By Adrian Hitchenor

The global crisis will lead to an increased focus on how executives increase shareholder value, with reward being consistently aligned to performance.

That is one of the key findings of KPMG’s newly published report ‘Directors’ remuneration in FTSE Small Cap companies’ which you can read here.

It found business impact response to COVID-19 has been varied, with many companies adjusting their executive pay downwards, cancelling bonuses/dividends and amending LTIP grants to manage costs. The report says firms now need to turn their attention to planning for the future and longer term remuneration strategy

Executives making tough decisions around salaries, jobs, furlough and the future of their staff has led to increased public scrutiny on executive pay and concern that any reductions in remuneration packages this year are just temporary or superficial gestures, it found.

With wider questions being raised around the ‘fairness’ of pay, KPMG says it expects calls for companies to look more broadly at how all their people are valued and rewarded – both those in the FTSE 350 as well as FTSE Small Cap and AIM listed companies.

The report says: “From an investor perspective, there will be sharp focus on how executives are going to rebuild and then further increase shareholder value. Guidance from institutional investors has been clear that reward must consistently align to performance. The role of the Remuneration Committee Chair, in terms of applying discretionary judgement to outcomes, will become ever more important.

“With…2020 being the year that many companies will be required to renew their remuneration policies, we believe that there is a unique opportunity to look more inwardly at how executive pay has been set and critically analyse if this remains appropriate for the recovery period ahead, in particular as businesses prepare for the next challenge on the horizon in the shape of Brexit.”

Current executive pay levels detailed in the report are based on pre-COVID-19 data published by FTSE Small Cap companies for the 2019 calendar year.

Key findings included:

• Median basic salary increases continue to be moderate for the majority of Small Cap companies at around 3%.
• More than 35%   of directors did not receive an annual bonus, with a higher proportion than in previous years receiving less than 50%  of the maximum bonus entitlement.
• A heavier weighting on fixed pay vs variable pay for Small Cap companies – 54%   fixed and 46%   variable compared to 39%   fixed and 61%   variable for FTSE 350 firms.
• Performance conditions for annual bonuses continue to focus on the financial, with the EPS and TSR continuing to dominate both annual bonuses and long-term incentives.
• The prevalence of Performance Share Plans continues to rise, as Stock Option Plans fall further out of favour.

The executive pay breakdown showed basic salary rates for chief executives ranged from £336,000 to £471,000, with total earnings between £498,000 and £1.28m.

For finance directors basic salaries ranged from £216,000 to £323,000 and total earnings were between £301,000 and £757,000. Other executive directors, including operational directors, functional directors and chief operating officers, were paid £185,000 to £296,000 basic and £317,000 to £776,000 in total.

Non-Executive Directors

Fees paid to Non-Executive Directors ranged from £44,000 to £53,000 for NEDs and £126,000 to £196,000 for Chairs.

Diversity

The report also looked at diversity, concluding “there is still significant work to do in this area” for Small Cap companies. Only 2%   of CEOs, 4%  of Finance Directors and other Executive Directors, and 3%   of Board members were female.

Reading the report I was in full agreement about the need for Boards to focus on how executives will add value. A key factor in HW Global’s success is that for us it is not just about filling positions; it’s about increasing shareholder value by introducing individuals who are fit for purpose and culturally aligned.

We particularly enjoy acquiring a thorough understanding of the values and strategic ambitions of the company we are engaged with; this helps us find the perfect fit.

Echoing KPMG’s findings, we always urge clients to carefully consider diversity during an executive search assignment; research shows that firms whose leadership teams best reflect their customer base outperform their competitors on profitability.

In part due to the pandemic, and generally as companies look to be more efficient and lean, there will be more executives looking for fewer available positions and selecting the right individual for a role will be ever important.

Adrian Hitchenor is a Founding Partner at HW Global Talent Partner with a specific focus on CFO, consumer and private equity. Contact him at adrianh@hwglobalpartner.com or on +44 (0) 7711 771 059.