How to manage executive pay during the pandemic

Organisations must carefully consider how they treat performance-based compensation to retain talent, says Varun Khosla of Mercer Middle East

Around 30% of GCC companies have made salary reductions of 15-25%, according to a recent Mercer survey. Getty Images

Over the past three to four months, the world has witnessed an unprecedented public health and economic crisis. Covid-19 has adversely affected societies and businesses globally and continues to change the way we lead our daily lives, defining ‘a new normal’ which will have lasting consequences.

While countries have responded to Covid-19 by taking several measures both on the economic and public health infrastructure fronts, the pandemic has also forced organisations to confront questions regarding their operations and employees. As much planning as organisations did, none were prepared for the severe impact of the virus outbreak coupled with the global oil price crisis, which has adversely affected some GCC organisations and industries more than others due to the sudden strain on business operations and loss of revenue.

To stay afloat and ride through these testing times, globally, organisations have taken several cost containment measures, including but not limited to, temporary salary reductions, furloughs, terminations and salary freezes.

Actions taken by the organisations across the GCC countries are very much in line with trends seen globally. As per Mercer's recently published GCC Covid-19 compensation & benefits survey, 70 per cent of the 169 organisations polled have taken cost containment actions. Approximately 30 per cent of organisations have made salary reductions ranging between 15 per cent to 25 per cent for the next three to four months.

In addition to the survey participants, we have also seen similar actions being taken by other prominent UAE organisations that have been badly affected, including Emaar, Emirates and Etihad.

In times like these, as economic conditions continue to evolve and employees continue to live with work-related insecurities, CEOs and senior executives across the GCC have shown strong leadership and thoughtful decision-making by leading the austerity measures, hence, sending an important message to the organisation stakeholders (shareholders, employees, suppliers and society).

Although these pay-cuts are unlikely to have a significant impact on organisations’ bottom lines, they will at least help to ease off the burden on the employees and help organizations to preserve much needed cash-flow.

Half way through the year, with no end in sight of the pandemic and 2020 annual business targets already seeming unrealistic, companies have started deliberating the treatment of 2020 variable pay plans, which is determined by employee performance.

With 2020 turning out to be an unprecedented year, boards, remuneration committees and senior leadership teams across organisations can consider the following approaches to adjust their executive Short-Term Incentive (STI) and Long-term Incentive (LTI) plans.

Short-Term Incentive (STI) plans

• Use mid-year performance review conversations to reflect on individual and business performance achievement over the last six months and accordingly reset/revise targets for the next six months in alignment with the business outlook for the full year.

• Include behavioural and task-based Key Performance Indicators (KPIs) that are less susceptible to the impact of Covid-19.

• Set wider performance goal ranges, for example plus/minus 10 to 15 per cent of annual target/budget, to yield incentive payouts. This may help organisations and boards to mitigate the goal-setting challenges in volatile situations when making business forecasts are difficult.

• Lower or eliminate the threshold performance levels (the minimum performance outcome at which incentive payout begins). For example, the threshold could be reduced from 90 per cent to 80 per cent of 2019 performance achievement to pay the minimum level of incentive.

• Model out incentive plans for potential payouts under various performance scenarios and align them with expectations to be prepared for possible outcomes.

Long-Term Incentive (LTI) plans

• For LTI awards vesting in 2020, fully defer the payout to 2021 or pay out only a small portion in 2020. The remaining portion can be paid out on a pro-rated basis over one or two equal tranches in subsequent years. This can help organisations to manage their respective cash flows and business operations.

• For ongoing LTI cycles: depending on which phase the current LTI cycle is in and whether it commenced in 2019 or 2020, remuneration committees should consider not making any changes to the performance metrics until the economic impact of Covid-19 is better understood.

• With salary cuts ranging between 25 per cent to 50 per cent for the senior executives across the GCC coupled with potential bonus reductions for 2020, board and remuneration committees can consider partial or full replacement of the upcoming performance-based LTI award cycle with retention-based awards. This could play a big role in engaging and retaining the senior and critical talent as the world gets a grip on the pandemic and regional economies and organisations start to rebound.

As boards, remuneration committees and senior leadership teams across GCC organisations start considering how they tackle variable pay plans, it is critical for them to be open and transparent regarding the impact of Covid-19 on the business. That way, employees understand that the changes and related actions are a matter of survival – and not merely related to profitability. Without timely and effective communication and action, post-crisis retention may become an issue, particularly for organisations that implement stringent pay reductions.

Varun Khosla is head of executive compensation at Mercer Middle East