Companies may look to preserve cash by delaying a percentage of employees' pay and replacing with a share award that would vest within 6 to 12 months.
If the share price rises during this period, employees will make gains. If the share price falls, the company may deploy a ‘look back’ feature at the point of vesting. 'Look back' allows the award to vest at the prevailing market share price, but the company will make up the difference between the award share price and the vesting share price by way of a cash payment.
Before deferring pay or bonuses, companies will need to consider:
Sourcing the award shares – This is likely to be newly issued/treasury shares, or shares already in an EBT. Market purchased shares are unlikely to be used at this time, as the aim is to preserve cash.
Selling shares - A company's share price is potentially affected by large quantities of shares vesting and selling on the same date. However, several mitigating actions can help to ensure orderly trading is maintained.