Towards the wider use of deferred share plans
Study by the “Purposeful Company”
The Purposeful Company is an independent voluntary think tank set up in 2015 with the support of the Bank of England to help transform British Business by identifying with like-minded companies changes to policy and practice aimed at creating long-term value. The think-tank has published extensively on policy matters relating to Executive Pay, Corporate Governance and Investor Stewardship.
In October 2019, it published a report which considered the use of deferred share plans by British companies. Increased use of such plans was the main recommendation of the Investment Association Working Group in July 2016 (a body comprising investors and major companies, to address the future of executive remuneration which was seen by many commentators to be broken). The Working Group’s headline recommendation was to simplify pay structures and get away from existing long-term incentive plans which were recognised as not working effectively for most companies. Shareholders wanted companies proactively to consider whether alternative performance incentives may better align pay with a company’s strategy. In particular the earlier report sought to encourage the use of Deferred Share Plans, such as restricted stock plans, in preference to the ubiquitous Performance Share Plans (LTIPS). The latter were considered to be the cause of undue complexity in executive pay packages.
In the three years since this report, very few companies have taken up this recommendation. Only about 5% of FTSE 350 companies use them. This new report seeks to address this problem and re-open the initiative – to find out if there is still support for greater adoption of deferred share plans amongst investors and companies (there is), to explore further their benefits and to find what the barriers are to wider adoption. The report is in two parts – the Key Findings and Recommendations and the Full Report.
The report steering group comprises five people, mostly business school academics. They engaged with over 100 organisations (asset owners, asset managers, companies, proxy advisors and remuneration consultants) and reviewed the experience of 19 companies that are currently operating deferred shares. Three-quarters of investors and companies believe that deferred shares are the best approach in the right circumstances. Deferred shares include restricted shares (awards of shares with no further performance conditions, other than possibly a minimum performance underpin condition prior to vesting) deferred bonuses or performance-on-grant awards. For full effect the deferral should be very long-term and ideally include a period when the executive is no longer in the role.
Academic research in the UK and the US indicates that share ownership alone can provide sufficient motivation to increase share value. There is also evidence that companies using restricted stock outperform those using LTIPs. It is not necessary to have performance hurdles. However, not everyone accepts this view and there is, potentially, considerable resistance to the introduction of a deferred share plan. Whilst such a plan is simpler than an LTIP, there is likely to be a lot of work and consultation persuading shareholders and proxy agencies that it is a measure to support. The two reports provide a lot of evidence and recommendations to help companies that wish to implement a plan. They consider that IA guidelines and proxy advisor guidelines will be revised in time for the 2021 season and companies planning a deferred share plan can use this to set their timetable for change.