A quarter of British companies should consider shifting their executive remuneration policies away from long-term incentive plans and towards restricted share awards, according to a report from an influential management think-tank.
The use of long-term incentive plans (LTIPs) has been criticised in recent years by some investment groups and politicians for their complexity, short-termism and allowing management to reap large payouts, not necessarily linked to performance.
A study by the Purposeful Company found growing support among investors and companies for greater adoption of restricted or deferred share models — where part of an annual bonus is paid subject to service and performance conditions measured over a longer period, and even after retirement.
Such plans might be appropriate for a quarter or more of companies, it found, after assessing the plans of the roughly 5 per cent of FTSE 350 groups that have adopted similar models.
The study was based on a survey of investors and companies, interviews with shareholders, asset managers, companies, proxy advisers and remuneration consultants as well as academic research that looked at companies using deferred share schemes.
Four-fifths of investors and three-quarters of companies said that deferred share schemes were the best approach for certain companies and industries in certain situations.
Purposeful Company chair Clare Chapman said: “There is a clear call from institutional investors for boards to be bold. A quarter of all companies could and should shift their executive remuneration policies away from long-term incentive plans and towards simpler plans like restricted shares.”
She called for clearer guidance to shareholder advisory groups. “Companies need a licence to simplify pay plans for CEOs based on deferred shares that must be held for the long-term, instead of complex performance targets.”
Deferred shares can help long-term alignment and behaviour as well as provide greater simplicity and less time spent on executive pay and target setting, the report found.
But 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.
The report follows a similar debate in the US, where the Council of Institutional Investors recently updated its guidelines to encourage greater use of deferred shares in place of LTIPs.
The report said that companies needed to look closely about how their pay rewards were designed, saying that the use of options resulted in higher risk taking and more volatility, particularly close to the exercise price and vesting events. High levels of CEO share ownership led to higher long-term share price performance, it said.
