UK asset owners consider new LTI guidelines that could see LTIs fundamentally change

It’s no secret that there is a high degree of dissatisfaction with long-term incentive plans across the stakeholder spectrum, and not least among asset owners and managers. Increasingly, investors are seeking LTI alternatives that will clearly incentivise high performance from executives.

In London, the Executive Remuneration Working Group has been assembled by the UK Investment Association, which represents the UK’s £5.5trillion asset management industry, to do just that (see HERE). The Association is concerned (among others) that the complexity of remuneration schemes is obscuring the proper scrutiny of their performance.

Over a 6-month period, the committee will come up with proposals that could result in an overhaul of the way Britain’s top public company CEOs are paid. It was acknowledged by a Group spokesman that between companies, investors, government and the media, we’ve failed to make executive pay an obvious reward for exceptional personal contribution. The Executive Group hopes to fix this failure.

It was mentioned that if the Group could propose valid executive reward alternatives, long-term incentives may be removed altogether. The Working Group’s objective is to make a real difference by bringing the simplicity that makes transparency meaningful to the issue.

Rather than eradicating LTIs altogether, another alternative suggested could be introducing systematic LTI plans that include setting fixed vesting periods and malus and clawback policies (to read more about these policies, see HERE).

While long-term incentive plans are controversial in their effectiveness, so far, very few other viable options exist. To borrow from Winston Churchill’s perspective on democracy, “LTIs are the worst form of CEO incentive, except for all those other forms that have been tried from time to time”.

It would be a positive development if the UK Investment Association came to a considered view of a viable LTI alternative. However, as regular attendees to Guerdon Associates’ and CGI Glass Lewis’s annual Forums for investors and directors have discovered, it is among investors that there is difficulty achieving consensus. We wish them well.

Their report should appear in the Autumn of 2016.


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