British Think Tank Calls for Elimination of Long-term Incentive Plans
November 2, 2019
Echoing the Council on Institutional Investors in the US, the influential British think-tank, The Purposeful Company, has called on more UK companies to award restricted shares rather than equity awards tied to performance metrics. The Financial Times reports that, according to the study conducted by the Purposeful Company, there is growing support among investors and companies for a restricted or deferred share model – where a portion of the annual bonus is paid based on service and performance conditions measured over a longer period and could continue into retirement. These plans could be appropriate for 25% of the listed companies compared to 5% that use them today.
To conduct the study, the think-tank surveyed investors and companies – interviewing shareholders, asset managers, companies, proxy advisors, and compensation consultants while also reviewing the practices of 19 large UK companies that are using deferred shares as opposed to LTIPs, as well as relevant academic research. The report states that approximately 80% of investors and 75% of companies said that deferred share schemes “were the best approach for certain companies and industries in certain situations.”
Deferred shares can help long-term alignment of executives’ and shareholders’ interests as well as provide greater simplicity, the report found. A minority of investors and companies also said that there were risks in using deferred shares, such as payment for mediocrity or failure, and reduced incentives.
To some extent, the conclusions lack specifics on which companies should consider deferred share schemes. Is it determined by the company’s sector or performance? Could it change over time? Tellingly, one of the final conclusions in the report states “While investors do not think that deferred shares are the right option for all companies, investors do want companies to consider a range of options, rather than defaulting to a traditional LTIP (emphasis included in the report).”
The Purposeful Company Task Force is a consortium of FTSE companies, investment houses, business schools, business consultancy firms and policy makers established with support from the Bank of England. It has been examining how the governance and capital markets environment in the UK could be enhanced to support the development of value generating companies, acting with purpose to the long-term benefit of all stakeholders. The organization is led by Clare Chapman, a Director at the Weir Group in the UK and Heidrick and Struggles and Will Hutton, Principal of Hertford College, University of Oxford.