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COVID-19: Implications for Remuneration Committees of the Coronavirus outbreak

3 March 2020

At the end of December 2019, Chinese authorities reported the first cases of COVID-19 in the Chinese city of Wuhan. The spreading of the virus over the following weeks within China, and then across the world, has already had a material impact on global supply chains and anticipated demand in certain sectors. As governments, health services and companies respond, developing and implementing contingency plans, Remuneration Committees will need to consider the potential implications of the epidemic on executive remuneration.

Implications for incentive based pay

Whilst some industries are likely to be more impacted than others and the true scale of the outbreak is yet to be known, implications for executive pay include:

  1. Setting targets for FY20 incentive awards – the uncertain and volatile market conditions present challenges in terms of target setting for annual bonus and long-term incentive plans for 2020. However, rather than delay setting targets (the full extent of the outbreak and its implications are unlikely to be known for some time), Remuneration Committees will need to agree targets taking into account current expectations of the impact of COVID-19, but with the mindset that adjustments may need to be made at the end of the performance period (or sooner for LTIPs) to true-up the actual vs the expected impact. Setting a wider performance range than might normally be used could also help ensure incentive outcomes are not unduly impacted by uncontrollable events. The extent to which the impact of COVID-19, in particular, is built into the targets will depend on its materiality and this is likely to differ between annual bonuses and longer-term incentives.

  2. Granting share based awards – stock markets have witnessed increased volatility, with the FTSE100 index falling by over 15% in the past few weeks. For companies where the share price is materially lower than previously, Remuneration Committees will be expected to take this into account when determining the number of shares over which awards should be granted to avoid excessive share dilution and executives potentially benefiting from a windfall gain (should share prices re-bound to their previous levels). Institutional investors will normally expect such an adjustment to be made where the share price has fallen by 25% or more since the last award date.

  3. Reviewing performance for in-flight incentive awards – if circumstances have changed significantly, it may mean that existing performance measures or targets for in-flight incentive awards are no longer appropriate and/or achievable due to factors outside of management’s control. Most remuneration policies and incentive plans allow Remuneration Committees to amend performance targets and/or apply discretion when assessing performance outcomes. However, this can be a contentious area for shareholders. To ascertain the latest views of the investment community on this topic, Mercer │ Kepler recently spoke with a number of leading institutional investors, the Investment Association and Glass Lewis. The initial response was that changes (if any) should be implemented through the use of Committee discretion applied at the end of the period (taking into account all known facts at the time of vesting) rather than through adjustments to in-flight performance targets. Any use of Committee discretion would be considered on a case-by-case and would require compelling rationale.

Factors to consider when exercising Remuneration Committee discretion

The decision on whether it would be appropriate to make an ex-post adjustment to incentives in due course, depends on a number of factors including:

  • Materiality: has performance against the incentive targets been materially impacted by the uncontrollable event?

  • Controllability: how have management responded to the event? Has there been clear, swift decision making and have successful steps been taken to mitigate the impact for the company and its stakeholders?

  • Timing: how long before the end of the performance period did the uncontrollable event occur? Was there sufficient time for the management team to take actions which could have mitigated the impact?

  • Stakeholder outcomes: what was the overall experience for shareholders, employees and customers? Given the increased focus on sustainable capitalism, shareholders will want to see a degree of alignment between any actions taken by the Committee in respect of executive remuneration and how the company has treated its wider workforce through the crisis.

  • Precedent and context: how has the Committee responded to the impact of similar events in the past? Shareholders will want to see evidence of consistent decisions by the Committee.

  • Authority: does the Committee have the authority to make the change within the shareholder approved remuneration policy or plan rules?

For Remuneration Committees to garner support from shareholders and proxy agencies, any proposed adjustments must be backed up by a clear explanation and strong justification. The shareholders that we consulted with indicated that they did not wish to see widespread “moving of the goal posts” but accepted that in genuinely exceptional cases, some adjustment may be appropriate. Shareholders would expect to be consulted in advance about any material use of discretion and would consider the appropriateness of any such proposal in the broader context of remuneration and other mitigating factors (for example, lengthening of deferral or holding periods).

How are companies responding to the outbreak?

Mercer recently conducted a spot survey to ascertain how businesses are responding to the COVID-19 outbreak. The survey gathered information from over 300 companies across 37 countries and includes responses on whether companies are considering an adjustment to incentives in response to the outbreak.

When asked whether companies were adjusting 2020 incentive plans to mitigate the effect of the outbreak, the vast majority of companies (77%) stated that no adjustments have been made or are currently planned. Few companies have confirmed plans to adjust incentives, with adjustments including isolating the China business (4%) and changing or adding performance metrics (3%). 11% of participating firms suggested that discretion may be applied at the end of the performance year/period when the impact of the virus is better known.


Whilst there are factors that can help provide guidance on whether there is a case for incentive adjustments, such as those outlined above, the ultimate decision on the appropriate treatment will depend on the individual company circumstances. With some market commentators forecasting a “bounce back” to China’s economy and global trade in Q3 2020 to make up for lost business in Q1/2, it may be best for any decisions to be postponed to the end of the 2020 when the overall impact can be more accurately quantified.

This briefing is for general guidance and does not necessarily cover all areas of the topics included in this briefing. It is not designed to give legal or other professional advice.

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