for awards made during employment
Conditional retention awards to curb the impact of non-vesting of LTIs
Pre-empting the need to adjust future LTI vesting outcomes
Amendments to the performance period
The Case for Diversity
Much research and discussion has been focused on the business performance benefits of fair and responsible remuneration. PWC highlights the fact that ethical considerations should come before any evaluation of performance. A remuneration policy plays a fundamental role in shaping the culture of an organisation: how people are treated in ranking, assignments, pay, and decision-making participation are concerns that a well-designed remuneration policy addresses and defines. Through this mechanism, companies can make a difference by harnessing and celebrating internal diversity. The PWC report suggests that creating fairness within companies, beyond that which is publicly visible, plays a vital role in addressing current and past social injustices and inequalities.
There is a general sense that companies are currently doing everything in their crisis-management playbook to stay afloat and that this state of affairs means that issues like diversity and inequality should be ‘put on ice’ for the time being. This is at odds with the reality that the COVID-19 pandemic has exacerbated gender and race inequality. The pandemic has had a disproportionate effect on women who, on average, had to bear the burden of unpaid labour during periods of lockdown. The PWC report further mentions that there is a distinct lack of cohesive strategies in businesses worldwide to address these issues.
Remuneration Committees globally are re-setting incentive structures to better accommodate a broader mandate. What’s more, C-suite executives are seeking changes to their remuneration plans. The pandemic has highlighted better ways for business to add value and disclosed where processes and organisations require renewal. While compensation is ultimately the decision of a remuneration body, ordinary shareholders are no longer passive. Improvements in financial reporting and disclosure of executive remuneration also allows ordinary shareholders to better understand how management are being remunerated. In addition, the role that non-executive directors play within internal structures such Remuneration Committees has been brought into sharp focus recently.