Push the reset button on pay

It’s increasingly clear that the Covid-19 crisis is going to have significant and sustained impact on economies around the world. Tens of thousands of people will die. Millions of people may lose their jobs. There is no ‘upside’ to any of this, but there is plenty of downside risk for those least able to shoulder it.
As we have written previously, this global catastrophe is revealing just how much of that risk some of the lowest paid workers in our societies are exposed to. Delivery drivers on temporary contracts can’t work from home, and won’t self-isolate if they have no sick pay. Workers in the hospitality industry on zero hours contracts get paid zero when they aren’t needed. Nor is the inequality in our economies only economic in nature. Modestly-paid public sector health workers will be on the front line, putting their own health at risk, whilst those of us who can afford to sit at home with our laptops. This is a debt that needs to be repaid, and that repayment should start at the top.
At PIRC we are long-time sceptics of the value of performance-related pay for directors. The idea that the richest in our society still need to be ‘incentivised’ with bonuses, LTIPs and the like is hard enough to swallow at the best of times. Watching medical staff worldwide throw themselves into the battle against Covid-19, without any expectation that they will be paid a single penny extra as a ‘bonus’ for their efforts, but with the expectation that some of them will die, requires us to rethink things fundamentally.
Last week we wrote to companies urging them to suspend all payments to executive board directors other than base salary, to demonstrate their understanding of the need for restraint. Because there is a risk of some very jarring pay outcomes ahead. The emphasis on trying to make executive remuneration more palatable by making it ‘long term’ (rather than just lower) means that awards lag. Executives can end up getting big dollops of cash or shares, based on previous performance, just at the moment that things turn bad. There is a real risk of this happening this year, unless boards and directors exercise common sense.
But this is a feature of the system, not a bug. If we insist on large amounts of deferred, variable reward this will always happen at some point. It’s just that the Covid-19 crisis has made the contrast much sharper. So let’s use this as an opportunity to put common sense back into the stucture of pay.
There are many, many people both inside and outside of boardrooms who think the current nature of executive pay is junk. Either they don’t believe incentive pay – especially with long-term deferral – really works, or they can’t justify pay differentials, or both. So why don’t we reset the pay debate? What is wrong with executives being paid like the rest of us – with a salary. Let’s scrap as much of the variable reward, and the plethora of targets that go with it, as possible and make base pay the core component. It’s much simpler – which is what everyone says they want – and will leave investors free to spend more time on issues that really matter. More importantly it is much fairer.
If directors want to be able to look the frontline medical staff in the eye once this is all over then accepting that they shouldn’t need large incentives to get them to work is really the least they can do.

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