Study shows low adoption of deferred share plans

A quarter of the UK’s biggest companies are failing to adopt the right remuneration polices to reward executive performance, according to a new study by The Purposeful Company, a management think tank.

The research, which looked at the benefits of adopting deferred share plans, found that at least 25% of British companies should be using schemes in order to pay fairer executive bonuses – rather than sticking to the more popular but controversial Long-Term Incentive Plans (LTIPs).

According to the paper, fewer than 5% of FTSE-350 firms have adopted deferred shares in place of a LTIP.  (See our analysis of Weir Group, the first company to attempt pay simplification.)

The major study, based on interviews with over 100 companies, investors, remuneration consultants and proxy advisers, showed widespread support amongst investors and companies for greater adoption of deferred share models.

The study revealed a massive 79% of investors and 73% of companies surveyed believe deferred shares are the best approach in certain companies and industries.

The respondents named greater simplicity and transparency as the key benefits of deferred share awards.

Nearly two-thirds (66%) of investors said changing to deferred shares would encourage executives to make decisions in the long-term interests of the business, while over half (52%) believed it would enable bosses to execute company strategies more effectively as they would not be distracted by LTIP targets.

Companies also highlighted practical benefits of deferred shares such as avoiding boom and bust in LTIP outcomes (49%) and the difficulties of long-term target setting (49%).

However, the report also exposed a reluctance by some firms to move away from LTIPs. Over half of the companies surveyed were sceptical about the behavioural impact of replacing LTIPs, with 59% saying they are not a key driver of behaviour.

A minority of investors and companies are also concerned deferred shares could lead to insufficiently variable pay outcomes, which in turn could increase the incidence of payment for mediocrity or failure.

LTIPs, which are usually paid out after three years, have come under increased scrutiny with banks and big corporates being accused of using the incentive plans to pay CEOs inflated bonuses.

While LTIPs are meant to be linked to performance, investors and stakeholders have questioned whether this is always the case.

Last November, the UK’s highest paid CEO Jeff Fairburn, then boss of housebuilder Persimmon, was ousted from the company after receiving a LTIP-linked £75m bonus. The big pay package was met with outrage from politicians and stakeholders. (See also Minerva’s previous posts)

Earlier this year the FTSE 100 CEO pay report revealed over £465m was paid out to FTSE 100 chief executives in 2018. While the average pay had fallen by 13% to £3.46m from the previous year, this was still more than 177 times the average UK salary of £29,574.

Following the FTSE report, which recommended restrictions on the use of LTIPs to help reign back on fat cat pay, a host of asset managers said they would take action to hold directors to account on pay.

In the US, the Council for Institutional Investors recently updated its guidelines to encourage greater use of deferred shares in place of LTIPs.

The Purposeful Company has made two key recommendations to help address the poor take-up of deferred shares in the UK following its findings.

These include changing how companies and investors engage on and evaluate the implementation of deferred shares, as well as design changes to tackle investor concerns about payment for mediocrity.

“To make progress in these two areas requires collaborative dialogue by investors and companies to enable new solutions and design norms to emerge,” the Purposeful Company stated in the report.

“This will require a willingness by investors and companies to devote more resources to the pay question in the short-term, both directly and via their respective service providers, in order to gain long-term benefits. Without specific effort on these issues, the pace of change will remain very slow,” the thinktank warned.

Last Updated: 24 October 2019