The Key to Hospitality and Travel Recovery? Retaining Talented Executives….
Hoggett Bowers hosted a group of senior industry figures at our first Leisure, Hospitality and Travel event of 2021. After 11 months of lockdown there appears to be light at the end of the tunnel, although is this light real or is it someone just waving a torch?
There is some optimism, albeit balanced with reality regarding consumer appetite to spend on leisure post lockdown, which will aid a quick recovery. It is also felt that the young and vaccinated over 50s play an important role.
Equally speed of recovery for businesses which rely on corporate spending is much less certain. If we enter recession with an associated rise in unemployment, once restrictions ease and government support ends, this will make strategic more planning difficult.
Our Chair started the conversation with a comment on Cineworld plc’s much publicised remuneration policy and the handling of their employees during the crisis. This highlights a challenge for many businesses which raised the key question of the discussion: How do businesses balance entrepreneurial spirit, drive and incentives with fairness and social governance in today’s world, let alone when recovering from a pandemic?
Executive flight risk and challenges for the Renumeration Committee (RemCo)
The RemCo and RemCo Chairs of listed businesses are in regular dialogue with shareholders over incentives for management teams. Boards are looking to retain their entrepreneurial management teams through key incentives. This can cause problems with the shareholder base but ultimately companies must be more flexible to encourage the management or there is the danger that talented executives drift to other sectors.
Private Equity (PE) backed businesses are different in that there is already an equity structure in place which creates the uptick in remuneration upon sale. The challenge this year is where the owners have had to recapitalise from their own pockets which is painful. Here it is not just a question of retention, but more keeping executives motivated over a very difficult one-to-two- year trading period as well as dealing with a delayed exit.
With so much short-term working and uncertainty in the sector, the challenge of how to create incentives for this year and next, which are not just based on profitability, remains incredibly difficult.
“Is it time for RemCo Chairs to be rewarded properly for what is an increasingly key difficult balancing act?”
There was some empathy with the entrepreneurial design that Cineworld plc have adopted given much of the owner’s wealth is tied up in the business. However, it was recognised that there was misalignment with the treatment of their workforce. Fair rewards for a CEO are expected, but it is accepted that the wealth must be shared more generously with the employees. Some businesses are already doing so but it is not yet the norm.
The divergence between management incentive plans in PE businesses versus the plc environment is stark. Plc LTIPs creates most value over a six year cycle, but the conservative nature of a public company comes with claw backs, which can affect that value. PE remuneration it is quite granular and straight forward. Management has shares, there is debt in the business and when the business gets sold, management share the remaining value according to the percentage of shares they own. The pandemic has had a negative impact on both scenarios with a drop in share prices for plc’s and extended timeframes to exit for PE companies.
Executives realise the different risk parameters between plc and PE. However, plc boards potentially face the flight risk as executives may weigh up the timelines for reward and choose to work in the private arena with more clear-cut rewards. This must be part of the remuneration dialogue and consultation with plc shareholders.
It is widely accepted that, whilst there is less enthusiasm for upward reward in the current climate, it does play a part in retaining talented executives.
To navigate this challenge engagement between the board and investors is vital. Early informal engagement which gets to the heart of the issues quickly, is vital. Most institutional investors will find the time to engage with quality companies and their leadership teams. If the renumeration policy does not pass the ‘smell’ test, then investors can quickly challenge this.
The RemCo role has become a lot ‘hotter’ in recent years. If the committee is not being challenged by executives, the board and shareholders, they are not having progressive conversations to address all of the above issues.
The social balancing act!
The ESG agenda highlights that executive reward is out of balance with the wider rewards in society. Specifically, when looking at the increase in global wealth over the last 20 years. The failed states have done badly, whilst Asian countries overall fared far better. In the case of Western democracies, low economic growth and aging populations have led to divergent needs. This partially explains Trump and Brexit and the associated protest voters who feel that wealth has been created, but not for them. Business is part of the ecosystem that has created this problem and it can be difficult to be part of the solution, if the risk is to lose the CEO to the competition.
“Financial performance seems not to be on the agenda, which is lunacy.”
Therefore, in this context, how can the social balancing of executive rewards with the need to remain competitive in the market be achieved? Are there enough SIDS, NEDs with experience to influence and steer the ESG agenda with new thinking?
In sectors which have frontline workers who are directly affected by the pandemic, it has rightly made employers think about benefits in a different way. Considering whether death in service insurance is set at the right level, is one example.
ESG is progressing to be a key part of annual reports, however some highlighted that many analysts focus on matters such a remuneration, energy consumption and social impact etc, rather than the financial consequences. A balance must be kept.
One of the benefits of the crisis is it has moved the focus in businesses from doing what is ‘worthy’ to what have businesses truly achieved. The focus on how businesses have made a tangible difference in their communities has improved focus on ESG impact. The ESG agenda must evolve from the strategic, high level to become aligned to a company’s local behaviours and tactics, as we have seen greater focus on community driven initiatives.
