A recent trend in long-term incentive design has been the introduction of share plans in which executives share directly in the growth in a company’s value, above a threshold, over a pre-set period. Known as VSPs, the number of shares receivable is potentially uncapped, in that the executive’s entitlement rises on a formula basis in line with the company’s growth in value. In contrast, a standard LTIP award is over a pre-set number of shares, which vest to the extent that targets are met.

Our team has been closely involved in introducing a number of these plans.

In January 2011 the Association of British Insurers (ABI) wrote to remuneration committee chairmen of listed companies raising concerns about the use of such uncapped plans. The letter can be found here.

The ABI indicated that they are particularly concerned about uncapped incentive plans:

  • in which awards reach a level such that there is a dilutive risk (ABI guidelines state that commitments to issue new shares to satisfy executive share schemes should not exceed 5% of the issued ordinary share capital of the company in any rolling 10 year period);
  • which do not have a cap; and
  • where targets are not sufficiently taxing.

The ABI acknowledges that uncapped incentive plans may be acceptable in certain instances, but indicates that the Institutional Voting Information Service would issue a ‘red top’ in instances where there is no acceptable cap in the plan or where no adequate reasoning has been provided to indicate that there are exceptional circumstances to justify it.

The ABI indicates that if companies do wish to implement such plans in the future they will need to give a clear basis for exceptional treatments, indicating the duration of the plan and its purpose (e.g. linking the plan’s introduction to transformational change or a merger). Early engagement with the ABI and shareholders is also likely to be beneficial with a focus on addressing concerns about dilution and the retention of directors. Companies may also help to justify the plan by implementing other changes to the remuneration package – e.g. reducing annual bonuses or freezing salaries.

There is a concern that institutional shareholders will tend to oppose VSPs as a matter of principle, even if a sound justification can be put forward.