Many listed organisations will be putting their directors’ remuneration policy back to shareholders at the 2017 annual general meeting (AGM) for the first time since 2014. Renewal of the policy comes against a background of increasing calls for executive pay restraint and the risk of another ‘shareholder spring’ if investors are not happy with what they see.
One of the key areas on which remuneration committees will need to focus is whether the traditional long-term incentive plan (L-tip) remains fit for purpose. The Investment Association Working Group has urged committees to look at alternatives to see which is most appropriate for the organisation’s strategy and business needs.
One of the alternative models raised by the Working Group is the annual grant to executives of restricted share awards. No performance conditions would apply to such awards with vesting being dependent only on remaining in service. As a corollary, investors would expect awards to be granted at approximately half the level of current L-tip awards in terms of value.
It seems inevitable that we will see more restricted share plans put to shareholders this year although it is unlikely that we will see a dramatic shift away from the traditional L-tip. For many organisations, sticking with their L-tip will still be a valid conclusion to reach after reviewing the alternatives. Additionally, although this may militate against the move for simplicity, we can expect to see some organisations choosing to run a restricted share plan alongside an L-tip with a balance of awards under the two. It will also be interesting to see whether organisations attempt to have a more fluid policy in place so that they move between L-tips and other structures as circumstances change.
Finally, organisations putting in restricted share arrangements should also think not only about increasing the number of shares that directors are expected to hold but also imposing an additional holding period following the vesting of awards.
David Baxter is counsel at law firm Ashurst