The State is back: Covid-19 is a game-changer - (Esop) Centre
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Vol 36 No 8 May 2020
The State is back: Covid-19 is a game-changer
Urgent corporate governance reform will be sought From the chairman
throughout the western world to reflect the new pre- NO PLAGUE WITHOUT A SMOKE - Sam Pepys
eminence of the state’s role in economic
came into his own at the time of the Great Plague
management in the wake of the Covid-19
of 1665. He buried his cheese in his garden to keep
pandemic.
it safe. It even became known as Pepys's plague so
The Esop Centre joined the many voices calling for
well did he record it.
an urgent redefinition of relationships between
He would not even have been fazed by the French
employers and employees in the private sector, as
the spectre grew of registered UK unemployment at
discovery that smokers are less likely to die, which
least doubling to more than three million, once has led Macron to confine sales of nicotine patches
taxpayer subsidies currently safeguarding jobs are to pharmacies.
removed. In such conditions, rising wealth When Pepys saw red crosses marked on houses in
inequalities will be exposed as never before, which Drury Lane on June 7 1665 he felt "forced to buy
could affect social cohesion. some roll-tobacco to smell to and chaw - which
Concerns were crystallised in the US by Walt took away the apprehension". A boy at Eton recalls
Disney empire heiress, Abigail Disney, who that he was never flogged so hard as he was in that
criticised the company for protecting executive year - for not smoking. Plague pits can be
bonuses and paying dividends of more than $1.5bn identified by fragments of the clay pipes on which
(£1.2bn) while cutting the pay of more than the sextons puffed hopefully.
100,000 employees to help weather the financial For scientific evidence of the role of the plague in
impact of Covid-19 (see full story on page 16). deaths we had to wait some 350 years till this
Meanwhile, the financial services sector was on the century. Then as now there were “pre-existing
brink of major structural change - more employees conditions” in nearly 90 percent of plague victims.
working full time from home, online and video- Instant knowledge is more than we can expect.
conferencing; factory-style shifts to limit the Malcolm Hurlston CBE
number of employees in the office at any one time;
one in every two desks pulled out to aid social
distancing; screening employees before letting them in which power migrated from states and
into the office, top of the range air filtration systems governments to market. Universal Credit has
and so on. consequently been transformed overnight from the
absolute minimum needed to keep ‘benefits
The Financial Times called for further radical
scroungers’ alive to a lifeline for hundreds of
reforms as multi-billion pound welfare and aid
thousands of newly unemployed workers and self-
packages were announced, believing that
employed.
unequivocally “the state is back”; as “the virus lays
bare the frailty of the social contract” and “an “This same conclusion I believe will be drawn by
irregular and precarious labour market,” with employers in respect of their extreme market-driven
welfare support of just £94.25 per week on and one-way-flexible reward policies. The
statutory sick pay or £317 a month on Universal responsible employer and their comprehensive,
Credit. security and support-driven reward package is
back.”
Esop Centre director, Alderman Professor Michael
Mainelli, said: “As a Financial Times leader article In a recent Long Finance paper, co-authored with
noted, the pandemic has exposed the limitations of Paul Taffinder, Professor Mainelli argued: “The
unfettered markets…and marks the close of an era scale of monetary and fiscal interventions by
1governments is breathtaking. It may be that this first’ as they battle to survive the lockdown. The
scale was essential. It may be that governments, City asset manager wrote to distressed firms
having decided on various forms of lock-down had offering rescue capital quickly, but in return said it
to take responsibility for the economic impact. It expected boards ‘to suspend dividends and
may be that financial services could only have a reconsider management remuneration’.
minor role in saving its own system, but it seems to Professor Mainelli called for the re-birth of job
have been mostly bypassed in favour of direct evaluation and pay structures, so that all staff,
government control of the economy. Post-Covid- including executives, are paid on a common basis,
19, in a world with governments assuming more fairly in relation to their skills and responsibilities
and more control of a shrinking GDP, the and for men and women to be paid equally, rather
resulting world may be one similar to post-WWII than continuing to import market-biases and
where the UK government comprised more than 60 premiums.
percent of the economy. There can be little doubt too that significant direct
“So far, financial services may be functioning, and indirect tax increases are on their way,
trundling along while government takes the especially for the wealthy of western Europe, once
commanding heights of the economy as a the pandemic is contained and nations get back to
sideswipe to addressing a pandemic, but the work. The business and jobs loan packages
performance of financial services in this crisis is launched by western governments are so huge that
not a shining one.” the annual interest bills faced by state exchequers
The worst example so far, said Professor Mainelli will run into billions, despite borrowing rates being
was the UK banks failing to take the initiative over at record lows.
scrapping £8bn worth of their own planned Professor Mainelli’s views were supported by
dividends amid recession fears – the need to former Tory leader William Hague, who wrote in
preserve capital in a crisis, rather than favouring ‘The Telegraph’: “The sharpest recession of our
shareholders. ‘‘That should have been an obvious lives will push to the forefront of politics
pitfall, though there are sensible counter- fundamental issues about the taxation of wealth, the
arguments of ‘business as usual’ dividends. case for basic income provided by governments and
However, this issue is now being seen as a the responsibility of companies for their employees.
decision taken by government, and not by It has been the natural tendency of the new
managers, and that is certainly not favourable for technologies to widen inequality, increasing the
banking leaders.” returns to capital, rather than labour and leaving
He warned: “Financial services may find ‘post- poorly educated people out of the (erstwhile)
Covid-19’ particularly painful. There may have booming global economy.
been an opportunity, sadly certainly missed, for “With young people the most severely affected
financial services to lay out how, working with socially and economically – the year they are losing
government, the sector could help people and can never be restored and the jobs they were
businesses through the crisis. Instead, whatever hoping for will be in shorter supply – the issue of
opportunities do exist have been left to how to handle the vast debts now being
government, and government has largely been accumulated will shoot to the top of election
bypassing financial services with perhaps the agendas. Political parties will campaign for debt
exception of a general reliance on payment forgiveness and write-offs and for the cancelling by
services. Some financial services sectors are central banks of money borrowed by governments,
working harder through the Covid-19 crisis, such with inflationary consequences.”
