MM&K News

Impact of COVID -19 on employee share schemes – HMRC bulletin

On 8 June 2020, HMRC published the Employment Related Securities Bulletin 35 which addresses certain issues concerning the impact of COVID -19 on employee share schemes.

A brief summary of the bulletin is set out below. Click here for the full bulletin.

Enterprise Management Incentives (EMIs)

With regard to EMI, the bulletin states that HMRC are considering the issues raised by stakeholders and they will provide updates as soon as it is possible. See EMI Update below.

With regard to agreed EMI valuations, HMRC acknowledges that COVID-19 may lead to situations where EMI options may not be granted within the 90-day normal validity period. Accordingly, HMRC have confirmed that, provided there have been no circumstances which would impact the valuation, then:

• where the 90 days expired on or after 1 March 2020, the valuation letter can be automatically treated as being extended by a period of 30 days; and

• any new EMI valuation agreement letter issued on or after 1 March 2020 will be valid for 120 days.

Save As You Earn (SAYE):

Under the existing rules, participants may miss contributions for up to a maximum of 12 months without the option lapsing or the cancellation of the savings contract. HMRC have confirmed that they will allow contributions to be postponed for a period exceeding the 12month payment holiday where the monthly contributions are missed because of employees being furloughed or being on unpaid leave due to COVID-19.

HMRC will update its specimen SAYE Prospectus from 10 June 2020 and its Employee Tax Advantaged Share Scheme User Manual to reflect the extension to the payment holiday, where the contributions are missed due to COVID-19. SAYE contracts do not need to be re-issued to take advantage of the extension.

The bulletin also states (with an illustration) that the maturity date of an option will be postponed by the total number of months missed, including those missed as a result of COVID-19.

The bulletin also confirms that, payments to furloughed employees pursuant to the Coronavirus Job Retention Scheme (CJRS) can constitute salary and SAYE contributions can continue to be deducted from such payments.

HMRC will also permit payments to be made via standing order for participants who are unable to make their monthly contributions from salary due to having to take unpaid leave as a result of COVID-19 but the deductions from salary would recommence at the earliest opportunity.

Share Incentive Plans (SIP):

The bulletin states that, like SAYE, payments to furloughed employees pursuant to CJRS can constitute salary and SIP contributions can continue to be deducted from these payments.

The bulletin confirms that participants will not be allowed to make-up missed deductions if they stop them due to COVID-19.

Company Share Option Plans (CSOP):

HMRC have confirmed that CSOP options granted to full time directors and/or qualifying employees at the time of grant before COVID-19 will continue to be qualifying CSOP options where such director or employee is furloughed because of COVID-19.

Deadline for registration of new schemes and filing of returns

The bulletin states that employers and agents should try to meet the 6 July 2020 deadline for registering new schemes and filing ERS annual returns.

However, if it is not possible to meet the 6 July deadline due to COVID-19, HMRC will consider COVID-19 as a reasonable excuse, provided employers and agents can demonstrate how they were affected by COVID-19 when making their appeal.

EMI Update

On 26 June 2020, a new clause 32 (Enterprise management incentives: disqualifying events) was added to Finance Bill 2020 in relation to the impact of COVID-19 to EMI plans.

This clause provides a time limited exception for EMI option holders who are unable to meet the necessary ‘working time’ requirements (see below) as a result of COVID-19. This exception will take effect from 19 March 2020 and come to an end of on 5 April 2021 (which can be extended to 5 April 2022, if required).

The legislation requires that to qualify for the tax advantages associated with an EMI option, an employee must work at least 25 hours per week or if less, at least 75% of the employee’s working time for the company (or the group) granting the EMI option. This is the ‘working time’ requirement. If the option holder is unable to meet the ‘working time’ requirement at any time during the period in which the option holder holds the EMI option, a ‘disqualifying event’ occurs. In that case, the option holder will lose the EMI tax advantages unless the option is exercised within 90 days of the ‘disqualifying event’.

The explanatory notes to the new clause states that the new clause ensures that:

• existing holders of EMI options do not suffer a disqualifying event and lose the tax advantages as a result of taking unpaid leave, being furloughed or working reduced hours because of COVID-19; and

• EMI option holders are not forced to exercise their option earlier than planned because of COVID-19.

