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Discretionary Share Plans

18 July 2017

Ian Cox, Equiniti Relationship Director - Equiniti Premier - discusses a tailored approach.

Corporate governance and executive pay are perennial talking points, helped by a regular stream of new rules and regulations that aim to improve how businesses and markets function.

Following the recent election there would appear to be uncertainty ahead for UK companies in relation to corporate governance. A key part of the government’s manifesto was a pledge for fairer corporate governance and legislation aimed at executive pay. However, following the Queen’s speech setting out her new government’s policies at the state opening of parliament this manifesto pledge was missing and it is currently not clear if the government will now look to tackle this politically sensitive subject without a large majority.

Executive and discretionary share plans have been key components of senior staff pay packages for years, helping companies recruit, retain and motivate key decision-makers who can make or break a business.

At a time when calls for executive pay restraint are ringing louder, many remuneration committees are looking closely at how well their own share plans align interests of top staff with the overall business strategy.

Corporates increasingly have to take into consideration Shareholder activism when granting discretionary share plans. By analysing their remuneration strategy and looking at market sentiment, companies are having to look longer term with their incentive schemes. William Turvill in CITYAM recently wrote about Fidelity International’s campaign against short-term pay rewards and how they will actively vote against short term executive incentive plans.

One fact from the report which demonstrates the change for our industry is that 65 out of 100 FTSE 100 companies now have a five year retention period within their Long Term Incentive Plans.

Companies should therefore be looking towards how they manage plans which have a longer lifespan, when the performance metrics will be measured and how the vesting of these plans will be handled.

It is also interesting to note that European Banking Authority guidelines state that financial institutions should no longer be granting executives dividend equivalents on their share plans. This could be an area to watch if this is also adopted by companies outside of the financial services sector and gains traction with shareholders. 

The diversity of corporate culture, working practices and ambition means there is no “one size fits all” share plan.

Instead companies work closely with specialist advisers to create tailored plans that they believe will provide the right incentives in a cost efficient manner, increasingly with safeguards and restrictions to avoid rewarding poor performance.

The management of executive and discretionary plans on a day to day basis is an equally specialist area that demands high levels of expertise and willingness to tailor the service and technology to the client and ensure the service mirrors the company’s corporate identity and culture. Equiniti has extensive experience of working with clients to help shape and manage their share plans whether they be small cap companies or large international plcs. A key element of the service is to seamlessly connect executive share plans with the wider all employee share schemes, other shares that are held as well as flexible benefits, to show the true value of their reward package.

As a company, we provide executive share plan services for around 100 of Britain’s biggest listed companies. These services range from full administration through to full insourcing using our software tools and support that enable employers to deal with their own administration in-house. Discretionary share plan administration can be complex and the requirements will differ from company to company. Plans may have multiple performance metrics, dividend equivalents, tranche vestings and many more bespoke elements incorporated into their design.

Our in-house administration software has been created to cope with a large number of variances and is a scalable solution that can administer plans that have a few dozen participants or many thousands.

Technology is at the heart of what we do and our primary system for administering executive and discretionary share plans – Centive allows Equiniti to react quickly to changes in the share plans market. Due to the fast moving market we operate in our technology needs to give companies quick access to key information for management and regulatory compliance purposes while offering executives easy online management of their share plans with a single log-in from an internet portal or corporate intranet backed up by helpful and knowledgeable contact-centre staff. In the last 12 months Equiniti have introduced online award acceptance and new clawback and forfeiture provisions within our Global Nominee. Part of the success of share plans right up to boardroom level relies on engagement from employees. 

The various approaches taken to putting together a communication strategy for participants, is a growing area of differentiation between share plan providers.

Modern companies want their share scheme choices explained in a clear and user-friendly way. Traditional paper brochures and forms no longer cut it in a world where many of us depend on our smartphones to help run our lives. Equiniti has a creative in-house team that looks for ways to maximise the impact of communications, using innovative graphic design and advanced technology such as augmented reality to spread and reinforce key messages which may have been missed by executives in the past.

Once an executive has received their vested shares, companies now need a vehicle which promotes share ownership in a safe and regulated environment such as a Global Nominee. 

In the case of Equiniti’s Global Nominee, we contract directly with the participant to ensure that the individual and their assets receive the correct level of protection that should be given to a retail investor. This product allows the company to promote share ownership without having to take the burden of providing a vested share account for the executive.

Employee services is a complex and constantly evolving marketplace so our role is not just providing a platform but also the knowledge and expertise to help clients understand and make the best use of the new opportunities while avoiding the pitfalls. Regulatory and shareholder scrutiny of the performance of senior managers will go on increasingly, putting extra focus on how talent is rewarded.

Share plans remain a key element of executive reward – but they are certainly going to change and it’s our job to help our clients adapt and stay one step ahead of the game.

For more information please contact ian.cox@equiniti.com