as share scheme and investment management firms Aspects of corporate governance which are coming
working overtime to reassure investors of their under immediate focus are: executive reward levels
positions. There are heart-warming tales of and equity incentives in public companies, the size
accountancy firms - smaller ones at least - offering and frequency of dividend payments to
immediate discounts and deferring fees. Not all shareholders and financial engineering strategies,
financial services are tarred with the same brush, such as corporate share/stock buy-backs and short-
but still...” selling by hedge funds. One problem which
The left-leaning High Pay Centre insisted that remuneration consultants will have to meet head on
government bail-outs and employee pay support of is whether to advise that deeply underwater share
large businesses affected by Covid-19 must options in executive incentive schemes be re-priced
include social and environmental conditions to take account of the steep falls on global share
including: fair pay, fair tax contributions and markets, or whether existing options be left to
worker representation on company boards. either recover in value or wither on the vine and be
Schroders agreed, saying that companies replaced with new sets of option incentives pitched
should ‘put employees, customers and suppliers at the new lower level of share prices.
2When normality returns, the pressure on UK plc to young people because they were suffering most
reduce comparative pay ratios within their from the lock-down and consequent mass
organisations will be huge. Will a £5m-a-year ceo unemployment. Since many young adults were
expect his or her reward package to receive a disenchanted with share ownership and markets,
universal nod of approval? The UK’s notion of the awarding them share stakes in state-rescued
term ‘key workers’ has changed. Since such sums companies could bring them back into the fold. The
are usually fuelled by share-based incentive government has already suspended the commercial
schemes, fund managers will come under pressure franchises of passenger rail companies for six
to urge remuneration committees not to re-draw months, effectively putting them into temporary
performance targets in executives’ favour. nationalisation and the same medicine could be
President Trump’s concessions on US executive dished out to other distressed sectors.
compensation levels in order to get the CARES It seems probable that UK taxpayers will end up
Act through Congress have put down a marker owning substantial stakes in some of the start-ups
over what may no longer be acceptable or even currently being protected by Chancellor Rishi
admirable in the size of reward packages received Sunak, who promised £1.25bn worth of support for
by senior US executives. Distressed US businesses those ineligible for current Covid-19 rescue
seeking state loans or loan guarantees via the $2 schemes for SMEs.
trillion CARES stimulus package must agree that, The Centre will argue that all employees –
from the date on which the loan or guarantee including other workers not technically employees -
agreement is executed until one year after the loan in those businesses in which the state is forced to
or loan guarantee is no longer outstanding, total take an equity stake should be offered a portion of
compensation (including salary, stock and the state’s equity stake, perhaps in the form of
bonuses) and severance of certain employees will discounted shares.
be limited. Specifically, *Applicable businesses The Treasury will match up to £250m of private
may not award employees receiving calendar year investment and add £550m to an existing loan and
2019 compensation above $425,000 pa (£342,740 grant scheme for smaller firms that focus on R & D.
sterling); or more compensation than they received To qualify to receive taxpayers’ money from the
in 2019 or severance pay or other benefits upon ‘Future Fund,’ a company must have raised
termination exceeding twice their 2019 £250,000 privately in the last five years. The
compensation amount – a condition which freezes matching investment in start-ups will be between
middle management pay in those US companies £125,000 and £5m and must be matched by private
forced to apply for taxpayer loans to tide them over investors. If the money is not repaid, the
the crisis. *The knock-out clause for top government will take an ownership stake in the
executives is that officers or employees receiving company. The state-backed investment in start-ups
annual compensation of more than $3m will come in the form of convertible loans, which
(£2,420,000 sterling) may not receive total means that if they are not repaid, they will convert
compensation in excess of $3m, plus 50 percent of into equity in the company. The new scheme is
the excess above $3m. So a senior executive who designed to provide liquidity in difficult times and
received $10m in total reward last year would have promote private investment, rather than have the
to ‘lose’ $3.5m of that amount this year, in order to UK government owning equity in a large number of
permit his/her company to make a valid application struggling tech companies, said the Treasury.
for loan assistance under the CARES Act. *France is to bar companies whose HQs are
Politicians, shareholder activists and social registered in tax havens, or who have subsidiaries
lobbyist groups will seize on this new $3m reward benefiting from low-tax regimes, from receiving
benchmark number, as an arbiter of the maximum any government aid during the Covid-19 crisis.
reward to be considered as ‘fair’ from now on. In France has pledged to stump up billions to help
the UK, £2,420,000 pa is easily beaten by many companies avoid folding during the nationwide
FTSE ceos and so pressures on top UK executive lockdown, which is set to be gradually lifted
remuneration levels will ratchet up further. beyond essential sectors, starting from Monday,
*Young people should be given shares in May 11. However tax havens are hard to define
companies rescued by the government, said former since Luxembourg, Monaco, the Netherlands and
10 Downing Street deputy policy chief, Will Ireland are tax havens to which many EU countries
Tanner. He proposed a scheme similar to that prefer to be blind.
operated by Mrs Thatcher when BT was privatised *Companies are reviewing employee reward plans,
in 1984, when ten percent of the equity was reported EQ Boardroom update. Some companies
reserved for BT employees. Mr Tanner, who runs are deferring bonus cash payments or converting
the think tank, Onward, urged the Treasury to them into shares, given the current economic
reserve a portion of Covid-19 shareholdings for environment. If a company is evaluating cash
3retention measures and has cash bonuses to pay payments or making changes to their workforce
over the coming months, it needs to review a range pay, members will support boards and
of factors: HR and finance teams need to determine remuneration committees who demonstrate how
whether discretion is available under the rules of this should be reflected in their approach to
the scheme and whether there will be accounting executive pay.”
consequences; is the remuneration committee likely The head of Federated Hermes’s investment
to endorse proposed changes? Are there sufficient stewardship, wrote an open letter to ceos too,
shares available within the company’s EBT– or will saying it would “urge companies to strengthen
new shares be needed under the headroom rules? their balance sheets and act in their long-term
Other issues include whether to use free shares, interest when making capital allocation decisions”.