Our view

In our view, HMRC have helpfully addressed some of the issues that have impacted the operation of tax-advantaged employee share schemes due to COVID-19, in particular, with regard to SAYE and SIP. The proposed changes to the EMI legislation through the Finance Bill should also alleviate some of the major concerns that COVID-19 has presented to EMI option holders.

However, it is conceivable that further issues will, and are likely to, emerge on the impact of the unprecedented pandemic on employee share schemes.  For example, the performance conditions attaching to certain EMI and CSOP options granted prior to COVID-19 may need to be substantially altered to give business efficacy post-COVID-19. Would HMRC view major alteration to the performance conditions a fundamental change to the option (and therefore, the grant of a new option)?

Further guidance on other aspects of the impact of COVID-19 on employee share schemes would be very welcome.

For further information,  please contact JD Ghosh or Stuart James

Brief Overview of Latest Trends in PE and VC Fund Managers’ Compensation

MM&K has recently conducted its annual Pulse Survey of the latest trends in the world of PE and VC Fund Managers’ pay and staffing levels. Perhaps not surprisingly, many firms were somewhat distracted by the Lockdown and the effect this was having on their staff and their working patterns.

Notwithstanding this, we were able to gather a reasonable amount of data, sufficient to make the following assessments:

1. Just one third of firms saw some increases in the bonus levels of their non partner investment professionals compared to 2019, and these increases tended to be not significant. For most firms, bonuses stayed pretty much at the same level for Investment directors, associates and analysts.

2. An even smaller percentage of firms saw any upward movement for partners.

3. 67% of firms indicated that they were expecting to increase the number of their associates and analysts during 2020, while half of firms were expecting to increase the numbers of their investment directors and junior partners.

4. These statistics are in contrast to the situation with administrative/support staff where only 15% of firms are expecting to increase their numbers.

For all the firms that participated in this pulse survey, they did so after scale of the Covid-19 pandemic was pretty well known.

From our 2019 survey, 54% of PE and VC firms pay their annual bonuses either in December or January, whilst another 31% pay them in February or March. From what we have heard in the industry, for those firms that did not pay their bonuses until March, many of them did decide to scale back their bonuses because of Covid-19. So we are not that surprised by the bonus statistics shown above.

One important reason for the scaling back of bonuses was the recognition by firms that they were going to need to recruit more staff, particularly at the associate and analyst levels, to help deal with the additional workload that the Covid pandemic was going to bring in. This additional workload that was becoming evident, was being driven by two factors, one relating to the need to monitor more closely and provide extra support to their existing portfolio businesses, the other to the need to research, identify, carry out due diligence and execute new deal opportunities that were expected to be coming up (albeit later in the year) at potentially attractive prices.

There is no question that the first of these factors started to happen some time ago, during March. However, the jury is out in respect of when and if the Covid pandemic will result in lots of new deal opportunities coming through at attractively low prices. Some new deals are happening at the moment, but not that many and certainly less than in 2019. We expect that Q3 will remain pretty quiet with Q4 seeing some opportunistic buying by those houses that are willing to take perhaps a bigger risk than normal. Much of course will depend on whether the easing of lockdown in western Europe continues successfully, without any new spikes and with increasing confidence returning to markets and to the deal doers.

We have not (yet) seen much evidence of firms going out into the market to recruit a whole raft of associates and analysts. If this is going to happen, we believe it is most likely to do so towards the end of Q3 when there will hopefully be much greater clarity about the long term effects on businesses and the economy generally of this ghastly virus and when the new deal opportunities really start to appear.

And of course, if it does happen, it will be interesting to see what effect this would have on the pay levels for these more junior investment professionals.

The 2020 MM&K/Holt European PE and VC Compensation Survey Report, which is supported by PEI Media, should shed some light on this question, as well as on many others, when it is published later this year, in October.

For further information about the issues raised in this article or to discuss any questions you may have, please contact Nigel Mills or Margarita Skripina.

