A recent CGI Glass Lewis blog reveals how much this proxy adviser believes executive long term incentives and their place within a pay package are not fit for purpose. While this is a view of the Asia Pacific region of Glass Lewis, it coincides with a global policy review being undertaken both by Glass Lewis and ISS (SEE HERE).

So, what are Glass Lewis’ problems with a typical CEO LTI:

Expected value

All else being equal, the expected value for a relative TSR measure would be 43.75% of the maximum grant value, because:

• There is a 25% chance of top quartile performance, with 100% vesting;
• There is a 25% chance of second quartile performance, with 75% vesting at the mid-point of that range; and
• There is a 50% chance of third or fourth quartile performance, with nil vesting.

This compares to an expected value of the STI maximum being about 65%.

Tenure

The expected value is further diminished by the expected term of the CEO. At most 3 grants may vest over a CEO’s expected tenure (5 years) with the rest lapsing, unless the CEO is a good leaver. Even as a good leaver, many companies pro rate the LTI to the proportion of the performance period served. So knock off another 20% of annualised value.

Influence

The nature of LTI measures (e.g. relative TSR) means results are outside of executive control. Even those that can be directly influenced (e.g. EPS growth), are prone to forecast errors and exogenous events that cannot be predicted at grant date.

Plus additional shareholder constraints

These may be TSR gateways, nothing vesting for below median performance.

Time vested equity grants may be a better alternative, or larger lumps of LTI

These factors, suggest Glass Lewis, may drive some to consider time vested restricted share grants, or higher quanta given the lower probability.

Alas, Glass Lewis is just one of the 4 proxy advisers boards will face this season. The others have different views.

See the Glass Lewis blog HERE.

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