The focus on the twin pillars of employee costs and executive pay in recent months has turned the spotlight on share-based awards, which are at the heart of some innovative and high-profile initiatives by companies to address the challenges presented by the current business environment. When reviewing compensation policy, companies are engaged in a continuous balancing act between controlling costs, delivering pay and incentives appropriate to their business and keeping shareholders as well as employees onside. As the commercial climate has changed, some companies have used their share incentives to help meet their particular requirements.
Some interesting examples include the following:
- Britain's five biggest banks have agreed to defer top executive bonuses over three years and pay at least 50% of any bonus in shares, following the principles set out for banking sector bonuses at the recent G20 summit.
- British Airways pilots have accepted an offer from the company of free share awards in 3 years' time if certain performance targets are achieved, in exchange for taking pay cuts now.
- DSG International, a leading UK electrical retailer, obtained shareholder approval for a controversial plan that saw key executives, including its CEO, take pay cuts in exchange for share option awards. The most unusual feature of this arrangement is that the share option awards do not contain any performance targets, causing the arrangement to attract criticism from institutional investors.
- Citigroup has launched a new share incentive programme that grants one option for every unit of restricted stock held. Its primary concern was to keep key employees on board to steer the organisation through the recession and the mixed use of options and share awards is designed to take advantage of the retention element of its share incentives.
- Royal Bank of Scotland has made significant share option awards to its new CEO which have very stringent performance targets attached, which have proved acceptable to the Bank's shareholders, including the UK government.
- Executives in Anglo American and Rio Tinto agreed to defer cash bonuses in exchange for stock awards that will not vest for at least two years.
- Companies are using all-employee share plans to motivate the wider workforce and take advantage of low share prices, e.g. HSBC has attracted a record 34,000 staff to participate in its 2009 SAYE share plan offer in the UK, and at Easyjet 25% of SAYE participants cancelled their 2007 SAYE savings contracts and replaced them with a new savings contract starting in 2008 with a lower option price.
- Google and Ebay employees, who held underwater share options, whereby the exercise price is higher than the shares are currently worth, have availed of exchange programmes to swap their old options for new options (Google) or new restricted stock awards (Ebay).
It is clear that companies in all business sectors are considering new approaches to employee remuneration, and share-based awards in particular can be tailored to meet the requirements of any business in the current recession. Many of the UK and US examples set out above would obviously need to be examined in the context of their tax, legal and accounting consequences in Ireland before similar steps are taken by Irish companies, but they are a useful insight into current trends.
Click here for more information on employee share incentives in Ireland.