possibly using a short deferral period of a week or Hans-Christoph Hirt added: “management
month to collect instructions, or nil-cost options, remuneration should be appropriately aligned with
with employees choosing when to receive shares the experience of the wider workforce and society.”
and the taxation point; if shares are used, will Federated Hermes manages $575bn in assets,
employees be able to execute trades promptly? including large holdings in major companies in
Consider any knock-on effects to share trading both the US and the UK. Mr Hirt warned: “The
facilities. When making their instructions, review world will not be the same again – or at least, it
the vesting choices given to employees about what should not be. We look forward to working with
to do with the remainder of their shares after tax you on a more sustainable form of capitalism
and NICs costs are covered. Any adjustments that during this unprecedented time and post-crisis.”
the company decides to implement need to be Media attacks on short-selling company shares and
explained carefully to all share plan participants. corporate share buy-backs are growing, even
The Chartered Institute of Personnel and though companies sometimes buy back some of
Development found in its latest reward survey that their shares to honour employee share plan and
individual performance is the most common form share option incentive pay-outs (as an alternative
of variable pay, used by 62 percent of those with to issuing new paper).
bonuses. Yet Cinderella collective bonus plans have Semler Brossy, the US executive compensation
a much stronger record in research, it said. Greater company, reported that 97 companies in the
use of collective pay schemes, such as profit and Russell 3000 stock index had made reductions to
gain-sharing, coincides with better site and ceo salaries before the end of March and the
organisation performance (Eurofound, 2015). For average reduction was 67 percent. The ceos of big
example, Benson and Sajjadiani (2017) report that US retail names, such as Burlington, Capri
manufacturing plants that use gain-sharing plans (Michael Kors), Macy’s and Neiman Marcus, have
experience greater productivity, higher quality and refused to take any more salary for the time being.
other performance improvements. Last year, the ceos of 181 large US corporations,
UK employers need to divert their attention from members of the Business Roundtable, signed a
executive and individual incentives and let all document pledging their commitment to run their
employees and valued co-workers share financially companies for the benefit of employees and
in the benefits of their success, said Centre communities and not just for shareholders.
chairman Malcolm Hurlston CBE. However, until a few weeks ago, some of these
*The Investment Association (IA) wrote to the signatories were still busy operating share buy-
chairs of all FTSE350 companies on behalf of its backs, paying out shareholder dividends and, in a
asset management members, saying: “Members few cases, seeking reward rises for their top brass,
recognise that it is for the board to decide on the said The New York Times.
payment of a dividend. In addition, they agree that The Financial Services Forum, comprising most of
companies should consider whether it is suitable America’s biggest banks, announced that its
and sustainable for a dividend to be paid in light of members would not make any more stock buy-
the current crisis and whether employees and backs during the second quarter of this year due to
suppliers can be paid. At the same time, the IA the pandemic.
stresses that dividends are an important income *The chancellor’s 80 percent emergency loan
stream for pensioners, charities, savers and funds guarantee scheme for larger SMEs got off to a slow
and therefore companies should not unnecessarily start, with only £1.1bn taken up 6,000 businesses
reduce their dividend level and they should restart by mid-April. Certain banks were being blamed for
payments as soon as prudent to do so. Ultimately tardiness over approving loan applications, for fear
companies are warned to be transparent about of being left with the uncovered 20 percent of the
their approach to dividends, particularly if seeking outstanding loan, should the business later fail.
additional capital.” On executive reward, the IA *More than 3.2m employees had been placed on
letter said “If companies are cancelling dividend official furlough after the first three days of the
4Treasury’s paid leave programme, as employers commercial paper issued by 35 companies and had
raced to get them registered for rebate before the given approval to another 40 companies to draw a
end of the pay month. HMRC had received further £28.4bn
435,000 applications from employers seeking *The new Coronavirus Large Business Interruption
financial help with their wage bills. Under the Jobs Loan Scheme, a scheme run by the British Business
Retention Scheme (JRS), 80 percent of the Bank, aimed at supporting mid-cap and larger
employees’ wages, up to a monthly limit of £2,500, businesses with a turnover of more than £45m; and
will be covered by taxpayers, who most likely will *The Coronavirus Business Interruption Loan
foot a bill of up to £50bn, as the scheme is being Scheme, a scheme run by the British Business
extended until the end of June. Employers pay their Bank, aimed at supporting smaller businesses with
employees and then reclaim the 80 percent of a maximum turnover of £45m. Under this latter
normal wages from HMRC at the end of the scheme, 16,600 businesses had secured loans (out
month. Bird & Bird advised companies using JRS of 28,000 applicants) to a total value of £2.8bn to
to obtain the written consent of the furloughed date, announced Business secretary Alok Sharma.
employees, rather than relying on their implied *Companies rescued by EU state share-buying
consent. programmes during the pandemic will be barred
During the pandemic, HMRC’s usual 3.5 percent from paying executives bonuses, according to a
annual interest on deferred tax payments will be leaked document from the Commission seen by the
waived. Guardian. The restrictions, which would extend to
Richard Harris, chief legal officer at recruitment a ban on dividend payments and share buybacks,
consultancy Robert Walters, said: “The chancellor could be imposed on companies where the
has offered a package of support for vast swathes government has taken an equity stake in order to
of the self-employed and freelance community. This keep them afloat through the global pandemic. If
is Keynesian – a new New Deal- but with the self- backed by the EU’s 27 member states, the rules
employed rather than big industry and it would apply to the UK too, at least until December
underlines the huge importance of the gig economy 31.
to UK plc – and, as the chancellor put it, ‘righting *Many Centre members, particularly major legal
the ship’. This is a lifeline for many. However, groups and share plan administrators, established
Rishi Sunak is focusing on helping those least dedicated Covid teams of professionals to advise
likely to weather the storm. The self-employed clients on a host of issues, including employment
making profits of over £50,000 are not part of the conditions, contracts disrupted by the pandemic,
scheme. This will adversely affect those in white- getting financial support from the government,
collar professional jobs. Perversely, those putting what the economy might look like in two years’
large amounts of expenses against their income - time, what to do when employees go down with the
who are on the cusp of this threshold - may be virus and so on.
