Long term incentive plans (“LTIPs”) – three things to consider as 2023 develops

For many businesses, 2023 will be the year that their current LTIP performance periods will come to an end, for others this may be the point where the LTIP looks as though it is unlikely to deliver any return at all.  For those tasked with reviewing and establishing the value (in all senses) of such awards, here are three things that we recommend you think about over the coming months:

1. Was the size of your award right in the first place?

This applies particularly to those using share / share option based LTIPs where the award size is based on a percentage of salary.  Whilst, of course, this question could mean “did we give people too small an award given the results that have occurred?”,– or, were awards made where the share price was in a dip (which is likely for many awards created in 2020) such that people have benefitted unduly now. The answer to these questions is likely to depend on whether there has been any element of “windfall” in the level of reward received by participants, which might cause the remuneration committee to consider exercising downward discretion.

Caution should always be exercised when considering reducing remuneration for key executives and employees – accordingly, it may only be suitable to make such an adjustment if there is a disparity between business performance and share price (i.e. if the business has not really grown in terms of turnover/profits but the share price has increased, this might indicate that the original value was low due to external factors on the market which have now gone).

2. Have we correctly factored-in the “covid period” into our calculations?

Where an LTIP is based upon long term “trading” metrics (such as turnover or profit) it is important to make sure that the effects of the pandemic period have been incorporated and understood when making a decision around awards.  In particular, does an “uplift” factor need to be included to reflect that the business was trading during a time of unprecedented uncertainty and therefore, in context, the results that were delivered were actually much better than could have been expected?

3. Is our LTIP still doing its job?

The purpose of the LTIP is to motivate and retain key executives to deliver sustained medium- to long-term value.  Therefore a LTIP which, with a few years still to run, that has no chance of making any payments (no matter how hard individuals work) may not be an effective incentive in these circumstances.

We would suggest caution before cancelling an existing plan and starting again.  This is due to both the practicalities/cost of taking such a step (including potentially speeding up P&L charges) and the message that it sends to owners/shareholders.  As a rule of thumb, it is unlikely to be appropriate to make a change to a LTIP if shareholders have suffered any loss during this time.

However, there are occasions where shareholders are also likely to consider that a “resetting” of the LTIP for executives and employees would be in their best interests too.  In such circumstances, we would recommend full and open dialogue with key shareholders as early as possible in order to establish agreement as to what changes could be made.

Should you want someone to help you explore your thinking on any of these issues, please contact Stuart James in the first instance.

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