Effective share based incentive plans are designed to align the activities of executives and senior employees with the requirements of the company’s shareholders and meet their expectations with regard to quantum and corporate performance.Effective share based incentive plans are designed to align the activities of executives and senior employees with the requirements of the company’s shareholders and meet their expectations with regard to quantum and corporate performance.
It is of great value for employers to be aware of what products are in the market place and have access to experienced advisors, administrators and trustees to actively manage the risks and rewards associated with the set up and ongoing operation of share plans.
The Performance & Reward Management Team currently administer a variety of share plans which are tailored to meet the specific requirements of the client. Examples include:
Long Term Incentive Plans
An award of free shares vests after a restricted period, typically three years, subject to the achievement of pre-determined financial performance targets.
Executive Share Option Plans
An option is purchased to acquire a specified number of shares after a pre-determined date, typically three years from grant. The purchase per option price is variable and the extent to which that option becomes exercisable is often subject to the achievement of performance targets. Stock Appreciation Rights (SARs) The executive receives an award of SARs that delivers the gain in market value of the company’s share price from the date of award to the date of vesting. The gain is paid in cash with no actual share ownership.
Deferred Bonus Plan
An executive may be invited (or required) to defer part or all of his or her annual cash bonus into company shares. These are held in trust for typically a three year period and may be matched with additional shares subject to the achievement of performance targets.
A cash plan mirroring the type of executive share plan adopted by the company. Such a plan may be used where legal, regulatory or other restrictions prevent the use of shares in a particular jurisdiction.
Employee Benefit Trust (EBT)
Executive share plans are typically operated in conjunction with an EBT. This is usually a trust that is established and funded by the employing company. It is the trustee’s duty to act in the interests of the employees who are beneficiaries under the EBT
An EBT is beneficial in the following circumstances:
- To hedge the cost of share awards that vest at a future date
- To create a market for unlisted company shares or illiquid listed company shares.
- To facilitate the administration of multiple share plans across a global business
- To shelter contributions to the trust from the company’s creditors
- To add a layer of confidentiality to the human resources team in a smaller organisation
- To provide comfort to the plan participants that the plan is being professionally administered by trustees bound to act in their best interests within the terms of the plan rules.
The Savings Trust is intended to provide a means of saving whilst in employment that can also be augmented by the employer depending on the rules of the plan established by the company.
The Savings Trust has the following characteristics:
- Possibility of investment in employer issued financial instruments
- Flexible investment choices with a risk profile that matches that of the employee
- Longer term savings vehicle
- Ex-employees can continue to save through the structure or transfer their savings to another employer’s Savings Trust
- Wealth creation
- Succession planning
- Alignment of employee investment with those of the employer and its clients
- Assets are remote from the employer’s creditors.
The economic downturn has prompted many organisations to reconsider their exposure to debt. Our team has established several trusts as integral parts of new group structures where banks and other financial institutions have agreed to swap their large debt exposure for equity in the entities they were supporting.
The trust in many instances owns between 30% and 60% of group equity, setting a large proportion of the ordinary share capital aside for the benefit of senior management.
The banks’ interest in preferential share classes ensures a first option on shareholder returns, effectively recovering their outstanding debt, before benefit accrues to the ordinary shareholders.
Bonus Deferral Plans
Bonus deferral plans are increasing in popularity in the United Kingdom and Europe as the regulatory bodies call for an ability to defer bonuses and for claw back conditions to be implemented.
Bonus deferral plans allow for various levels of performance criteria and vesting periods to be built into the plans and claw back of bonuses is possible where performance conditions are not met.
In addition to meeting EU and UK regulatory requirements, bonus deferral plans provide very strong retention and incentive tools for employers and allow employees the ability to recommend investment strategies to the trustee.
Ogier has been increasingly involved in establishing trusts and other entities where the employer is able to define the investment choice for deferred bonuses prior to vesting, usually over a three or five year period.
Private companies often have the problem of an illiquid market for trading shares. An employee benefit trust can assist in creating a market for a company’s shares as part of a share incentive scheme.
The trust fulfils a dual role in addition to the share incentive arrangement. The trust can both create a market in the illiquid shares as well as hedge the company’s exposure to its own share price prior to awards vesting, by warehousing shares in the trust.
The delivery of value to participants is therefore capped at the cost of the initial shares contributed to the trust and those shares can be “traded” between employees within the trust should an employee leave the company’s employ and the articles forbid the holding of shares by ex-employees.
Secure Online Web Access
The Performance & Reward Management team offers clients secure online access to plan awards that is designed specifically to meet the needs of a variety of plan types and client needs.
Plan participants are provided with online secure access to view and interact with their entitlements and trust assets at any time of day and from any location. Details of participants’ current entitlements together with valuations and information about previous transactions are available.
Plan documentation and associated literature such as plan rules and operational documentation may be downloaded and participants’ personal details can be managed.
Employer representatives can be permitted secure online access to view participants’ entitlements and trust assets at both an individual participant and consolidated levels. The systems can also operate with multi-currency and multi-instrument plans. Extensive reporting capabilities allow for bespoke reports and statements to be easily produced and distributed.
The three systems that deliver these benefits to our clients and plan participants are:
- Share Awards - for all forms of share plans
- Tailored Awards - for cash deferral, pension and savings plans that require bespoke investment options
- Classic Awards - for cash deferral, pension and saving plans that offer a set suite of investments per plan.
It is possible to tailor executive incentive plans to meet an employer’s specific financial and incentive needs.
A crucial element of effective remuneration planning is the use of experienced and professional advisors as well as professional independent trustees and administrators that can deliver the service excellence that the successful operation of an incentive plan demands.