Study into deferred share alternatives to LTIPs

I am delighted to have been engaged by The Purposeful Company, supported by HSBC Global Asset Management, to help undertake an important new research project exploring the adoption of simplified LTIP models in UK listed companies.

Context

In 2016 the report of the Investment Association Executive Remuneration Working Group recommended that companies be given greater flexibility to adopt alternatives to LTIPs, including deferred share awards, whether in the form of restricted shares or awards with pre-grant performance conditions. This recommendation was supported by The Purposeful Company Executive Remuneration Report published in February 2017.

Since these reports, there have been some developments in favour of greater flexibility in LTIP design. Norges Bank and Hermes both issued revised guidance in favour of simplified LTIP structures, and other leading investors have been strong advocates. The approach was also endorsed by the recent BEIS Select Committee report on executive pay, and the revised UK Corporate Governance Code created a level playing field between different pay models.

However, the number of implementations of deferred share alternatives to LTIPs in the UK market remains small and investor opinion remains divided on the merits of these models, despite anecdotal evidence that a number of companies would be keen to go down this route.

The study

HSBC Global Asset Management is sponsoring The Purposeful Company to undertake an independent review of the state of the market in relation to simplified LTIP models. We are reviewing case studies of companies that have implemented such plans, identifying motivations, anticipated benefits, perceived risks, and anticipated behavioural consequences. We are analysing experience to date of adopting such plans including lessons learned, implementation challenges, and barriers to adoption.

The views of investors, asset owners, proxy agencies, and remuneration consultants are being sought through interviews and a market-wide survey. Account will be taken of relevant research from academia, and international perspectives on the subject will be also be reflected. We will seek to assess whether the low adoption rate is due to lack of market demand, or whether there are other barriers to adoption that could and should be addressed. We will then publish a comprehensive review of market attitudes and experience in this area, together with recommendations for the future for both companies and investors.

As part of the study we are undertaking market-wide surveys of companies, asset managers, asset owners, and service providers. This will enable us to establish an overall market view of attitudes to simplified LTIP models and to understand the motivations for, and barriers to, their adoption.  

The survey results will be combined with the findings from case study interviews with companies, investors, and consultants, desk top research, and a review of academic evidence, in order to provide a comprehensive overview of the state of the market and any recommendations for companies or investors in relation to adoption of these models. The final report, survey results and conclusions will be published in October 2019 in time to inform policy reviews for the 2020 AGM season. All market participants will have equal access to the report and survey results.

About the Purposeful Company

The Purposeful Company is an independent think tank founded by Will Hutton and Clare Chapman in 2015 with the support of Andy Haldane at the Bank of England. It explores how aspects of the UK corporate governance and capital market ecosystem can be improved to encourage long-term behaviour by companies, creating value through fulfilling a purpose that benefits society. They have worked extensively on matters of corporate governance, strategic reporting, executive pay, and investor stewardship, providing submissions and evidence to BEIS, the FRC, the FCA, and the BEIS Select Committee. They convene groups of companies and investors, at twice-yearly dinners at the Bank of England and other events, to discuss reform of policy and practice to encourage purposeful companies. They are supported by members from the corporate, investor, and consulting sectors. They work closely with other think tanks such as Blue Print for Better Business.