Why the next “people conversation” you have is likely to be the most important one yet

The recent summer solstice reminds us that the year is half way through and for those involved in managing people, this is likely to be the time for a half year or even full year review. However, even if it isn’t, now is still the time to have these conversations.

Given all of the recent challenges offered to businesses, it may be tempting to think that not enough has happened to warrant a conversation, or that the wider circumstances in the economy means that any meaningful assessment of someone’s performance is not possible or even appropriate.

However, as with many situations, what might be considered a challenge is actually an opportunity. Here are three thoughts regarding why taking the time to have some sort of “review” with your team over the next month will be important to your business:

1. Connection
Even for those people who spend all their days in Zoom meetings, there is a fundamental difference between a business call, often where interaction is stilted and often involves multiple parties, and a video (or even regular phone call) focused on that person and how they are doing.

Making your team member feel connected to you (and by proxy the wider organisation) can help them deal with feelings of self-isolation or stress – feelings they may not even realise they are having as they move towards whatever the “new normal” may be for them.

Honest conversations, built on trust, are the best way to raise early warning flags that someone might be struggling or could be struggling soon. Given that the cost of prevention is always cheaper than the cost of treatment or rectification (both in terms of productivity and money) making this connection is essential.

2. Loyalty to Leadership
Simply put, the more loyal a person feels towards someone or something, the harder they will work and the more effort they will give. Showing leadership and understanding in times of uncertainty is a sure-fire way to increase loyalty.

3. Performance
There are two ways in which a review of someone’s performance will be critical to the business now.

Firstly, it should afford you the ability to see whether some important work skills like adaptability, resilience and innovation are being displayed. It is likely that these types of skills will be the most valuable in moving any business out of its current situation and into smoother waters. Even if your current people-management system does not allow for it, reviewing against these skills sets should be done.

Conversely, a well planned and executed conversation with your team member may start to show that they are displaying “limited thinking”. Again, early identification of a potential issue can lead to early interventions which are always beneficial for people development and cost savings.

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

Designing remuneration policy for the “new normal”

All of us have had to make major adjustments to our lives over the past three months. Boards of directors and their remuneration committees are no exception. Many companies have been required to make transformational changes to their operations and their remuneration policies, and may yet have to make more.

Here are five key agenda items for remuneration committees as companies navigate their way to a successful transition to the “new normal”, whatever that might look like for them:

1. Incentives

In many cases, corporate objectives and related performance targets, set before lock-down for both annual bonus and LTIs, will not be achievable. The Investment Association recently published guidance on the way investors expect companies to deal with this. However, their approach may not work for everyone.

Some have commented that the current, economic situation, highlights the importance of relative performance, particularly TSR. We do not share this view.

Remuneration committees and investors should be concerned about the ability of relative TSR comparisons to produce maximum vesting for management, despite lower returns to shareholders. Mitigation, based on the underlying financial performance of the company determined at the discretion of the committee, may do little to avert criticism if it is perceived, at a time when executive pay is likely to be subject to even closer scrutiny, that executives have not shared the pain with investors.

Three-year rolling LTI cycles will be affected, possibly up to 2022, by 2020 performance. As a result, many companies have had (and will have) to re-think the design of their incentive programmes, paying particular attention to:

• funding and
• performance measures  /  targets.

MM&K has written about the emergence (and benefits) of restricted share plans as a way of retaining executive talent and aligning their interests with those of their shareholders over time.   We expect this trend to quicken.

2. Use of discretion

In our experience, remuneration committees are sometimes wary about exercising discretion, on the grounds that they will be damned if they do and damned if they don’t. However, we expect to see greater use of discretion, particularly in relation to annual bonus, as committees battle with the difficulty of identifying performance targets and need to find some basis on which to set incentive awards.

But the exercise of discretion requires care. More than ever, committees need to be in touch with remuneration policies for the wider workforce, whose incentives may be formulaic.  It may be hard for the committee to justify a maximum bonus award for top executives after exercising discretion to adjust for missed objectives if, in the wider workforce, bonus awards are reduced owing to missed targets.

Proxy agencies oppose discretion. This is not likely to change but there is pressure to reduce their influence, which should reduce the dependence placed on their views by some committees. Therefore, committees need support to develop clear policies which they can justify to stakeholders. Early engagement to present well thought-through proposals to investors has never been more important.

