According to reporting by The Financial Times, BT (formerly British Telecom) is planning to submit a drastic overhaul of its compensation program to shareholders for approval at its 2020 annual meeting. Specifically, BT will no longer grant a long-term incentive tied to performance metrics. Rather, executives will receive a smaller grant of time-based restricted shares. Effectively, these shares are guaranteed as long as the executive remains with the company.
This policy appears to fall in line with recent policy statements from the Council on Institutional Investors in the US and the UK-based think tank, the Purposeful Company, each of which have called on companies to cease granting performance-based incentives in favor of simplified time-based restricted share awards. The publications highlighted the concern that complex performance-based plans tend to obscure methodology but result in outsize awards not clearly tied to shareholder returns. This is also very similar to recommendations rejected by Parliament in 2017 to reduce the proportion of variable pay in executive arrangements.
However, in this case, the company appears motivated by a lack of payouts, not excess. A collapse in BT’s value resulted in former chief executive Gavin Patterson failing to receive his full bonus in consecutive years. He did not receive any LTIP shares in the previous two years and agreed to forfeit half of his annual bonus.
Shareholders are not necessarily opposed to the move. The article quotes a top 30 shareholder stating “[w]e are certainly not closed to it…I do think investors are expecting a big discount [on the total amount paid out] because restricted shares are easier to get.”
While another British firm, engineering company Weir, made a similar change and received shareholder support last year, there has not been a massive shift to similar pay structures. Given the size of the US market, there is substantially more variability in plan design, and thus so far there has not been a high-profile company disclosing a similar change. US shareholders broadly support performance-based pay, and companies have been encouraged to adopt best practices such as incorporating relative performance metrics, providing clear disclosure on how performance against non-GAAP metrics is derived, and adjusting metrics to account for non-core activities or the effects of stock buybacks.