What’s the Story?

This month the authoritative Lex column of the Financial Times claimed that investors are too strict about Restricted Stock in the UK. Restricted Stock is an award of free shares becoming available to the executive only on finishing a required period of service.

Lex says that many are uncomfortable that top pay for bosses at median exceeds 100 times that of the typical UK worker, but notes too that CEOs of S&P 500 companies often have triple the compensation of their UK peers. Indeed some, such as the CEO of the London stock exchange, say that executive compensation in the UK is uncompetitively low.

Overwhelmingly in the UK the main LTIP vehicle is a performance share plan. Here, PSP awarded shares are subject to a performance test normally judged at the end of three years with the shares typically then held a further two years. The chosen metrics and targets must all be disclosed and explained.

Lex observes that in other major economies, global investors are happy to see restricted stock awarded to executives as part of their overall compensation package.

The near absence of Restricted Stock in the UK adds to the complexity of UK executive compensation and disproportionately lowers the “perceived value” of the shares in the eyes of the executive.

Why Does it Matter?

Restricted Stock as an LTIP vehicle creates an immediate and simple link between executive compensation outcomes and the shareholder experience.

The executive personal risk discount is often much higher than the theoretical discount rate used to calculate the total compensation opportunity. This means that shares awarded without a performance test have a much higher “perceived value” than the equivalent Performance Share award.

In addition, setting multi-year, performance targets is difficult, and this is particularly so in times of economic uncertainty such as when there is pandemic disruption or when inflation or interest rates are changing at speed.

Restricted Stock is a legitimate and powerful executive compensation tool. It is used extensively and effectively in many companies throughout the OECD and beyond. There is no good reason why investors should single out the UK as the only jurisdiction where Restricted Stock awards are seen as inappropriate.

Newspoint view

The UK has often provided world leading corporate governance thinking. The first investor guidance on dilution was published in 1974. Performance tests for LTIPs have been expected continuously since 1992. The body of rules surrounding good governance and investor preferences for UK top pay is now extensive.

While top pay should be strongly performance linked, the pressure to deliver almost all share based incentives as performance shares creates complexity, inefficiency in the spend, and compressed uniformity. None of these things help businesses.

Advanced governance thinker Guy Jubb of Edinburgh University and the European Corporate Governance Institute has recognised this and calls for an independent Corporate Governance and Stewardship Commission among other things.

Some UK governance experts will say “but restricted stock is permitted in the UK”. In practice though, investors expect a hefty 2 for 1 performance shares exchange rate to convert into Restricted Stock. Furthermore, Restricted Stock must still have an underpin performance test - which frustrates the aim of removing performance tests.

Those two rules applied in practice mean UK restricted stock is very rare.

To be competitive in a fast-moving, technology-based global economy, the UK must be sensitive to both the quantum and structure of top pay. The role of technology in national competitiveness is vital. That stark fact is explored in a recent Tony Blair and William Hague joint paper: A New National Purpose.

Private equity backed companies and many global technology companies routinely deploy restricted stock as a major plank of the incentive and stock ownership programs. Denying UK listed companies the same sharp tool is rightly questioned by Lex.

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

Please share this CORPGRO information with your board or your colleagues.