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Head of Executive Remuneration ASEAN/Growth Markets Leader at Mercer Singapore

In a matter of three months, COVID-19 rapidly transformed from a local virus outbreak to aglobalpandemic. While the stress it has put on society at large and on health care systems around the world is unprecedented, it has also nearly brought the global economy to a grinding halt.

This slowdown is likely to be prolonged, and given the scale and severity, businesses need to adapt quickly. In the short-term, organizations will need to adopt some cost-containment measures and rethink their cash flows and working capital requirements.

An important piece of the jigsaw for organizations from this perspective is remuneration. Often constituting one of the largest “controllable” costs, organizations need to undertake careful planning to retain, reward and motivate employees through this crisis.

Extraordinary Times Demand Extraordinary Measures

Several companies in Singapore and around the globe are already implementing executive pay reductions in the form of salary freezes and voluntary pay cuts or reduction and deferral of bonuses in response to the COVID-19 crisis.

While the overall financial impact of executive pay cuts on the company’s bottom line is likely to be limited, such cuts are critical from a leadership, perception and messaging perspective. At a time when share prices are plunging and as companies may need to consider headcount reductions, executives cannot be seen as financially insulated.

From a remuneration standpoint, however, mostsenior executives通过绩效联系的可变薪酬奖励薪酬奖励,支付了总薪酬的重大比例 - 现金和股权。这些奖项必然会受到放缓的显着影响。

To put this in perspective, senior executives in Singapore typically receive between 40%-70% of their total pay in performance-linked incentives, up to half of which could be in long-term equity-based vehicles. In comparison, most other employees only receive between 10%-20% of their total pay in incentives — usually as annual cash bonuses.

Presently, it is critical for organizations to effectively navigate and manage variable pay components by trying to balance the affordability aspects with fairness to ensure that motivation and productivity levels do not drop — which can arguably have a major enduring impact on business performance.

What Can Boards and Remuneration Committees Do?

In Mercer’s discussions with multiple boards and management teams over recent weeks, it has come to light that a number of alternative approaches are being considered with respect to variablecompensation for executives.

One approach includes reducing budgets for annual executive and employee cash incentive programs in light of lowered performance expectations and the need to better manage immediate cash flow and expenses. Organizations need to be mindful to do it in conjunction with reduced performance goals, or management will be doubly penalized with reduced budgets and below-par performance, resulting almost certainly in low or no payouts.

另一个方法就是修改目标激励wards for FY2020 and beyond — especially where they were set prior to the COVID-19 outbreak taking hold. While in some sectors in particular, this is necessary, given the immediate nature of the impact, it is still difficult to forecast the duration and scale of such impact as the situation continues to evolve. It is important to bear in mind that reduced expectations have to be balanced with reduced spending to manage affordability of budgets.

If no adjustments are made to either budgets or targets for incentive awards, given the uncertainty, boards and remuneration committees could make discretionary adjustments at year-end. These would be based on actual outcomes and business response, considering talent risk, pay competitiveness and affordability.

Company boards across industries are responding by reducing their own fee levels to express solidarity with senior management and shareholders.

For equity based long-term incentive awards, there are multiple implications and considerations:

  • Equity based compensation can serve as a useful reward and retention tool, especially when cash spend on salaries and incentives is being reduced. Many startups are adopting this approach to reduce cash-burn rate.
  • 根据业务期望设置未来赠款的长期目标,但允许在绩效计算中排除Covid-19或“重新测试”目标通过赠款周期中途的中途,如果受影响延长并且比预期更深。这将是由机构股东的一种不太喜欢的方法。
  • Given that the share prices for most companies have dropped around 20%-30%, on average, in the last few weeks, any grants made right now would inevitably result in a higher number of shares being awarded, resulting in higher dilution/depletion of share reserves. Boards are considering either delaying the grants to later in the year when share prices normalize, or awarding the same number of shares as last year, using a three-month average share price or capping the dilution impact to normalize share award grants for FY2020.
  • 还有重要的是要注意对当年份额奖励的调整;还必须适当调整受当前爆发的历史奖励。鉴于大多数奖项基于两到四年的汇总性能,公司应从性能计算中排除Covid-19影响时期,以维持方法的一致性。
  • As the full impact and duration of COVID-19 remains unknown, it is difficult to set meaningful and accurate long-term targets for performance-based awards. One way to provide for that inaccuracy is by expanding the range between threshold and superior levels of performance expectations, hedging against significant deviations and avoiding major volatility in pay outs. Another way is to increase the use and proportion of relative performance measures so management is rewarded for how they performed against their peers rather than against absolute targets.
  • Boards are also considering replacing a proportion of the performance-linked share awards with time-vested restricted-share awards. This hedges against any unfair and undesirable volatility in executive earnings, overcoming accurate long-term target-setting limitations and providing a retention tool to secure talent when the business emerges from the crisis. This should inevitably be clubbed with reduced award sizes, longer vesting periods or higher shareholding requirements for executives to ensure they are held accountable for a positive and sustained post-crisis recovery.

在所有这一切中,公司必须采取长期的美联社proach to variable pay, ensuring that executives’ behaviors are aligned with the long-term success of the company.

Responding From the Top

At times such as these, it is important that a company’s leadership team is front-and-center, ensuring they guide their people through the difficult period by maintaining a sense of fairness, commitment and optimism. To do so, they must ensure that they are not seen as protecting self-interest over the interests of employees, shareholders and the broader community.

Company boards across industries are responding by reducing their own fee levels to express solidarity with senior management and shareholders.

In addressing the immediate challenges, it is also important that organizations do not overlook long-term priorities of the business, links to compensation structures and the need to effectively communicate these with senior management and employees. Companies need to acknowledge thattalent is a scarce commodity, and therefore, they must do enough to retain their best, especially as they emerge from this outbreak.

It is heartening to see companies respond to the downturn in humane ways. Some are setting up funds to address hardships faced by their employees while several company executives are foregoing their paychecks to contribute toward humanitarian efforts to support communities.

This is as much a test of leadership as it is of businesses. Those who lead from the front and row the boat to safety while ensuring no one falls over will emerge in the best shape to thrive when this crisis abates.

This article was first published in The Business Times on April 10, 2020.

Nishant Mahajan

Head of Executive Remuneration ASEAN/Growth Markets Leader at Mercer Singapore

Nishant leads the Executive Remuneration Advisory Business forMerceracross the ASEAN market. He currently advises remuneration committees and boards of some of the leading listed and privately owned companies across multiple industry sectors, investor profiles and strategic challenges. He also supports the Singapore Institute of Directors professional development programs and is part of the guest faculty with the INSEAD MBA module on incentives and performance.

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