In our May newsletter we reflected on how restricted share units (RSUs) were commonplace in the US (77% of S&P500), and although relatively uncommon in the UK and Australia, are present in some to executive equity grants.

Hybrid LTI plans combine performance share units (PSUs) with RSUs. Both provide alignment with shareholder interests but serve different purposes within the equity grant. Within Australia the RSU has multiple uses, including:

• Countering an executive’s short and medium term focus with traditional plans for a more balanced approach;
• A retention mechanism for when the economic environment is challenging and dampens cyclical company performance during downturns;
• Encouraging capital investment that have excellent internal rates of return, but a ramp up period exceeding traditional LTI performance periods; and
• Meeting prudential regulator requirements for pay to be deferred over very long periods

The PSUs use is typically to focus an executive on a specified performance outcome to be achieved at the end of a 3 or 4 year period.

Our sister GECN Group company, Farient Advisors, recently published an article that showed 17 FTSE 350 companies provided executive RSUs as a part of hybrid LTI plans.

They detailed 3 key drivers behind the UK adoption:

1. Market alignment: the current debate about the competitiveness of the UK market, particularly for those companies with significant US exposure, means hybrid plans are a way some FTSE companies are looking to compete for executive talent.
2. Uncertainty: the retentive benefit of RSUs, without the need to sacrifice the performance drive and potential upside that comes from PSUs.
3. Alignment with other senior employees: hybrid plans are already commonly adopted below board level in many companies. Where this is the case, including RSUs provides LTI participants alignment.

Early adopters in the UK also tended to be those with a significant market presence in the US, with this being the most compelling rationale for investors.

Three have been in place for over 5 years, 6 were put in place in 2023 and 2024. Eight have been proposed as a part of the 2025 AGM season.

Table 1: Comparison of Hybrid LTIs in Australia and United Kingdom

 

From the Australian perspective, 10 of the 11 companies that issue RSUs have hybrid plans. One company issues RSUs only.

RSUs first appeared in Australia in 2013, with 1 company in the communication services sector introducing a hybrid plan. They remained the only hybrid plans until 2021, when others began to incorporate them in their remuneration packages.

Of the 10, 4 are in the financial sector, 2 in the industrials sector and 1 in each of the utilities, communication services, materials and information technology sectors. While 7 of the 10 have a presence in the US, only 2 have more than 20% of their revenue derived from there.

Our analysis found 4 of the hybrid plans had a reduction in maximum long-term opportunity when first introduced; 4 increased maximum opportunity; and 2 made no change. Of the 4 that reduced their long-term opportunity, 1 reduced total fixed remuneration and 1 reduced the short-term opportunity.

Ownership Matters and CGI Glass Lewis have indicated that they will consider a hybrid LTI so long as there is a discount of “at least” 50% when replacing an LTI with RSUs. This accounts for the increased certainty of vesting. ISS Australia remains opposed to RSUs in most circumstances.

Despite the proxy indication they will be looking for discounts of “at least” 50%, our analysis found that the total long-term opportunity was reduced on average 23%, and ranged from 4% to 33%.

Guerdon Associates provided bases for whether RSUs could be a fit for your company. To read this article, click HERE.

May’s newsletter contained an article detailing the prevalence of RSUs in the ASX100, which can be found HERE.

To read our sister UK firm’s summary, click HERE.

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