3. Diversity/fairness

A stronger focus on diversity and inequality, apart from disclosure requirements, is likely to create heightened attention on the CEO pay ratio, which will require committees to balance carefully:

• performance and competitiveness
• ESG priorities and
• customer, employee and shareholder expectations

as part of their assessment of the justifiability of the company’s remuneration policy and practice.

Committees may also be asked to pay interim bonuses to retain key executives. Such awards must be considered on their individual merits. However, committees might consider the quid pro quo of a commitment to repay the award if the executive resigns before the end of the financial year to which the bonus relates.

4. Reviews

Remuneration data for 2019 may be unreliable in relation to 2020 and, possibly, 2021. Committees will need to work with their HR departments and external advisers to reach decisions about the positioning of remuneration for the next year or two.

It may, therefore, be prudent to make an early start on the 2020 review.

5. Working practices

Mass scale working from home has transformed working practices, aided by technology. It will be interesting to see its effect on pay policies; lower pay as a trade-off for a better lifestyle or higher pay because there are fewer people to do the work?

Lower employee numbers are likely to increase focus on diversity and impact on training, recruitment and culture. Unless the “new normal” is the same as the “old normal” (which is looking increasingly doubtful), companies will need their remuneration, recruitment, diversity and ESG policies to come together to manage the future.

With thanks to our friends at Johnson Associates Inc. in New York, whose observations about pay in the financial services sector, in which they are specialists, provided the inspiration for this article. For further information or if you would like to discuss any of the points or issues raised, please contact Paul Norris.

A recent report sponsored by the Investment Association said that the IA is strongly in favour of wider employee share ownership.  But is now a good time to adopt a new employee share plan?

A recent report, published by The Social Market Foundation (“the SMF”), in February 2020 was entitled “Strengthening employee share ownership in the UK”.  This report was both supported and funded by the Investment Association.

The SMF is an independent British political public policy think-tank based in Westminster, London.  It is allegedly one of the ‘Top 12 Think Tanks in Britain’.

The Report is a lengthy tome and it assesses the potential for employee share ownership to reduce inequality, tackle the UK’s supposed productivity problems, improve financial resilience and increase the employees’ voice within companies.

There is, says the report, a growing amount of evidence that employee ownership enhances long-term performance within companies, it improves employee commitment and it helps staff retention.  A poll of workers in larger companies found that 68 per cent liked the idea of holding shares in the companies they worked for, while 58 per cent agreed that it would make them more motivated.

Britain’s institutional investors are seemingly warming to the idea that companies should be set targets to increase employee share ownership.

The SMF has urged the government to set a target for large listed companies. This could either be a percentage of share capital owned by staff or a percentage of the workforce owning shares.  A target of 10 per cent of the company owned by staff “might capture the public imagination”, it said.

There needed to be “a sea change in attitudes to employee ownership”, the SMF has said, including giving employee shareholders a bigger say than outside shareholders in running the company.

Whilst the IA said it was strongly in favour of employee ownership it declined (sensibly) to comment on the 10 per cent target proposed.

For our part, we do strongly support wider employee share ownership in many listed companies and even in some privately owned ones.  However, we do not advocate any sort of league table, nor the need to have any sort of target for large listed companies.  We certainly do not favour employee shareholders having a bigger say than outside shareholders in how a company should be run.

Companies in the UK have a wide choice of tax-approved employee share plans that they may consider adopting.  These include Savings Related Share Option Schemes (“Sharesave” or “SAYE” Schemes), Share Incentive Plans (or “SIPs”), Company Share Option Plans (or “CSOPs”) and Enterprise Management Incentives (or “EMIs”) for smaller companies.

It seems a shame, therefore, that so few companies in the UK have any sort of wider share ownership plan to provide their employees with an opportunity to acquire shares in their employing company.  The statistics suggest that just over 13,000 out of 1.4 million firms operate tax-advantaged employee share ownership plans. The SMF estimates that just 1.9 million workers have a stake in the business they work for and about 10 per cent of employees in companies with more than 500 workers have some shares.

