Tuesday 7 April 2020 ★ FINANCIAL TIMES 7
CO M PA N I E S & M A R K E T S
DA N I E L T H O M A S A N D
AT T R AC TA M O O N E Y— LO N D O N
A N D R E W E D G E C L I F F E- J O H N S O N
N E W YO R K
As companies suspend operations,
scrap dividends and send staff home,
top executives are facing demands to
make sacrifices of their own.
Some have acted in advance of the
pitchforks, with a list of voluntary pay
cuts spanning sectors and time zones
and including both companies hard hit
by the virus and those that expect to
ride it out.
Marriott CEO Arne Sorensen will
donate his salary to charities supporting
Covid-19 relief efforts “for the duration”
of a crisis in which the hotelier has put
tens of thousands of staff on unpaid
leave. Fiat Chrysler’s John Elkann, who
has suspended much of the carmaker’s
production, will forgo his annual pay.
At Qantas, which has halted all inter-
national flights, CEO Alan Joyce will not
take any salary for the remainder of the
2020 financial year. BT chief executive
Philip Jansen — who has coronavirus —
said half his annual salary would go to
the National Health Service.
“I don’t think we have ever seen [this
level] before, and it is only going to pick
up,” said Amit Batish of pay consultancy
Equilar, noting that more than 70 US
groups had announced that executives
would take full or partial salary cuts.
In the UK, more than three dozen
groups have cut their top executives’
pay so far, according to research by the
FT and investment adviser Minerva.
Executives who profited from boom-
ing markets thanks to their stock-heavy
pay packages are faced with plunging
share prices and the prospect of a pain-
ful recession that will shine a harsher
spotlight on the highly paid.
Boards’ pay discussions with share-
holders would be more “sensitive than
ever” this year, said Hans-Christoph
Hirt, head of Hermes EOS, which
advises investors on stewardship
issues. Companies making lay-offs or
cutting staff salaries “would be very well
advised to ensure that pain will be
shared across the board and C-suite”.
Remuneration has become particu-
larly sensitive in sectors such as retail
and hospitality, where companies have
suspended payouts to shareholders and
begun to furlough hundreds of thou-
sands of workers.
In the US, the salary-sacrificing
announcements began with executives
from the likes of Delta Air Lines and
United Airlines, whose companies were
among the first and hardest hit, and who
knew early on that they would need to
appeal for government support.
The lessons of the 2008 financial cri-
sis are fresh in US CEOs’ minds, when
bailout recipients such as insurance
group AIG were forced to cut their lead-
ers’ pay after a fierce backlash. The poli-
tics of executive pay have only sharp-
ened since then as left-leaning Demo-
crats such as Elizabeth Warren have
risen in prominence.
Regulators in the UK have already
leaned on banks to curtail bonuses,
and Andrea Enria, chairman of the
European Central Bank’s supervisory
board, has called on the sector to exer-
cise “extreme moderation on variable
remuneration”.
To date, according to Matteo Tonello,
author of The Conference Board’s
benchmarking research on US board-
room pay, liquidity concerns had played
the biggest role.
Glenn Fogel, CEO of Booking Hold-
ings, who has tested positive for Cov-
id-19, said he would take no salary for
the rest of the year as part of a drive to
conserve cash, telling employees of the
online travel group: “Every single dollar,
euro, baht, etc, counts in this effort.”
But Mr Tonello said peer pressure
would play more of a role if a prolonged
crisis saw unemployment continue to
rise. Companies proposing slashing
employees’ pay through furloughs
“would not be able to justify their imple-
mentation without applying those same
measures to themselves too”.
Even those which are not yet seeing a
drastic impact from the virus, such as
supermarkets, were concerned about
standing out from the pack, advisers
said, in particular if they were in sectors
that had benefited from state support.
“One factor for boards to consider
in pay decisions will be whether the
company has received taxpayer sup-
port,” said Tom Gosling, partner at PwC.
“But with the level of government inter-
vention in the economy being so wide-
ranging, it’s going to be tough to untan-
gle who has and has not materially ben-
efited.”
Executives face scrutiny from inves-
tors about how meaningful their sacri-
fices will be. Advisers warn about bosses
making only token cuts to their salaries
while retaining lucrative bonus, stock
and pension payments.
Many companies in the UK have
trimmed employees’ pay by 20 per cent,
for example, to reflect a governmentoffer to cover four-fifths of the wages of
laid-off workers. But the £2,500 per
month cap on this support means their
bosses will suffer far less through the
coronavirus crisis.
Bonuses — which often account for
the lion’s share of executive pay — are
less likely to have been cut so far, and
companies whose financial year ends in
December have already paid them.
Companies with March year-ends,
including some UK retailers, are facing
pressure now to cut bonuses before they
are paid.
The political and investor backlash
has begun, with Schroders, the UK’s sec-
ond-largest listed asset manager, writ-
ing to British companies last week urg-
ing chief executives to “share the pain”.
Michael Herskovich, head of corpo-
rate governance at BNP Paribas Asset
Management, said the French asset
manager would be looking carefully at
remuneration this year.
