From salary sacrifice to the new Consob rules: it’s going to be the year of the remuneration committees

The crisis is producing unprecedented impacts. In addition to the effects on healthcare, those on the economy are just as significant.

From salary sacrifice to the new Consob rules: it’s going to be the year of the remuneration committees

The crisis is producing unprecedented impacts. In addition to the effects on healthcare, those on the economy are just as significant.

The International Monetary Fund estimates there will be a global economic downturn of around 3% (-9% for Italy), unemployment is rising, the financial markets have burned billions of euros in capitalization and companies are not paying dividends in order to meet their liquidity needs.

Recently, Schroders, one of the leading English fund managers with over €500 billion in assets under management, wrote a letter to British issuers in which they said that, never as in the current moment has it been so important to “share the pain”:

corporate managers must also bear a part of the sacrifice.

More than 70 companies in the US have already announced a reduction in the compensation of their CEOs and managers. For example, top managers at Disney and Delta Airlines have given up all or part of their fixed salaries. Similarly in the UK, top managers of over thirty companies have reduced their salaries.

Also in Italy, a number of listed companies have announced
a “salary sacrifice”.

Companies including FCA, Pirelli, Tod’s, Luxottica, Intesa Sanpaolo and Generali have instated cuts in the salaries of their CEOs, management and board members. In most of these cases, these initiatives involve the fixed component of remuneration.

Institutional investors are showing themselves to be very sensitive on the question of salary sacrifice for corporate management, especially in those sectors most severely affected by the crisis (tourism, retail, air transport, etc.) and which could benefit from government assistance.

In particular, taking into account that for top management the variable component of remuneration could even be more significant than the fixed part, the fear is that what goes out the door will just come back through the window. Specifically, they are concerned that performance goals may be revised (lowered) and, perhaps even more significantly, that managers will possibly be involved in medium/long-term incentive programs based on the allocation of financial instruments (shares or options) which, if made at current low prices and in the event of a major recovery in stock values, could result in a very significant variable remuneration which does not necessarily reflect real value creation.

For years, the issue of compensation has been one of the major aspects the market—and institutional investors in particular—watch closely.

For example, in the latest rounds of stockholder meetings, on average, 80% of the negative recommendations from proxy advisors (investor voting consultants) involved top management remuneration.

This year, there will be much pressure on the committees which will be called upon to manage a clear trade-off. On the one hand, the market asking that the sacrifices be “shared” and, on the other, the need to ensure motivation of key resources and talent loyalty.

Many issues remain unresolved. While awaiting the normal revision of budgets and industrial plans (many companies have already modified the guidance for 2020), what will happen with the MBO (short-term incentive) systems which were most probably already been communicated during January-February 2020?

More or less all plans provide for the possibility of goal restatement, but this is something investors do not like. How can a new, long-term incentive plan be designed (especially if it is based on financial instruments), taking into consideration current share prices (which probably do not reflect the true fundamentals of the company)? Added to this scenario of uncertainty is the probable entry into effect of the Consob regulation that will create (major) changes in the content of the upcoming remuneration relations to be published in 2021. These are all highly-relevant issues that over the coming months will fill the agendas of remuneration committees and for which efficacious answers are needed.


by Marco Visani, Head of the Governance & Executive Compensation unit of The European House – Ambrosetti and Beatrice Tarabelli, Consultant, The European House – Ambrosetti.

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