One of the big dangers associated with employee share plans is the risk that employees may become disincentivised if the value of their shares goes down.  It is important in this connection to educate employees on the financial risk to them of investing in shares and in particular of potentially having all their eggs in the one basket.

As far as the employing company is concerned, it will need to understand the various different types of employee share plan that are available to them to implement and decide which type of plan is right for them and their workforce.  Most of the tax-advantaged plans that are available are option based plans and, to that extent, while the employee is holding options, they are not benefitting from any dividends that are being declared on the company’s shares.

Having said that, employees often prefer the option-based plan structure because they feel protected, while holding options, from a fall in the company’s share price.

One might argue that putting in a new employee-wide share scheme just after there has been significant turmoil in financial markets is not the best time to do so, as employees will be worried about the concept of investing in shares generally and the reliability of their employer’s shares in particular.  We would argue, on the other hand, that now would be a very good time to consider putting in a new employee share plan.  To some extent one may be able to communicate that a lower share price provides a potentially attractive buying opportunity, although of course employers must be careful not to be seen to be providing any sort of financial advice.

Education and communication will be key.  If communicated well, a new employee share plan should be seen as an attractive perk to employees, particularly those who are invited to participate for the first time.  It can also be communicated (and structured) in a way of expressing a sort of thank you and appreciation to employees for bearing with and continuing to work hard for the company through difficult times.

MM&K is very well experienced at advising companies on the different types of employee wide plans that are available in the UK market as well as on a more global basis.  We would be pleased to have an initial discussion with any of our clients about the pros and cons of putting in an employee wide share plan, and the various different types of plan that are typically being used, on a completely non-committal basis.

For further information or if you would like to have a discussion on all employee share plans,  please contact Nigel Mills or Stuart James.

Oil and gas on a knife-edge – remuneration might have to break the mould to retain talent throughout this current crisis

The market price of oil balances the scales between success and failure for companies operating in the sector. Boards keep a close watch on the break-even price.

The average break-even price in the US was estimated recently to be between $48 and $54 per barrel (with the caveat that a sustained price of less than $40 per barrel would have a devastating effect on the US industry). On the other hand, Saudi Arabia can make money at $20 per barrel but operators in Russia need $40. In the North Sea, where production costs are high, close observers of the industry have commented that at $60 to $70 per barrel life is comfortable but at $40 to $50 projects are at risk.

At the time of writing, the market price of a barrel of Brent crude is about $36 and the West Texas Intermediate price per barrel is about $34. A recent survey published by the Oil & Gas Council indicates that nearly 90% of respondents think that, over the next 12 months, the market price of oil will be in the range $20 to $50 per barrel. If that is right, the industry, globally, faces a prolonged period of belt-tightening.

Africa, where there have been a number of discoveries, is seen as a source of opportunities. Companies looking to reposition their business models through energy transition and diversification can see opportunities to acquire gas assets on the continent. But Africa has been hit hard by COVID-19 and there are other challenges. It was reported recently, that all drilling activity in Angola, the continent’s second-largest oil producer, has been halted. Our clients operating in Africa have first-hand experience of difficulties arising from:

• inconsistent regulatory environments and inadequate infrastructure
• renegotiation of financial terms
• delays to licence applications and renewals.

Closer to home, in the North Sea, decarbonisation (which involves developing robust ESG policies and practices), automation and increased investment in digitalisation are key focuses for the future. For our North Sea clients, decommissioning costs are a major challenge. There is also some concern about a dearth of private equity exit strategies. Private equity has made significant investments in North Sea and UKCS E&P companies. PE firms, particularly infrastructure funds, have also invested in mid-stream companies, some of which have been divested by bigger operators as part of their A & D policies. Their lower risk profile and cash flows make them attractive to long-term investors.

The current state of the oil and gas industry points to a strategy of cost cutting, consolidation and collaboration. Conserving cash resources is the priority – for all firms but particularly for the small and mid-size players, whose balance sheets are not so strong as those of the large firms.