inadvertently better off. I believe the chancellor *Pension consultancy firm, LCP, estimated that
has gone for simplicity and quick-delivery rather more than 500 companies would take advantage of
than trying to save everyone and he is an emergency measure under which the trustees of
unapologetic about this stance.” company pension schemes can allow them to
The current three state-sponsored bank funding postpone paying top up contributions for three
schemes for distressed businesses are: months. The hope is that they will preserve cash
*The Covid Corporate Financing Facility, a and catch up with the contributions later.
scheme run by the Bank of England (BoE) and HM *Meanwhile, more than seven million UK citizens
Treasury, enabling larger investment grade rated are mired in dangerous levels of debt and at risk of
(or equivalent) businesses to obtain cheap short exploitation by unscrupulous lenders, the Financial
term lending money from the BoE, which revealed Conduct Authority warned. They are struggling to
that it had already bought £10.7bn worth of pay bills and day-to-day expenses, said the FCA,
with 7.4m saying they have borrowed too much and
find paying the money back a burden. The figures
will raise fresh fears about the implications of a five
-year debt binge fuelled by ultra-low interest rates,
which has pushed the amount owed on credit cards
in the UK up to £72.2bn, revealed Bank of England
data. It suggests that many families will be unable
to cope, now that an economic downturn, brought
on by the pandemic, is hitting the jobs market.
*The Global Compact Network UK said in a report
that businesses faced increasing demands from their
5stakeholders, especially consumers, investors, and price setting, windfall mitigation strategies,
regulators, to be more transparent about their regulatory compliance for financial services and
business practices and their exposure to risks fairness (vis-a-vis shareholders, employees and
related to their environmental, social, and broader stakeholders). This is a particular hot topic
governance (ESG) performance. Oxfam’s Behind for companies in receipt of government support.”
the Brands campaign and the World Benchmarking Are companies still installing all-employee share
Alliance are creating new incentives for leading plans and discretionary share schemes to the same
companies to be transparent about their ESG extent as before? – “We have seen some companies
performance. Major concerns are the costs of data defer grants until there is a bit less volatility in the
collection, requirements for assurance, exposure to capital markets. But share plans are remaining a
legal jeopardy, and perceptions of reputational risk. key component of remuneration packages despite
The lines between mandatory and voluntary, the crisis knocking confidence.”
compliance and non-compliance, financial and non
*While most of Equiniti’s ops teams are working
-financial are all blurring. Changes in the corporate
reporting landscape and, more generally, in the from home, it has colleagues continuing to trek into
context of sustainability information disclosure, are its offices to ensure that essential services continue
creating new conflicts within companies as to be delivered to customers, pensioners and
different departments try to reconcile their shareholders who must receive the documents they
sometimes very different views of the costs and need. “Whether it’s payroll services, share dealing
benefits of transparency. ‘Debating Disclosure: the for investors or share plan maturities, there are
pros and cons of corporate transparency’ explores some things that must be completed in the office.
the tension within companies over their reporting This is the engine room of Equiniti’s business and
and disclosure on ESG issues to build a better it’s still running on full steam,” said coo Thera
understanding of the risk/return profile of Prins. The plan administrator advised plan issuers
transparency and so help companies to balance to check their share registers to find out who has
competing interests. been buying, selling or shorting their shares during
the pandemic, in order to better manage their
How Centre members are coping with Covid-19 investor relations.
Bird & Bird’s incentives team, like most others, *William Franklin partner at Pett Franklin
has been working at home since the lock-down on commented: ”As with Chou En Lai’s oft
March 23. Partner Colin Kendon told newspad: misquoted and misunderstood remarks about the
“We are set up well for home working and the long term impact of the French Revolution it is too
transition has gone relatively smoothly. We are early to tell what the long term impact on business
seeing more enquiries from private companies of social distancing will be, but some things are
relating to sacrificing salary in exchange for already emerging. At Pett Franklin we moved
equity. The main issue (as always) is whether the swiftly to remote home based working using
equity is like value. Companies usually have to Microsoft Teams but are only now
apply a future looking valuation to prevent the gradually starting to make full use of the enormous
proposals being too dilutive.” power of this system to promote team working. It is
so much more than just a video conferencing
Deloitte’s share plans team are all at home. Partner
system. The long term impacts of pay cuts, mass
Bill Cohen told newspad: “We have supported
unemployment, low or very volatile valuations, and
flexible working for many years, and therefore we
the moral hazards associated with executive pay
have been able to move to home working pretty
after most of the private sector has been bailed out
seamlessly and the technology has held up
by the taxpayers of countries worldwide will take
brilliantly.
time to sink in.
There has been a natural uplift of Covid related
“There is going to be a huge opportunity to
work e.g. impact of furloughing on share plan
accelerate all-employee ownership through
participation, SAYE resets, LTIP target setting,
swapping some of the emergency government debt
post Covid windfall mitigation etc. However,
funding of business for new forms of equity based
business as usual remains at the core: plan
interests as we come out of the crisis. Whether that
renewals, performance target setting, and
great opportunity will be seized will require a new
compliance.
consensus and many of those, who should have
Newspad asked whether clients were asking for a known better, who have in easier times indulged in
different focus on executive equity remuneration the politics of polarisation and division being
schemes and Bill replied: “Yes. They are asking shocked out of their self indulgence into fresh
about quantum, performance target setting, strike thinking”
6BT honours promise of free shares to staff Malin may now be available. The seminar will
Centre member BT is to honour its promise to give conclude with a buffet lunch for all. Experts
each of its 100,000 staff £500 in shares in June include: Katherine Neal, Ogier; Graham Muir,
under its new “your share” scheme, which costs CMS; David Pett, Temple Tax Chambers and
£50m annually. In addition, BT has given staff David Craddock of his eponymously named
guarantees that they will not lose their jobs or be Consultancy Services. The seminar will be chaired
furloughed - and it has awarded 58,000 frontline by Malcolm Hurlston CBE, who first visited the
workers, such as engineers, a 1.5 percent pay rise - Pomme d’Or during his national service in 1957.
