Global economic volatility to impact executive incentives

By Jerome Doraisamy|05 July 2020
Sydney CBD

The economic fallout of COVID-19 is set to hit Australian boardrooms, as businesses take drastic measures to keep their heads above water, new research shows.

On Monday, Governance Institute of Australia and Aon published the results of their “2020 Board and Executive Remuneration Survey”, which sought responses from directors and senior executives in 433 organisations, including 288 from the S&P ASX 300 Index.

It found that, in almost two-thirds of ASX 300 companies, there were no increases to board fees in FY19. In those organisations where there was an increase, the median rise for both chair and members was just 4 per cent.

In some of the larger financial institutions, interestingly, there were reductions in board fees in response to negative investor sentiment, the authors noted.

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Further, median salary movement for senior executives within the ASX 300 from FY19 to FY20 was 2.4 per cent, except where annual report disclosures were used to derive executive remuneration information. Median salary increases for CEOs came in at 1.8 per cent.

Responding to the results, Governance Institute CEO Megan Motto said that the volatile global economic environment is “set to be reflected strongly” in executive incentives this coming year, with evidence of this already starting to emerge.

As a result, some “difficult discussions” will already be underway, she mused.

“The economic fallout of COVID-19 is impacting boardrooms across Australia as many businesses take drastic measures including widespread pay cuts and [lay-offs],” Ms Motto said.

“There is clearly no one-size-fits-all solution when it comes to managing the impacts of a pandemic on executive remuneration.”

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Aon partner and head of rewards solutions in the Pacific Simon Kennedy added: “As boards will look to balance multiple stakeholder perspectives in determining executive incentive outcomes in FY20, proactive and cogent communication of the rationale used in making this determination to investors, shareholders and the public will be extremely crucial.”

Elsewhere, it appears that many companies have announced short-term changes to executive and director remuneration as a result of the economic impacts of the pandemic.

According to an analysis of recent ASX disclosures of 226 organisations by Aon, 87 per cent of companies will reduce chair and non-executive director fees by an average of 51 per cent, and 72 per cent of organisations announced reductions in CEO fixed remuneration by an average of 37 per cent.

These announcements came almost exclusively (85 per cent) from organisations outside of the ASX 300, which appear to have been impacted “more severely”, Aon noted, with their pay reductions being higher than others by approximately 10 to 15 per cent.

“Setting goals for short-term and long-term incentives for 2021 and beyond will be extremely challenging given the uncertain recovery timeframe. For most companies the performance metrics and indeed the design and terms of the incentives may need a complete rethink. Early engagement with investors in this regard will be vital,” Mr Kennedy said.

Remuneration data captured in the survey covered both board and executives and was effective for FY20, except for the annual report disclosures for ASX-listed organisations which were for FY19, while the salary increases figures for the ASX 300 showed salary movement in FY19 over FY18.

Global economic volatility to impact executive incentives
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