Those companies, which eventually emerge successfully from this latest crisis to affect the industry, will need to have retained their executive talent. They will also need to ensure that remuneration policy and practice can and does recognise executives’ contribution to that success in a way which can be justified in terms of the outcome for shareholders and other stakeholders and the economics of the business. We are seeing more examples of companies breaking the mould by amending their remuneration policies and practices to deliver a greater proportion of remuneration in shares or share options, for executives and non-executives – and, in some cases abandoning annual cash bonuses.

In the meantime, if the number of acquisitions and divestments in the oil and gas sector increases, as forecast, companies operating long-term incentive plans and plan participants, will want to be certain of their position under the plan rules in the event of termination of employment or a change in control of the company. And, the deal on exit for executives managing private-equity-backed companies, agreed at the time the PE firm makes its investment, will be a key consideration for those executives. It may be difficult (and may be impossible, in practice) to renegotiate at a later date.

MM&K advises extensively on directors’ and executives’ remuneration policy and practice in the oil and gas sector internationally and is a leading independent adviser on remuneration to PE firms and their portfolio companies. In addition, MM&K is authorised and regulated by the Financial Conduct Authority for the provision of corporate finance advice.

For further information or if you would like to discuss points or issues raised in this article, please contact Paul Norris or Nigel Mills.

Revisit NED remuneration policy to conserve cash and increase alignment

Traditionally, UK NEDs have been paid an annual cash fee, supplemented, in some cases, by additional cash for chairing or being a member of a Board committee. Participation by NEDs in annual bonus plans and performance-related share options or LTIs is opposed by investors and good corporate governance guidance. Some investors have gone even further and have written to companies to inform them that they will vote against share option proposals for executive directors, too.

These are not normal times. CFOs are keeping an even closer than normal eye on cash. Companies of all sizes have had to adapt their business models to help them emerge successfully from a crisis with an uncertain future. Their remuneration policies and practices, if they have not done so already, will also need to adapt.

There are well-publicised examples of CEOs agreeing to take a salary cut. Many of their non-executive colleagues will have done the same. Compared with executive remuneration, however, NED fees represent a significantly lower drain on a company’s cash. Nonetheless, research done following the 2019 AGM season shows that the median fee for a FTSE100 Chair was in excess of £400,000. In the FTSE30, the median was more than £650,000. The corresponding amounts for NEDs were broadly in the range £70,000 to £90,000. Additional fees for committee membership could easily add £10,000 to £20,000; more for the committee Chair. So, the cash outlay for NED fees can be significant. For smaller companies, in particular, conserving cash, by whatever means, is their top priority.

Agreeing to take a temporary cut in salary or fees is an immediate response to an immediate problem. But what about the longer-term shape of NED remuneration?

Non-executive directors of US public companies receive annual restricted stock unit awards in addition to an annual cash retainer. Walmart NEDs receive annual stock grants worth $175,000 in addition to an annual cash retainer of $90,000. NEDs at Apple receive annual RSU awards worth $250,000 plus an annual retainer of $100,000.

Ten years ago, International Corporate Governance Network (ICGN) guidance recognised that properly structured equity-based compensation for NEDs, which is not performance-related, creates an immediate alignment with investors. Current Investment Association (IA) guidance, whilst also opposing share awards linked to share price or corporate performance, encourages share ownership by NEDs. Echoing the earlier ICGN guidance, current IA guidelines state remuneration committees should be free to select remuneration structures which are appropriate for their specific businesses.

Recently, MM&K has been working with clients which, having a pressing need to conserve cash, have sought to adapt their NED remuneration policies to substitute cash fees wholly or mainly with share awards. Calls for restricted share awards, of which a nil-priced option, not subject to any performance conditions on vesting, is a form, are gaining ground, even if the arguments are not yet fully accepted by all investors. Earlier this month, Lloyds Bank plc was successful in gaining shareholders’ approval for a deferred (restricted) share plan but the majority in favour was only 64%.

In our 2020 Chair and Non-executive director survey report, “Life in the Boardroom”, which is on sale now (contact us if you would like to purchase a copy), 53% of respondents reported that the demands on NEDs’ time are increasing. That is likely to lead to upward pressure on costs (because either more NEDs will be needed or existing NEDs will have to bear a greater load and will need to be compensated accordingly).

