UK: Glass Lewis publishes Covid-19 guidance

Tapestry Newsletters

29 January 2021

Proxy advisor Glass Lewis has published guidance setting out how it intends to apply its proxy voting recommendations in light of the ongoing Covid-19 pandemic.

Glass Lewis is one of the most influential proxy advisory services and its views and voting recommendations regarding executive compensation carry significant weight with institutional investors. As such, companies preparing their Directors Remuneration Reports ahead of the 2021 AGM season should carefully consider this recent publication.

The publication is intended to act as an illustrative guide for how Glass Lewis would expect to apply its existing policies in the context of Covid-19-related scenarios.  You can access the publication in full here and we have set out the key highlights below.

Pay-for-performance alignment

The publication highlights a number of specific focus areas for 2020/21:

  • Dividends.  Executive pay outcomes should reflect where a company has cancelled or reduced the payment of dividends due to Covid-19.
  • Furlough and lay-off.  Where a company has furloughed employees or reduced staff numbers or salaries, Glass Lewis would expect the remuneration report to explain how such measures were taken into account when determining pay outcomes for executives.
  • Stakeholder perspectives. Any concerns raised by stakeholders in respect of executive pay should be publicly answered.
  • Key financials. In addition to performance targets attached to awards, Glass Lewis may consider performance against other financial metrics, such as absolute and relative TSR, EBITDA, net profit, and historical year-on-year changes.
  • Equity grants and share price. The grant value and number of shares to be granted under long-term incentive equity grants will be scrutinised. Specifically, in situations where windfall gains are likely, Glass Lewis would expect a board to adjust the grant value accordingly and/or implement adjustments to other elements of executives’ pay to mitigate this effect.

Adjustment to pay policy and safeguards

Generally, Glass Lewis is opposed to adjustments to remuneration packages to reflect short-term macroeconomic situations. However, the publication states that it will consider limited one-off remuneration policy deviations provided appropriate safeguards are in place.

  • Target adjustment.  Adjustment of targets for awards yet to be granted is generally reasonable, but where targets are adjusted downwards there should be limits imposed on future pay-outs. 
  • Coronavirus-specific metrics. If bonus plans already contain annual non-financial metrics, Glass Lewis will accept that these metrics could include Covid-19-related targets. However, this does not extend to the introduction of such non-financial metrics where they did not exist previously.
  • Long-term incentives.  If a board chooses to exclude fiscal year 2020 from the calculation of the final level of performance target for outstanding long-term awards, the value of the affected grant should be reduced proportionately.
  • Retention awards. Glass Lewis generally does not like one-off retention awards but accepts that there might be circumstances where these are appropriate such as where a company’s standard incentive plans have resulted in a nil pay-out.

Holistic look at pay outcomes

For companies affected by the Covid-19 pandemic, Glass Lewis is expecting generally lower pay outcomes than previously.  Adjustments to base salaries are not anticipated, but boards should use their discretion when deciding whether to implement anticipated salary increases.

  • Wider workforce. Concerns regarding executive remuneration may be mitigated where a company excludes their executives from proposed adjustments or expands the advantageous effects to below-board employees.
  • Disclosure of adjustments. Any adjustment to remuneration should be supported by thorough disclosure detailing why the adjustment is necessary, (for example, in terms of retention, exceptional efforts by the executive team, or good relative performance).  In a situation where there may be a case for a downward adjustment, if the board resolves not to exercise its discretion to adjust, the rationale for this decision should be disclosed.
  • Unaffected companies. Where companies have not been significantly affected by Covid-19, they should not deviate from their planned remuneration policy.

Tapestry comment
Effective reward programmes are an essential tool to incentivise, motivate and recruit talented individuals who will be responsible for guiding companies through these exceptional times. However, these programmes need to be balanced with a strong link between pay and performance, and being able to evidence this alignment to shareholders is increasingly important.

As Glass Lewis points out in this latest guidance, the burden on issuers for increased disclosure is higher than ever this year, to ensure that stakeholders can fully understand and evaluate remuneration-related decisions. We have certainly seen this across the updated guidance issued by other large and institutional investors in the last couple of months. As we saw with the recent publication of the Investment Association’s shareholder expectations for 2021, the calls go wider than just Covid-19-related disclosures, including climate change disclosures and progress against diversity targets, which could lead to receiving an amber or red top from IVIS if companies are not meeting the required standards (see our recent update here).

Companies will need to consider all the new disclosure requirements when preparing this year’s annual reports.

We recently held a webinar covering Q4 2020 updates to remuneration-related guidance from key institutional investors, looking at their approach to performance conditions (in-flight adjustments and for new awards), ESG metrics, 2020 bonuses, 2021 LTIP awards, post-employment shareholding requirements and all the new disclosure requirements, amongst other matters. If you would like a copy of the recording of the webinar, please let us know.

If you have any questions about the new disclosure requirements this year, or would like any help with your Directors’ Remuneration Report, then please do get in touch.
Hannah Needle FGE & Sarah Bruce

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