He said many of the pay awards being
made now related to 2019, which was a
strong year for many companies. But “I
expect there will be huge attention to
pay next year. There will be a lot of com-
panies that will be making lay-offs. A lot
of companies will suffer.”
Investors are concerned that compa-
nies are granting options or long-term
incentive packages during the market
crash, which are often a multiple of
basic salary converted into shares. If
directors are granted shares during the
crash and the market rebounds, there
could be a windfall.Some companies have attempted to
head off future criticism. In its annual
report published in late March, Rolls-
Royce noted that it had experienced
a “recent significant fall in our share
price due to COVID-19”, and the board
would ensure that the final payout
included “consideration of any poten-
tial for windfall gains”.
Sebastien Thevoux-Chabuel, a portfo-
lio manager at Comgest, the French
asset manager, said he had been
speaking about pay to companies in
which it invests.
He said: “In these particularly harsh
times, leadership is a lot about leading
by example. Even if some remuneration
packages were validated by past AGMs,
we would expect some CEOs to willingly
take a cut or give to a charity [some] of
money they are owed.”
But investors are mindful that compa-
nies need strong leadership during
the crisis, which means that scrutiny
on pay during a period of unprece-
dented challenges is not every investor’s
first priority.
“I don’t think we should be telling
companies what they should be doing
[on pay],” said Sacha Sadan, director of
investment stewardship at Legal & Gen-
eral Investment. “They have a lot on
their plate. We do need leadership at the
moment. We need good people. The
best leaders could end up saving their
companies a lot more.”
Additional reporting Patrick Temple-West,
Antonia Cundy and Alistair Gray
See OpinionCEOs act to keep the pitchforks at bay
Pay cuts span sectors and include both the bruised and those expecting to ride out the pandemic
O L I V E R R A L P H— LO N D O N
As the coronavirus pandemic flattens
companies and shuts down entire
industries, controversy over how much
businesses can claim from their insur-
ance policies is growing.
Companies say they have been paying
premiums for business interruption
coverage for years, while insurers insist
that pandemics are explicitly excluded.
What does ‘interruption’ cover?
Business interruption insurance is usu-
ally designed to cover the costs of dam-
age to a building, such as a factory fire.
What is excluded?
Like all insurance products, the small
print carries a list of exclusions — and
infectious diseases are typically one of
them. Insurers started to model the
impact of epidemics following the Sars
outbreak in the early 2000s. “The insur-
ance industry foresaw what we are see-
ing now,” says Eric Dinallo, chair of the
insurance regulatory practice at Debev-
oise & Plimpton. “The insurance com-
panies managed this exact risk and
exposure appropriately.”
Businesses have been able to pay for
add-ons to policies that would cover
infectious diseases, but they have not
been popular with customers. Indeed,
some insurers say that even these were
not designed to cover the sort of cata-
strophic damage unleashed by Covid-19.
Huw Evans, director-general of the
Association of British Insurers, said:
“These covers were written to protect,
say, a restaurant against an employee
getting norovirus, and then the
premises having to be shut for a period
to be deep cleaned and the loss of busi-
ness that would follow.”
“Some people have argued they
should cover a global pandemic which
affects everything, but that’s not what
these policies are for,” he added.Are there any exceptions?
Potentially lots. While insurers haveplayed down the extent of business
interruption coverage for the pandemic,
lawyers who act for customers see
things very differently.
“We do believe that there is coverage,”
said Ben Lenhart at law firm Covington
&Burling. “We disagree strongly with
the view that it is generally excluded.”
Lawyers point to the variation in lan-
guage used in policies. Robin Cohen at
McKool Smith in New York, said her
firm had reviewed many policies. “A lot
of coverage we’ve seen does not have a
virus exclusion at all,” she said.
There were strong grounds for sayingthat the virus had caused physical dam-
age to properties, added Ms Cohen. In
the US, the government-ordered lock-
down might also trigger claims.
“A lot of governments are ordering
people to vacate properties. The virus
isn’t causing the loss, it’s the govern-
ment orders,” she said.
UK-based advisers also say there is
hope for policyholders. According to
Alex Balcombe, a partner at claims con-
sultant Harris Balcombe, businesses
should look carefully at their ability to
claim under “non-damage denial of
access” clauses, which cover occasionswhen the policyholder cannot access
the premises for reasons other than
physical damage.Will insurers be forced to pay up?
Several state legislatures in the US have
introduced bills that would compel
insurers to pay out for business inter-
ruption, especially to small companies.
However, any effort to force the
industry to pay out is likely to be
strongly resisted, not just by the insur-
ers but also potentially by regulators.
“I don’t see any regulators jumping to
support these proposals,” said Mr
Dinallo. “They understand the impact
of the exclusions from a financial health
point of view — all of a sudden [insurers]
could be under financial distress.”How long will this take to process?
Insurers and customers expect a lot of
disputes will end up in court. Given the
variety of policy wordings in place and
the sums at stake, litigation is likely to
go on for years and incur huge costs.Can I buy cover for pandemics?