“Businesses will be judged on this when people look back.”
One possible shape of the recovery for the UK is a ‘K shaped curve’ with an increasing divide on consumer spending power between the haves and have nots. The economy could be fuelled by the middle class but there are c. 9 million people who have used savings to get by during the pandemic. These individuals, who will be struggling in the months and years ahead represent the core customer base for many organisations. Therefore, businesses must remain mindful of how to connect with these customers through their actions.
Experimentation rather than strategic innovation..
Organisations were forced to rapidly address the requirements of a dispersed work force through technology in the initial weeks of the pandemic. On the back of this, many businesses highlighted an increased appetite to enable innovation to carry on at a much faster pace than was typical of the industry – but has that been the case in reality?
Innovation is a big word for many businesses right now when speaking of true innovation at a strategic level. The willingness and ability to think about innovation in short cycles, trial things and then kill them off if they are not working, is much greater than before. The word agility has been much used, but this becomes harder as businesses find themselves facing new challenges during the various lockdown cycles.
“Businesses have been more prepared to fail in trying new things.”
Many businesses have continued to push forward on environmental initiatives such as reducing or eliminating single use plastics, however the feeling is that innovation in the true sense of the word has slowed down due to capital restraints and has had to give way to the urgent necessary changes, such as QR codes and digitisation of customer journeys.
What is clear is businesses have been more prepared to fail in trying new things and some have been turning the model on its head and are experimenting, but more out of necessity than a strategic imperative.
The flip flop nature of Government during the pandemic.
In terms of engagement from Government, the view was there has been a huge amount of tea and sympathy but not a lot of action. The Government has not engaged in a meaningful way and often shutting down quickly and re-opening with little notice, which is particularly difficult for smaller businesses and is costly for all. Of course, the Government is not in an easy position, but the ‘flip flop’ nature of decision making was seen as very unhelpful.
How confident people should feel about booking a holiday remains a big question. It is incredibly time consuming and costly for travel and holiday companies to sell holidays, only to cancel and refund them, particularly as customer goodwill is at stake.
Many travel businesses had a disastrous 2020 and to have a second summer written off could be fatal. The Government should be factoring this into their thinking and prioritising such things as digital vaccine passports, if this is the agreed solution.
“There has been a huge amount of tea and sympathy but not a lot of action.”
With travel at 8% of GDP it is not clear if Government views the sector as significant enough or is treating it as a luxury item.
The Government is not providing clarity and both business and the consumer just want to know where they stand. If there is no overseas travel in 2021, Government should make the call and business will deal with it. In Germany, the furlough scheme will run until 2023 which has given business some certainty and enabled forward planning.
What has become clear is the resources within the Government seem limited and rather depends on the minister in charge of various sectors. The minister in charge of the sectors is Phil Scully, who is highly rated. However his department is also responsible for non-essential retail and London. This is far too broad a remit to be effective and has not served all sectors equally.
The sectors with strong industry bodies and representation seem to have been best served e.g., pubs represented by UK Hospitality. These stronger industry bodies have created a louder voice and better alignment of objectives for the sectors. It is recognised that Government engaged very regularly during lockdown 1.0 but this has not been sustained since, much to the frustration of all the sectors in Leisure, Hospitality & Travel.
Since we held this roundtable, a clearer road map has been outlined by the government, albeit with a high number of caveats. How quickly the sectors recover remain very uncertain and provides strategic challenges for executive teams and boards.
The quality of the management teams, and retention of these, will be key to the long-term success, as will strategic innovation. Whilst innovation is off the agenda for now, the benefits of the more agile approach adopted during the pandemic, will surely have a positive impact, and should accelerate significant opportunities for innovation once businesses return to profitability.
Engagement with stakeholders, communities and employees has evolved during this time, and whilst those leading businesses will always be paid more that those who ‘do the doing’, the dialogue fostered over the past 11months will surely enable a more socially balanced approach to business going forward.
As businesses build back better, we will surely see a newfound resilience and greater appreciation for the communities they serve, thus improving the value business brings to society as a whole, not just major shareholders.
Hoggett Bowers are very grateful to all our guests and a special thank you to:
Senior Independent Director
Revolution Bars Group plc
Hollywood Bowl Group plc
Senior Independent Director Non-Executive Director Non-Executive Director
Domino’s Pizza Group plc Dunelm Group plc St Modwen plc
A-Rosa River Cruises Veeve
On the Beach Group plc Howden Joinery Group plc
Executive Chair Chair
Direct Ferries Peach
Non-Executive Director Senior Independent Director Non-Executive Director Senior Independent Director
William Hill plc Dr Martens plc Stagecoach Group plc Treatt plc