while managers have had their salaries frozen. Ceo “Those were uncertain times and I wondered
Philip Jansen, the first publicly whether I would be able to travel so far again” he
confirmed FTSE 100 boss to be diagnosed with reveals. “Not unlike now”. Prices: Esop Centre/
Covid-19, said that he would donate his salary to STEP members: £375, Non-members: £480. Email
the NHS Charities Together Covid-19 appeal and events@esopcentre.com or call the Centre on +44
to affected small businesses in his local community (0)20 7562 0586.
for at least the next six months. Jansen’s annual
base salary, before performance bonuses, is £1.1m. Centre share plan symposium
BT said: “No employee will lose their job in the The Centre’s fourth British Isles share plans
foreseeable future – at least the next three months symposium, co-sponsored by Ocorian, the award-
– as a direct result of changing trading conditions winning provider of bespoke administration and
brought about by coronavirus.” The company said fiduciary services to corporate, institutional and
that the 1.5 percent pay rise from July 1 applies to private investors, is rescheduled to take place in
58,000 team workers, among its 85,000 UK staff, London on Thursday October 15 this year.
the vast majority of whom are frontline designated Enquiries please to Fred Hackworth:
key workers. BT said that 26,000 managers will fred_hackworth@zyen.com.
have their pay frozen during this financial year.
However, the 1.5 percent pay rise does not extend
to another 16,000 employees in BT’s global MOVERS AND SHAKERS
business.
Centre member Ocorian completed the acquisition
of Allegro, a Luxembourg based third party
EVENTS management company and fund administrator.
Allegro is fully licensed to provide management
Next Centre webinar and fund administration services to AIF, RAIF, non
On May 15 at 14:30 , David Craddock will follow -AIF and UCITS funds. Founded twelve years ago,
up his, well received, introduction to EMIs with Allegro’s multiple regulatory licences means it
“EMIs: powerful lessons from five practical case provides comprehensive services in alternative
studies”. Details on how to register will be assets. Together Ocorian and Allegro can offer a
published on https://fsclub.zyen.com/events/ one-stop shop for fund groups so they can
webinars. maximise the benefit of centralising their
administration, said Ocorian group ceo Farah
Jersey seminar re-schedule Ballands. Allegro’s clients are large institutional
The Centre’s Jersey share schemes and trustees investors, international fund promoters and
seminar, held in partnership with the Society of investment managers. Allegro is the first
Trust & Estate Practitioners (STEP -Jersey branch), acquisition Ocorian has made since its merger with
due to take place at the Pomme d’Or Hotel in St Estera earlier this year.
Helier has been re-scheduled to the autumn (date to
be confirmed). Given the Covid-19 pandemic, the UK CORNER
hiatus in post Brexit negotiations, corporate
governance, the global reach of trustees and the
growth of employee ownership trusts, it is vital for Share plan tax benefits threatened by furloughs
those interested in employee share ownership If a company has Enterprise Management Incentive
schemes and trusteeship to attend this annual (EMI) option holders who aren’t working for the
seminar. The programme includes updates on the company during a period on furlough, RM2
loan charge, case law, and Esops. Given the revised Partnership believes that technically it is a
timing we shall invite Mark Hoban, the new “disqualifying event” under EMI legislation and the
chairman of the Jersey Financial Services relevant tax advantages for the individual
Commission to be guest of honour and check participant could be lost. This is because the
whether popular speaker and revenue-watcher Paul employee would have no committed time as defined
in the EMI legislation as the employee would not
7be required to spend any time on the business of the work reduced hours and no longer meet the
company. It is believed that this issue has been raised statutory test. For those on reduced hours, the 75
with HMRC and the hope is that the government will percent of working time rule may provide a safety
publish a concession similar to the one that already net.
exists for EMI option holders who are called up to
serve as armed forces reservists. “We hope that such Sales to EOTs now more advantageous
a concession can be provided soon to aid struggling The reduction of the Entrepreneurs Relief lifetime
companies dealing with furloughing within their allowance from £10m to £1m, announced by the
organisation” said RM2. chancellor in his Budget speech, will make selling
The adverse tax consequences that some of the UK to an EOT even more attractive, according to
government’s business support measures (including transatlantic expert and author Garry Karch of
the Coronavirus Job Retention Scheme) could have Doyle Clayton. Whereas the change in lifetime
on employee share schemes, were examined by allowance can double the cgt burden on sales to
lawyers Squire Patton Boggs. They said that leaver third parties, a sale to an EOT could produce
provisions in all-employee share schemes were additional sales proceeds of £900,000 on a sale at a
another area of concern over preserving tax benefits market value of £5m. “There are certain reasons
and that concern extended to those employees who why a third party sale can continue to make sense”
were made redundant. A failure to consider carefully said Garry “but business owners looking to
and then navigate, the complexities of both scheme transition are now doing themselves a major
rules and tax law, before making or communicating disservice if they do not explore the EOT
decisions, could lead to a loss of valuable tax alternative.”
advantages. An employer has to decide when
designing an employee share scheme how it will deal Virtual agms
with those employees who leave the business or who Two out of three FTSE 100 companies were
are made redundant. There are several ways that holding agms behind closed doors this year, with no
scheme rules cover this, ranging from an automatic opportunity for shareholders to hold directors to
lapse of options, to wide discretion being granted to account by asking them unfiltered questions in real
boards and remuneration committees to decide on a time, claimed Share Action, the shareholder lobby
case-by-case basis. Under the first alternative, there group. It criticised companies such as BAE
is a risk that the current pandemic crisis could result Systems, HSBC and Next, who were giving
in share options and awards lapsing inadvertently shareholders no chance to ask questions by live
(e.g. where ceasing to perform employment duties webcasts. While all companies have been hit by
while on furlough creates a lapse event). In the Covid-19 restrictions, which make the physical
second case, boards should have some scope to use presence of more than a handful of shareholders
discretion to prevent options from lapsing. However, impossible, some are allowing shareholders to ask
boards should consider the circumstances carefully questions live by webcast and, crucially, ahead of
and operate their discretion in line with the rules of the voting on resolutions. These so-called hybrid
the relevant scheme. In some scenarios, scheme rules meetings are being conducted by, among others,
will specifically have catered for redundancy creating Reckitt Benckiser, Taylor Wimpey and Unilever.
