Bonuses and Furloughed Workers, when should a business pay it back?

By Elisabeth Cowell, Partner

Yesterday, The Spectator announced that it would be returning the money it received from the Government’s furlough scheme. The Company made this decision as while it has taken a financial hit due to Covid-19, it was nowhere near as bad as initially feared.

Speaking about the decision, Spectator Chairman Andrew Neil said that since the lockdown begun in March the business had actually managed to “remain a profitable and growing company, now with strengthening cash flow”. This is because the majority of its revenue comes from subscriptions and these have grown c.5% to 87,000 since the start of the outbreak. 

The decision to return this money has marked the start of a new reputational challenge for UK businesses. The latest HMRC data shows that a staggering £17.5 billion has been claimed by 1.1 million employers which have furloughed their staff since Rishi Sunak launched the Government’s job retention scheme in April. The UK taxpayer is now paying the salaries of nine million workers who have been placed on furlough. Unprecedented indeed.  

Any business – particularly those in the leisure, tourism and hospitality sectors - which has been forced to stop operating due to Covid-19 will be perceived as being completely justified in those applications. But those that have received government support – be it through the job retention scheme or one of the various loans being made available, yet has continued to trade, will need to think very carefully about their actions in the months and years to come. Otherwise, it is possible that the reputational implications from their decisions could indeed have as big an impact on their balance sheets as the Covid-19 outbreak. 

We have already seen plenty of businesses, particularly those run by wealthy individuals such as Richard Branson, or that are cash rich such as Disney, chastised by the media for their decision to furlough staff. As we start to look towards the winding down of lockdown, and a slow return to “business as usual”, this media scrutiny is only likely to grow as companies which have received government support must prepare to have their accounts analysed forensically for the years to come. 

The conversation in the media around this has already begun. The Guardian highlighted that “37% of FTSE 100 companies have already cut executive pay in order to reduce costs during the coronavirus lockdown. However, only 13% have cut the bonuses, and long-term incentive payments often comprise the biggest component of executive pay awards, raising concerns that pay cuts will not necessarily result in large reductions”. While The Times put bosses of leading PLCs under the spotlight who have paid themselves as much as £46m over the past five years, but are ‘taking advantage’ of the scheme.

Understanding how the media works will be crucial when making business decisions and it will be essential for businesses to test activities with advisers to assess the risk of creating significant reputational damage. If you are a business which has furloughed staff but your revenues and/or profits have remained the same, or increased, what pressures are you going to be under? There is every possibility that the media will portray you as a business which has taken advantage of, or benefitted from the furlough scheme.

Investors are another stakeholder group that will need to be managed expertly going forward. Corporate social responsibility has been a monumental theme in recent months, and  Environmental, Social & Governance (ESG) credentials have arguably never been more important to the investment community. How a business decides to behave in light of Covid-19 and the economic support it has received, immediately raises questions over the ‘social’ part of ESG. For instance, if your business has furloughed staff yet continues to pay dividends or bonuses, there is potential for severe scrutiny in the months ahead. 

Activism in relation to ESG has made the headlines already with the likes of JD Wetherspoon’s when it was accused of abandoning its staff during the pandemic. With a new wave of investors coming through with a much stronger ethical set of priorities, it has never been more important to think long term when it comes to your response to this issue which has rapidly dominated corporate life. 

Finally, there is a political risk to this all of this. The government will need to rebuild its finances after its huge splurge on the back of the pandemic. There are even murmurs that companies that have continued to operate robustly during this period, yet have received support from the UK taxpayer, could be subject to a “supertax”; another reason to tread carefully. 

It is clear that Covid-19 has created a very complicated web which companies will have to navigate for many years to come. The urgency for companies to demonstrate positive purpose have never been stronger. Being proactive, planning and clearly communicating with key stakeholders and investors is, and will remain, the best and most effective way in protecting a reputation.