For the moment, buying any sort ofinsurance that offsets the costs of
the coronavirus outbreak is next to
impossible.
Over the long term, new systems
could be established that will provide
some level of coverage.
“There is a need for a long, hard look
at how we provide pandemic cover to
businesses,” says Mr Evans at the Asso-
ciation of British Insurers. “What we
need to do is look at whether there is a
public-private partnership model,
which would have to involve very signif-
icant state support to enable the provi-
sion of affordable insurance to busi-
nesses.”What will happen to prices?
Regardless of whether the insurers end
up paying out on disputed business
interruption policies, prices are likely to
rise. Insurers say they will be paying
claims on more than a dozen different
types of policy, from travel to directors’
and officers’ liability.
There are no firm estimates yet of
how much it will all cost, but privately
some in the industry say the total bill
could easily pass $50bn.Insurance.Coronavirus
Disputes rise over how much businesses can claim for disruption
Given the variety of policies
and sums at stake, litigation is
likely to go on for years
Closed shop: stores in Regent Street, London, have had to shut— Tolga Akmen/AFP/GettyFiatChrysler’s
John Elkann,
who has
suspended
much of the
carmaker’s
production,
is to forgo his
annual pay
epa-EFEK AY E W I G G I N S— LO N D O N
M A R K VA N D E V E L D E— N E W YO R KThe US private equity firm behind one
of Europe’s biggest leveraged buyouts
is seizing on the coronavirus pandemic
to open talks with once-elusive take-
over targets.Advent International, which bought
Thyssenkrupp’s elevator business
alongside other investors for €17.2bn in
February, has started talks with “global
leaders” about possible deals, its chair-
man David Mussafer told the Financial
Times.
The coronavirus crisis has sent share
prices plummeting and left many com-
panies in desperate need of cash. There
is now an “opportunity for us to get
involved with some of the most incredi-
ble businesses on the planet that hereto-
fore might not have been interested, or
needed capital, or sought a partner,” Mr
Mussafer said, notably in the technol-
ogy, healthcare and consumer sectors.
“These opportunities are some of the
things that were so successful for us in
the last crisis... we’ve already begun to
have some incredible outreach and dis-
cussions with amazing businesses,” he
added.
The private equity industry is sitting
on a record cash pile of $2.5tn across all
fund types, according to consult-
ants Bain & Co.
Advent is targeting companies that
were “very high priced” before the pan-
demic and will look for so-called carve-
out deals to buy units that are spun out
of corporations, Mr Mussafer said. Its
strategy could involve buyouts, taking
minority stakes in public companies or
facilitating mergers between compa-
nies.
The €17.2bn price tag for Thyssenk-
rupp’s elevator business looks steep
today, following the drop in valuations
since their peak just a few weeks ago.
Mr Mussafer defended the deal,
describing the company as “one of the
world’s pearls, that we are incredibly
p r o u d t o o w n ,” h e s a i d. “O f
course... we would always like to own
everything at a lower price, but we don’t
predicate our business model on what
we call trying to steal first base,” he
added. “You have to pay a fair price.”
Some European politicians have
voiced concerns that coronavirus could
leave companies open to hostile cross-
border takeovers. In a speech last
month,European Commission presi-
dent Ursula von der Leyen urged
EU member states to “protect critical
European companies from foreign take-
overs or influence that could undermine
our security and public order”.
Advent is no stranger to politically
contentious deals, having acquired the
UK aerospace and defence group
Cobham in January over objections
from parts of Britain’s defence establish-
ment.
In the wake of the 2008 financial cri-
sis, Advent and rival private equity firm
Bain Capital bought Royal Bank of Scot-
land’s payments business, Worldpay, for
£1.8bn after the European Commission
ordered the bank to sell it as a condition
of its bailout. Worldpay’s growth surged
under private equity ownership, and its
2015 listing valued the company at
£6.3bn including debt.Financials
Advent opens
talks with
once-elusive
takeover
targets
The big freeze
Respondents to compensation consultancy survey ( )Sources: Pearl Meyer poll; FT researchDecided to make pay adjustments as scheduledDecided to freeze base salariesStrongly considering base salary freezesGiven some consideration to base salary freezesGiven little consideration to base salary freezes
Have not considered base salary freezes
but may yet do so
Other of respondents had yet to make a decisionCompany Name Pay cutDisney Bob Iger (exec chair) Forgo base salaryRoyal Caribbean Richard Fain Forgo base salaryAllegiant Travel Maurice Gallagher Forgo base salarySantander Ana Botín (chair) of total pay (salary and bonus)for Ryanair Michael O'Leary of salary for April and MayVirgin Atlantic Shai Weiss between April and JulyRolls-Royce Warren East salary for rest of
with additional deferral of bonusPay cuts for top bosses
There are
to be salaryreductions
for seniormanagers
at morethan 70 US
companiesAPRIL 7 2020 Section:Companies Time: 6/4/2020 - 18: 41 User: jeremy.wright Page Name: CONEWS2, Part,Page,Edition: USA, 7, 1