a good leaver event but will not have envisaged Virtual agms are needed during social isolation
furloughing. However, the rules for tax advantaged periods so that shareholders can question directors
plans often apply in a way that will treat redundancy and vote on resolutions for changes in boardroom
differently from other leaver events, added Squire personnel and/or executive remuneration. This
Patton Boggs. conclusion emerged after four magic circle legal
Meanwhile, the EMI working time requirement groups -Linklaters, Slaughter and May, Clifford
applies both at the time of an option grant and Chance and Freshfields Bruckhaus Deringer jointly
throughout its life and failure to meet the condition issued a guidance note to public companies in the
can mean that an option ceases to qualify for EMI tax run-up to their agms this month and last month.
benefits. The rules state that an employee must be They stepped into the vacuum after company agms
required to spend at least 25 hours a week or, if less, were being postponed and corporate reports
75 percent of their working time on the business of ignored. Supporting the guidance were the
the relevant group. Concessions are built in where an Financial Reporting Council, the City of London
employee would have been able to commit that time Law Society Company Law Committee, GC100 –
to the business but for injury, ill health, disability, the Association of General Counsel and Company
pregnancy or parental leave, a reasonable holiday Secretaries working in FTSE 100 Companies, the
entitlement or as a result of garden leave during a Investment Association and the Quoted Companies
notice period. It remains to be seen whether these Alliance. The guidelines are: *Shareholders should
concessions will be extended to cover employees not attend in person *Two people (directors) only
who have been furloughed or who are required to should attend; *Shareholders should be encouraged
8to vote by proxy. *Companies may want to
encourage the submission of questions for the Join the Esop Centre
board of directors in writing with the answers to be The Centre offers many benefits to members,
published in whatever manner companies whose support and professional activities are
determine, e.g. on the company website. *Some essential to the development of broad-based
companies may have to have extra personnel at the employee share ownership plans. Members
agm to ensure its proper conduct and safe
operation (such as technicians, if there is to be a
include listed and private companies, as well
web-cast, and/or security staff) but this should be professional experts providing share plan
kept to the minimum. The UK Shareholders services covering accountancy, administration,
Association wants companies to ensure voting design, finance, law and trusteeship.
rights are passed through to all small shareholders, Membership benefits in full:
including employee shareholders. Malcolm Attend our conferences, half-day training
Hurlston is a director of UKSA with which the seminars, breakfast roundtable discussions
Centre shares reciprocal membership. and high table dinners. Members receive
*Companies House accounts filing – Companies heavily discounted entry to all paid events
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accounts, in order to avoid an automatic late-filing and preferential access to free events.
penalty. Access an online directory of Esop
*Stamp duty payments to HMRC – HMRC will not administrators; consultants; lawyers;
be stamping stock transfer forms as it has registrars; remuneration advisers;
temporarily changed the way it deals with stamp companies and trustees.
duty paid on the purchase of shares using a stock Interact with Esop practitioner experts and
transfer form. Payments should be made company share plan managers
electronically, with details of the transaction
emailed to HMRC, which will accept e-signatures Publicise your achievements to more than
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is approved, HMRC will send a confirmation letter news publications.
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with exclusive news, insights, regulatory
Regulators gang up on dividend pay outs briefs and global Esop updates.
After the intervention of their regulator, Barclays, Hear the latest legal updates, regulatory
RBS, HSBC, Standard Chartered and Lloyds said briefs and market trends from expert
in co-ordinated announcements that they would speakers at Esop Centre events, at a
scrap their dividend pay-outs this year. In addition
discounted member rate.
the Prudential Regulation Authority said it
expected the major UK banks not to pay bonuses to Work with the Esop Centre on working
senior staff this year. This came after pressure to groups, joint research or outreach projects
put a stop to £15.6bn of dividends due to be paid Access organisational and event
out by UK banks in April and May. Agustín sponsorship opportunities.
Carstens, head of the Bank for International Participate in newspad’s annual employee
Settlements (BIS) — known as the central bank for
share ownership awards.
central banks — called for a global freeze on
dividends in the sector. In an appeal for action by Discounted access to further training from
supervisors to ensure that lenders are equipped to the Esop Institute.
push out the huge amount of extra credit needed to Add your voice to an organisation
keep companies afloat, Mr Carstens said: “Banks encouraging greater uptake of employee
should be part of the solution, not part of the ownership within businesses; receive
problem.” support when seeking legal/policy
None of the main banks initially discussed their clarifications from government and meet
ceo total annual reward packages, which last year representatives from think tanks, media,
collectively totalled more than £20m, but pressure
rapidly mounted on them to react in the pandemic
government, industry bodies and non-
crisis. The Co-operative Bank and TSB both profits by attending Centre events.
announced that they had axed executive bonus How to join: contact the Centre at
payments this year. esop@esopcentre.com or call the team on +44
Lenders eventually buckled under pressure to cut (0)20 7562 0586.
remuneration after the Bank of England warned
them against handing senior staff cash bonuses in
9the next few months and blocked dividends. HSBC
said that chairman Mark Tucker would donate his
entire fee for 2020 to charities supporting
healthcare workers and vulnerable people in
Britain and Hong Kong. Alison Rose, ceo of state-
supported RBS, decided to donate much of her
salary to charity and to give up projected bonuses
as the industry sought to ward off criticism over
excessive pay amid the Covid-19 pandemic. Bill
Winters, Standard Chartered ceo, will give away
pay too. public backlash against bankers receiving large
The Prudential Regulation Authority (PRA) wrote bonuses despite the financial crash of 2008/2009.
to the seven largest UK retail banks asking them to The Institute of Directors joined the chorus by
confirm that they would suspend the payment of asking UK banks not to make large executive
dividends - and share buy backs – until the end of incentive awards this year.
