How do not-for-profits design their long-term incentives?
October 18, 2018
MM&K investigated the LTIP policies for 59 of the largest not-for-profit organisations to answer this question.
Our sample consists of Charities, Housing Associations, Co-operatives, Building Societies, Mutual Insurance companies and Education Establishments (Universities and College Groups). It is important to note that the vast majority of these organisations do not operate an LTIP. Policy data is publicly available for 16 companies, which we have analysed.
Firstly, we found that the performance measures are very specific to the individual organisation. This contrasts with what we see in many listed companies, which often have very similar designs of LTIPs within certain sectors, especially the performance measures. For example, Oil & Gas exploration and production companies will often place a heavy weighting on a TSR based target. In contrast, in not-for profit companies the performance measures vary greatly; examples include return on capital, revenue, profit and net debt to EBITDA ratio. There are a few measures we do see recurring – such as employee engagement and customer service, but even these only occur in just over half of the companies we looked at.
This isn’t the only way in which the designs differ from listed companies. All the not-for-profit plans are cash-based (as there aren’t any shares available!) whereas it is much more common for listed companies to award shares through their LTIPs. Also, the earnings opportunity is generally more modest, with exceptions such as Liverpool Victoria offering a maximum opportunity of 300% of salary to its CEO.
In all cases, awards are granted annually and vest over a period of three years, a paradigm often seen in listed companies’ LTIP designs. We found only two cases in which an additional deferral/holding period is required. This is where the company defers the award for a further period of time (usually between one and three years), with no further performance conditions, a practice that is rapidly becoming the norm among listed companies.
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