UK politicians agree (no small feat) that LTIs are no good.
Rather, a critical analysis of their recommendations indicates UK politicians prefer that incentive payments not vary with performance.
The UK House of Commons Business, Industrial and Energy Committee’s report on Governance released on 30 March 2017 preferred LTIs to be replaced with grants of equity that vest over a long period of time, irrespective of the performance achieved by the executives at the company.
We expect that poorly performing British executives will barely contain their glee. The kingdom from which all those convicts came can now be a source of talent as good performing executives consider transporting themselves to meritocracies with performance pay, like Australia.
Specifically, the report concludes that LTIs should be phased out as soon as possible. No new LTIs should be agreed from the start of 2018 and existing agreements should not be renewed.
This, of course, is fatuous and unrealistic. For more than two decades, institutional investors have not been able to agree on what is appropriate executive remuneration, so it is improbable if not impossible to see it happening before 2018. So, if the politicians get their wish, expect a higher number of “no” votes than the average number in recent years. That is, instead of the circa 10% of FTSE 200 companies receiving no votes of more than 20%, expect a much higher proportion. This will sell more news article clicks, and feed the cycle of never-ending outrage.
The Committee is comprised of politicians from both main parties. The fact they could all agree while institutional investors may not, gives some indication of the populist feeling in the UK electorate.
The report also suggested the performance focus be further diluted by having short-term incentives based on non-financial measures and, more specifically, broader corporate responsibilities.
So those that think it is difficult to correlate executive pay with company performance will not have their dreams fulfilled if recommendations within this particular report are enacted.
The Committee recommends that the Financial Reporting Council (FRC) consult with stakeholders with a view to amending the Code (the ‘comply or explain’ code applicable in the UK) to establish deferred stock plans rather than LTIPs as best practice to incentivise long-term decision making.
The Committee report recommends this consultation should develop guidelines for the structure of executive pay that features:
- A simpler structure based primarily on salary plus long-term equity, to divest over a genuinely “long-term” period, normally at least five years, without large steps;
- Limited use of short-term performance-related cash bonuses, which should be tied, where possible, to wider company objectives or corporate governance responsibilities;
- Clear criteria for STIs: they should be genuinely stretching and be aimed to provide incentives rather than just reward.
We think it interesting that the Committee supports employee representation on remuneration committees. In effect, this report on governance is suggesting that board remuneration committees comprised of independent directors free of conflicts of interest should have members (i.e. employees) with conflicts of interest.
In line with the trend for simplification, the Committee advocates that RemCo chairs should drive discussions aimed at delivering simpler structures.
The report also advocates other aspects associated with reporting (that will, of course, increase remuneration report length and complexity), and governance. The latter, in contrast to the general tenor of the report, includes the view that there should not be a binding vote on pay policy.
See the report HERE.
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