this calendar year. In practice, this was an order Shareholder voting agency PIRC, which wants
from the regulator and eventually the banks variable pay to be suspended, said that if companies
confirmed they would comply, said Stephen Diosi were axing or reducing dividend pay-outs and
of Mishcon de Reya. However others believe that slashing jobs, then awarding executives substantial
the PRA is going beyond its remit and it may face bonuses would be unacceptable.
a legal challenge. One in every four of the biggest companies listed
The aim is to ensure that the banks keep as much in London slashed the amount of money paid to
cash as they can to lend to a UK economy that is ceos in the face of the Covid-19 pandemic. Most
facing perilous times. In addition the letter said directors at these 25 firms cut their salaries and fees
many banks had already paid the 2019 bonuses, but by 20 percent, the same proportion of pay which
for those where the numbers had been declared, but furloughed workers are forfeiting. However, some
not yet paid to the employees, the cash element went further, according to a survey and analysis
will be suspended. The PRA’s letter did not of FTSE 100 companies’ announcements by the
address whether the usual Remuneration Code High Pay Centre. Andy Ransom, ceo of Rentokil,
rules on deferred compensation (malus) would reduced his own salary by 35 per cent and donated
apply to the suspended cash element. Normally, the rest of it to an employee fund. Burberry
deferred compensation is at risk of malus if announced a 20 percent cut to directors’ pay for
information subsequently comes to the bank’s three months and said it would not rely on the
attention. Ordinarily, the cash element of a bonus government’s Covid-19 job retention scheme for
is only at risk of reduction if it can be shown there employees unable to work during the crisis. The top
was misconduct by an individual employee, or a salary savings will be donated to a charitable fund,
major failure in risk management for which they the Burberry Foundation Covid-19 Community
bear some responsibility (known as claw-back). Fund, to help support communities struggling with
Remuneration advisers may be negotiating the the fallout from the coronavirus pandemic by
consequences of this decision for years to come. supplying personal protective equipment (PPE) and
The European Banking Authority sent a similar food banks.
instruction, which means it is highly likely that a Three FTSE 100 companies sent staff home without
ban on paying cash bonuses will be followed by all cutting dividends. Primark owner, Associated
major banks. Nathan Bostock, ceo of Santander British Foods has said it would furlough 30,000
UK, announced that he would donate £1m of his staff, but has not cut its dividend. Companies whose
total £4.3m annual reward to a virus fund launched ceos take pay cuts during the Covid-19 crisis should
by his bank’s parent company. Spanish lenders be wary of handing them lucrative share awards at
were early to move, with Banco Bilbao Vizcaya the same time, investment advisers warned.
announcing that 300 of its top executives had Although a flurry of executives accepted wage
waived their 2020 bonuses. reductions, made charity donations or waived
Italy’s UniCredit followed suit a few days later. bonuses, some firms, including those receiving state
“Banks, shareholders, managers and key risk support to pay “furloughed” staff, went ahead with
takers should take part in the rethink of where we LTIPs, which will authorise sizeable share awards
are right now and try to preserve as much capital to directors if they hit targets, reported The
as possible,” said Andrea Enria, the European Guardian.
Central Bank’s top banking watchdog. Insurer Prudential announced executive pay cuts in
The sums involved may be relatively immaterial the light of the current situation and the need for
compared to the amounts payable by way of continued restraint in executive remuneration. For
dividends, but the regulators clearly recall the ceo Michael Wells, that meant a salary reduction of
10£23,000, to £1.15m. Hours later, in a separate present. Like ITV, Reach said it could adjust
disclosure, the insurer handed Wells an LTIP payouts retrospectively if they balloon.
worth £878,873 at current share prices. He will not Heathrow Airport paid out more than £100m in
get anything for three years and will have to meet dividend pre-arranged before the Covid-19 crisis.
stretching performance criteria to receive the The pay-out appeared to knee-cap the lobbying
maximum amount of 83,782 shares. However, the efforts of the Airports Owners Association, which
shares could be worth significantly more by the is begging ministers for emergency taxpayers’ cash
time the scheme pays out in April 2023, if markets to keep them going. Almost 25 percent of
rebound once the Covid-19 pandemic eases. The Heathrow’s senior management has been made
salaries of Prudential executive directors were redundant.
reduced to December 31 2019, levels, effective G4S granted LTIPs worth a notional £9m to ten
April 1 and their pension cash contribution benefits senior staff. The security firm has stressed that it
were cut from 25 percent to 13 percent of salary, could retrospectively adjust LTIP payouts and said
starting May 14. Meanwhile, the group 2020 directors were taking no 2020 bonus.
Prudential LTIP award maximum pay-out will no Meanwhile, the board and senior management at JD
longer be raised from 250 percent to 300 percent of Sports have taken a salary cut of at least 25 percent,
salary. while chairman Peter Cowgill agreed to a 75
ITV directors, including ceo Carolyn percent cut in his annual salary of £863m. The
McCall, volunteered to take a 20 percent pay cut sportswear chain, whose stores remain shut,
and forfeit their 2020 bonuses. Three days later, cancelled its dividend and deferred bonus and other
ITV announced LTIPs and other share-based bonus incentive payments for senior staff.
payments, including some related to 2019, a year Investment institutions managing pension fund
for which investors will receive no dividend. The money will be watching closely to make sure firms
payments, which come despite ITV putting some rein in LTIPs, whose value could be artificially
staff on the state-backed furlough scheme, would inflated by eventual stock market recovery. “In the
be worth £3.2m to McCall alone, even at current overall context of the company, the experience of
low share prices. A spokesperson pointed out that the workforce, the experience of shareholders,
ITV “retains full discretion to adjust final companies should think about making a gesture,”
outcomes under the awards to ensure that they are said Hans-Christoph Hirt of Federated Hermes,
warranted, taking into account all relevant factors”. which advises investors holding £700bn worth of
Channel 4 had already paid out millions in assets. “If there’s a relatively quick recovery there
bonuses to directors and staff while opening talks may be windfall profits that are not really related to
with ministers about potentially tapping an company performance but to the fact that there was
emergency £75m credit facility. All C4 board a crisis and the government supported the overall
members have taken a 20 percent pay cut and economy.” He warned against the temptation to
bonuses have been axed. Pay rises at Guardian redraw LTIP criteria in favour of bosses who might
Media Group have been suspended for at least six otherwise face diminished rewards: “It is critical
months, while managers face a 20 percent pay cut not to allow readjustment of performance targets at
and board and Scott Trust members a 30 percent this point,” he said. “If you start to fiddle around
cut for six months. The group expects its revenues with them and say things have changed and targets
in the first half of the new financial year to be need to be lowered, pay wouldn’t go down for
£20m lower than in the corresponding period last 2020.”