Introducing share awards for NEDs could help to conserve cash and create alignment with shareholders but raises a number of issues in light of current governance guidance and practice. Operating within a strong governance framework is important for all companies. Proposals to make such a change to remuneration policy require careful thought, not least in connection with the terms of the awards and to make the case to shareholders that the policy is in the best interests of the company. Flexibility will be required on all sides and engagement with shareholders will be an essential element of the process.

For further information or if you would like to discuss points or issues raised in this article, please contact Paul Norris.

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 21^st 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.

Coming out of a downturn strong (and how long-term incentives will be key to doing that)

One of the things that we have seen time and time again, as advisors to a wide range of companies across many sectors, is that future success after a downturn is not measured by how you weathered the initial storm, but how you came out the other side.

Frequently, success is measured by costs saved or margins retained. Little or no thought is given to the “people” aspect of the downturn. In the worst cases, the prevailing attitude from management is that the workforce must be alright as “at least they have kept their jobs”.

Whilst it may be true that in the immediate aftermath there is a gratefulness for employment, this does not automatically translate into perpetual gratitude. Many workers will remember and retain the words, actions and behaviours of management during the more difficult moments and use them as the reason and motivation for moving on.

In addition, perceived poor treatment during this period can have the effect of demotivating the best people in the workforce. This is an important point as, no matter their role, it is these people who are the real engine of a business. These are the people who are usually focused on the success of the company (not their own advancement) and are willing to go the extra mile to help it get places. The people who get their colleagues to deliver more and will often sacrifice their own time to put more energy into the success of the business.

We would always recommend two steps for any business who wants to not only retain their best people but also make sure they can start to help delivering growth as soon as possible.

Firstly, the business should conduct its own “people audit” as part of its plans to get back to growth. Even where decisions have been made genuinely for the benefit of the business as a whole, messages and intentions can be lost in the speed of change as recovery measures are put in place.

Secondly, in order to further tie-in the interests of both the key individuals and the wider workforce to those of the owners and managers, we would recommend introducing some form of long-term incentive. This may be cash or equity, it may be for a bespoke group or the entire workforce and it may come with all manner of performance conditions attached.

Research has shown that the inclusion of any long-term incentive plan improves retention by up to one third – a crucial factor when competitors start to look at your workforce in order to help rebuild their business.

In addition, “paper based” long term incentives, which require no upfront cash cost by the business, can be an effective way to reward and remunerate. Performance conditions mean that the workforce is only rewarded if results are delivered.

Whilst there are costs associated with setting up these types of plan, the return over the medium to long-term is likely to far outweigh these – in terms of both performance and retention.

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

Share and share option plan reporting for 2019/20

Overview

If your company operates a share or share option plan for employees or directors (including non-executive directors) you will need to report any awards by filing electronically with HMRC (as well as reporting the adoption of the plan if it is the first year in which awards have been made).

In addition, if employees or Directors (again including NEDs) have personally acquired shares in the business this may also need to be reported.

Finally, if you have an existing share or share option scheme for employees but have made no awards in the year, a NIL return will still be required to be sent to HMRC to avoid penalties and fines.

Practicalities

All reporting for the tax year ending 5 April 2020 must be done through the HMRC Employment Related Securities (ERS) online service. This is for both tax advantaged and non-tax advantaged plans. Registration is required, even where a company already operates the PAYE for employers online service.

All annual returns must be filed by 6 July 2020.

Any share or share options transactions in any group entity involving employees or office holders will need to be reported online on an Employment Related Securities return. In addition to acquisitions or grants, the form also covers the position where shares / options have been sold, lapsed or cancelled due to someone leaving the organisation.

For approved schemes, there is also a self-certification process under which all EMI, CSOPs, SIPs and SAYEs must submit a declaration to HMRC that the criteria for qualification have been met. Self-certification only needs to be done once, therefore only new schemes which commenced operation in 2019/20 need to be completed by 6 July 2020. Failure to register the scheme within the ERS online service could mean the tax benefits of the approved scheme will be lost.

It can take up to a week to register a scheme on the ERS online service, so we recommend registering sooner rather than later to ensure any technical issues can be resolved without any delay before the deadline.

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