Investors and proxy advisers, among others, decry remuneration structures or one-off grants to retain executives as not being warranted and/or excessive remuneration. Many times the criticism is well justified. At other times, these criticisms fail to consider the full context and circumstances in which these grants may be made.
Here is a range of circumstances in which a one-off grant of equity in addition to the annual remuneration opportunity may be responsible and justified:
- CEO succession is the prime example when there may be several well qualified internal candidates. While this may seem counter-intuitive, the CEO position being the retention magnet, there is still a high risk of losing the high calibre talent. The capabilities of the potential successors will be well recognised in the market and open to poaching. The directors would be acting responsibly and in the best interests of the company to consider retention awards that are effective in keeping these highly regarded executives. These may be one-off grants or, a common feature in US compensation that has other advantages, an annual grant that is effectively deferred fixed pay in equity. “Deferred fixed pay” has been used as a criticism by some external stakeholders, but one that is usually not backed up with sufficient analysis and reasoning as to why it is “bad”. As a concept there are many things going for it.
- The board wants to keep these people up to and often after the succession – there is much corporate knowledge they do not want to lose. But, again, the unsuccessful internal candidate will often be quickly approached for other opportunities. The circumstances may be that the new CEO and board together want to retain the unsuccessful candidate for at least a year, if not longer.
- These are not the only circumstances, of course. There will often be one or more key people responsible for a transformation project that may be a muti year project. Their capabilities will be well known in the market and attractive for poaching. The board is obligated to manage risk and minimise the risk of loss of critical executives midway through a project. It makes sense to ensure the key executives see the transformation through. These candidates are best suited to receive a one-off grant.
- What if you have an executive leadership team (ELT) who are already well paid – potentially above the median – who are successful business leaders? They are ripe for the next CEO position that may be put in front of them. The remuneration framework simply may not be retentive and increasing fixed pay or incentive opportunity in line with market will not minimise the risk of loss. A special award contingent on service and a critical milestone may be justified.
- There may be a takeover in the offing. Key executives are often targeted by search firms, whereas the company would like them to see service through the takeover process, and often beyond.
There are other circumstances. Here is a checklist for directors to consider before looking to make a ‘responsible retention grant’ of equity.
- What are the circumstances? How are they different from usual that the remuneration framework is not sufficient to address?
- What are the implications of the executive/s loss? Can they be quantified?
- Will the explanation for the awards in the remuneration report and engagement meetings be accepted? Draft the explanation now and see if it makes sense.
- Have you made such grants previously? What was the rationale? What was investor response?
- Have investors given feedback on the executive team? Are they concerned about key person risk? If nothing has been said, are you sure there is a concern about management loss?
- Who initiated the discussion? And why?
- What retention hooks are already in place?
- What value will be effective? If that amount is excessive, it will devalue current remuneration and runs the risk of cannibalising the influence of the existing incentive framework.
- Have you considered the other ways to get the same effect without being nominated as a ‘retention grant’?
So, remember that a retention award may be warranted – but it needs to be a responsible retention award.© Guerdon Associates 2024 Back to all articles