Deferred Share Plans get over the first major hurdle (just about…)

May 28, 2020

Deferred Share Plans get over the first major hurdle (just about…)

Without doubt, it is always difficult being an early adopter and trying something new.

Those in new areas of the economy talk about being at the “bleeding edge” rather than the leading edge when it comes to changing things.  As we explored in a recent Article, the adoption in the UK of a Deferred Share Plan (also known as a Restricted Share Plan) by listed businesses for their Executives would certainly seem to fall into this category.

On May 21st 2020, Lloyds Banking Group (“Lloyds”) took that plunge with its proposed move from a Performance Share Plan (often dubbed a “PSP” or sometimes confusingly “LTIP”) to a Deferred Share Plan.

The resolution regarding this was passed by the shareholders but with a majority of only 64%.

This is likely to make an interesting dilemma for those Remuneration Committees considering a change in approach to long term incentives.

Whilst those outside the listed arena may consider 64% to be well above the “50.1%” required, it is likely be to seen by those closely involved as, at best, a cautious acceptance that the Deferred Shares may be a suitable plan – and certainly something that will remain highly scrutinised.

Importantly, by having more than 20% of shareholders dissent against the proposal, Lloyds will now be put on the Investment Association (“IA”)’s Public Register and will have to provide an “Update Statement” within six months of the vote, setting out an update on the views received from shareholders and any actions taken.

Whilst some companies will already have their changes to long term incentive plans in place and therefore we may see a few more Deferred Share Plans put to shareholders, it is most likely that the majority of Remuneration Committees will adopt a “wait and see” approach once all the smoke has cleared following the Update Statement.  Given that this may not be issued until November, it does indicate that an uptake in using Deferred Shares may not come until 2021 (and late into that year at that).

Whilst understandable, we would encourage Remuneration Committee not to wait just because market conditions are not fully favourable now.

Whilst Deferred Shares will not be the right solution for every organisation, if, following careful review, they are considered to be the best approach then it is well within IA guidelines for a Remuneration Committee to choose a “non-market” approach to incentivisation if that is what it believes would be best for the business.  Indeed, in our recent conversation with Andrew Ninian (the IA’s Corporate Governance Director), he reiterated that this should always be the approach that any Remuneration Committee should take to Executive Reward.

For further information about the issues raised in this article or to discuss any questions you may have, please contact Stuart James.

Our previous Article on Deferred Shares can be found here.

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