Pay is in the news again. This time boards have been warned that pay should not be excessive, especially if their companies have received pandemic furlough money that has not been paid back. The ethical dimensions of pay in a world of Covid-19 continue to multiply.
This week’s fresh focus on pay takes place in two acts: one from the Investment Association, an organisation for institutional investment managers; and one direct from $3.3trn global investment house Fidelity.
Fidelity’s action took the form of a letter written directly to the boards of FTSE 350 companies. The note is reported to have warned boards that a “restrained approach” should be used for pay arrangement this year, alongside an emphatic warning that investors will vote against pay bonuses at corporates where furlough money has not been repaid.
Elsewhere, investors combined their voices with a warning through the Investment Association, which last week issued a sharp missive not only on pay but also with a warning over the climate crisis and ethnic minority representation on boards, one of many to come in the last few weeks.
The IA warns that investment managers will “continue to shine a spotlight on executive pay”, following a warning that companies should treat their executives “in line with the rest of the workforce”.
The IA’s concern is that remuneration committees might feel the need to boost pay this year to make up for income lost during the pandemic in 2020.
The IA’s note says: “Investors have warned remuneration committees not to compensate executives for reduced pay as a result of the pandemic by adjusting this year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases.
“Investors also do not generally expect bonuses to be paid if a company has taken government or shareholder support—any company that chooses to do so is expected to provide a clear rationale.”
Pandemic puts pressure on pay
Among observers there is a recognition that executive pay remains a contentious issue, but the pandemic has given it extra bite.
The Institute of Business Ethics’ (IBE) most recent attitudes survey found that pay remains a top three issue among those polled behind corporate tax avoidance in the top spot and environmental responsibility in second. Pay has, however, dropped from second place among public concerns, and is more likely to be a cause of worry for those aged over 55, rather than other age groups.
In January, research from think tank the High Pay Centre revealed that the average FTSE 100 chief executive pay is currently 120 times that of the average worker.
Some, however, note a change under way in some boards. Sandy Pepper, a professor and executive pay expert at the London School of Economics, told Board Agenda in January: “More generally, there is some evidence that companies are taking notice of increasing pressure on executive pay which is being applied by institutional investors like BlackRock and the Norwegian sovereign wealth fund.”
Mark Chambers, associate director for governance with the IBE, says decisions about what to do with furlough money will be “hard” with conditions varying from company to company. It’s worth bearing in mind, he notes, that furlough money was not lent, so there is no obligation to pay it back. However, reputation looms large as a secondary consideration when weighing the issue of repayment. Choosing to retain furlough payments might also present a decision to be covered in section 172 reports.
“Those businesses that can afford to repay furlough payments will need to balance the reputational challenges if they choose not to,” says Chambers.
“Those challenges will increase markedly if the company is able to pay dividends or reward senior executives at anything like pre-Covid levels.”
Companies that choose to repay furlough cash early receive a “reputational boost”, while “those that don’t will need to explain their decision,” he says. “For larger companies choosing not to repay: this is surely the sort of board decision that deserves explanation in their next section 172 report.”
Which raises a tricky issue. Section 172 reports are about corporate consideration for wider society, part of a drive towards a “stakeholder” model of accountability. How will a board justify a decision to hold on to furlough cash paid for by tax payers?
The question is fraught with discomfort and is no doubt being felt in boardrooms up and down the country. Investors have begun to give their views. It’s now up to board members.