year. At Reach, owner of the Daily Mirror and Legal & General Investment Management warned
Daily Express newspapers, almost 1,000 staff are that companies needed to be questioned if they took
going on furlough, meaning they will be paid 80 taxpayers’ money during the crisis without ensuring
percent of their salary. Senior staff including boss that their own directors shouldered some of the
Jim Mullen will forfeit 20 percent of their base financial pain.
pay. On March 30 however, Mullen was handed a Amid renewed scrutiny on pay however, executive
750,000-share LTIP worth more than £650,000 at sacrifices are proving varied: Lloyds executives
will lose only their bonuses, but there is frugality at
Persimmon, the house-builder castigated for
the £110m bonus originally handed to former boss
Jeff Fairburn (before public outrage forced a 30
percent reduction). Its board is taking a 20 percent
basic pay cut and foregoing bonuses while workers
are furloughed.
Company ceo reward sacrifices include: Monzo -
Tom Blomfield, 100 percent salary cut for 12
11months; Sky -Jeremy Darroch, six months’ salary
donated; BT- Philip Jansen, six months’ salary
donated; RBS -Alison Rose, 25 percent salary cut,
no bonus Ryanair-Michael O’Leary, 50 percent
salary cut in April/May; ITV-Carolyn McCall, 20
percent cut, no 2020 bonus; Virgin Atlantic - Shai
Weiss, 20 percent cut from April to July; easyJet-
Johan Lundgren, 20 percent cut for initial three
months; Lloyds -Antonio Horta-Osorio, no bonus
for 2020 and BAE Systems- Charles Woodburn, millionaire, warned in his FT column: “A dividend
pledged to review passed leaves a scar on a company’s record that can
UK dividend pay-outs this year could fall by half, never be erased and investors have long memories”.
wiping out more than £50bn in shareholder returns, He said goodbye to Aviva and topped up with
due to the Covid-19 crisis, lamented The L&G, reserving the wooden spoon for Vimto-
Telegraph. Already, almost £30bn worth of maker Nichols. “Many thousands of investors rely
dividends have been either axed or delayed, on dividend income to sustain them in retirement,
according to a report by the financial data firm or perhaps to pay care home fees.”
Link, which fears that a further £25bn worth of
scheduled dividends are at risk of being scrapped. Covid-19 company news
Banks and miners have slashed their dividends, *Global brewer AB InBev cut its dividend in half
while there were doubts in the City that the oil to save £800m. The owner of Budweiser and Stella
companies could maintain their expected dividend Artois will pay shareholders a final 2019 dividend
pay-outs. However, companies in the food, of 50 cents per share.
healthcare, pharmaceutical and utility sectors are *Auto Trader Group slashed executive pay, put
thought most unlikely to want to cut their its staff on furlough and announced a share placing
dividends. The European Central Bank ordered to strengthen its finances during the on-going
Euro-zone lenders to cancel all dividends until at coronavirus pandemic. The FTSE 100 listed online
least October and warned them to be very car marketplace said its entire board would forego
moderate when paying out staff bonuses. However, at least half their salaries and that bonuses for top
most Wall Street banks want to pay out dividends. executives would be waived. Staff were being sent
Tesco went against the tide, handing investors a home under the government job retention scheme,
total £900m in dividend, despite taking £585m under which they will still receive 80 percent of their
from the government’s business rates relief salary, but Auto Trader said it intended to fully top
holiday. Ceo Dave Lewis, said that the business up salaries for the large majority of those who are
rates relief allowed the supermarket to invest in impacted. It announced plans to issue £200m of new
“making the right decisions to feed the nation” shares in a bid to strengthen its balance sheet. The
during the pandemic and he argued that the relief company said up to 46.5m new shares have been
covered only half of the additional costs the placed, worth five percent of its equity, at 400p per
supermarket chain would face. Tesco has hired share.
45,000 extra employees and is not using the state- *Daily Mail and General Trust (DMGT) offered
supported paid employee furlough programme. shares to 2,400 employees, as a means of avoiding
Global drinks maker Diageo suspended its £4.5bn job cuts and/or furloughing, said Employee Benefits
share buyback programme due to Covid-19. magazine. Senior management offered this
*Some insurers halted dividend payments citing alternative approach to employees working within
pressure from regulators and a row about the its group, which includes the Daily Mail, Metro and
appropriateness of shareholder returns during the Mail Online. Employees earning £40,000 or below
Covid-19 crisis. Aviva, Direct Line, RSA and will be able to take a pay cut of between one and 26
Hiscox all said that they had suspended or dropped percent in exchange for shares within the parent
dividend payments in the light of the challenges business. At the end of the financial year,
created by the pandemic for businesses, households employees who opt for shares could make a profit.
and customers. The Bank of England’s PRA If the share price is lower than when the shares
welcomed the news. The European insurance were awarded, employees who wish to sell will be
regulator and the PRA had urged restraint on compensated.
dividend payments and staff bonuses. Aviva said *Deutsche Bank may scrap bonuses for top
later that its executive directors and leadership management this year as regulators urge banks to
team would not be considered for any bonus preserve capital and keep lending through the
awards, or basic pay rises, for 2020 until dividends Covid-19 pandemic. The company is looking at a
are restarted. But Lord Lee, famously the first ISA range of possible measures and. a final decision
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