Nine Big Trends in Long Term Incentive (LTI) Policy
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Nine Big Trends in Long Term Incentive (LTI) Policy

14 November 2019

Do you want to understand changes in the Long Term Incentive (LTI) landscape? Well, thanks to research from EY, we can bring you nine key trends.

David Ellis of EY wanted to test two hypotheses. He wanted to see if it’s true that most companies no longer operate one aligned LTI policy across their organisation. And he wanted to investigate whether LTIs were adapting to the significant changes in workforce patterns. The curiosity of David and his colleagues led to in-depth interviews with 20 FTSE 100 companies and research documenting nine key themes across the LTI landscape. We asked David to comment on the findings, along with Robert Head of Neo Reward, Cara Hegarty of Linklaters and Lina Brown of Equiniti.

1 The alignment of interest between the executive population and everybody else within the business is becoming a thing of the past

89% of companies sampled now have different LTI arrangements by level. 

“The reason why organisations operate incentives differently for various groups is because they think it’s the right thing to do,” says Robert. “There are real differences between senior executives on the one hand and other employees on the other that very rightly manifest themselves in the way they’re rewarded.”

2 Emerging and high-performing talent is now a greater focus

LTIs are now increasingly used to motivate talented individuals, with a growing emphasis on performance, and decisions based on leadership recommendations rather than formulaic processes.

“This is probably the most important aspect of the research,” says David. “Historically, we’ve run LTIs by reference to formula, and this is still very much the prevalent market practice. But we’re now seeing much more prevalence of people, as a matter of discretion, selecting high-performing or high-potential talent, or people in scarce roles, and letting them participate in LTI, either on an ad hoc basis or as a special group of participants.”

There are benefits to this more flexible approach, but Cara also warns of dangers. “You need to think about who is making the decisions,” she says. “If you have a very disaggregated approach where people at reasonably low levels of management choose the people in their teams who they think deserve LTIs, there could be issues with the bigger picture. They may be making decisions on a rational basis, but when you aggregate those decisions back up to the top and have a look at them, they may cause problems. There's a need for oversight.”

3 The global role is only a partial reality

32% of participants focus on key markets or follow a local market approach.

“It comes down to circumstances, making a judgement about your marketplace and aligning reward with your business objectives and culture,” says Robert.

4 Business model, size or profitability are not meaningful drivers of LTI participation

Inertia is also a factor. If an organisation usually invites a number of people to participate in the LTI, it appears to then stick with that number – irrespective of business cycle, corporate change or strategic pivot.

“People increasingly care not just about the financial rewards but the intrinsic rewards of working in an organisation, whether its flexible working hours and being able to work at home; or the social purpose, mission and values of an organisation,” says Lina.

5 LTI cost is not a driver of LTI practice

The programme cost is often not front of mind – particularly where cost is held centrally and not reflected in local business unit budgets. 

“Things work so much better when all the main stakeholders are on the same page,” says Robert.

6 The sophistication of communication is progressing – but at a snail’s pace

Portals and modelling tools are often not very intuitive and LTI participants rarely visit them.  

“The fundamental point around communication is complexity,” says Robert. “Back in the day, I remember when we had to give everyone a computer disk to understand their awards and, as my former boss said at the time, the moment you do that you have gone too far. People shouldn’t need a complicated spreadsheet to work out their incentive.” 

7 Market data is not key

Grant opportunity is infrequently assessed against market data and, where it is, there is widespread scepticism as to its accuracy and worth. 

“It’s important to set incentives in a business context,” says Robert. “How much do incentives cost relative to other costs of doing business? And when value is created by employees’ performance, how is that value shared?”

8 All-employee equity remains very important

The benefits of such plans were persuasively articulated by participants.

“If you ask a board director why they provide all-employee equity, you have a purposeful, compelling, very straightforward story about why it’s central and important to their business,” says David. “If you ask them why they use LTI for their top 200, it's a different story.”

9 LTI has a lot of catching up to do in terms of agile working practices

The workforce landscape is changing rapidly and LTI policy needs to adapt fast.

“The big change I’m seeing is a lessening of focus on retention,” says Cara. “I have quite a few clients in the gig economy/tech company space and what they're saying to me is: ‘We don't care if our employees leave. We’re happy for them to leave and go to work for competitors; we see that as a way for them to get more skills, and then hopefully, they'll come back to us.’ They're seeing their workforces as much more fluid and more cyclical and that doesn't really sit with how we think about LTI plans at the moment.”

 

*This article was based on presentations at the 2019 Equiniti Employee Services Forum

Deferred Bonus Plans

The EY research coincides with the 2019 Baker McKenzie FTSE 100 survey, which demonstrated no significant movement in re-structuring of executive share awards. Only a small number of companies (around 5% of FTSE 100) have moved away from LTIP/performance share plan to restricted share plans.

Deferred bonus plans are now very common, showing up at 85% of FTSE 100 companies – and most are structured so that between 1/3 and 60% of a bonus is deferred for a three-year period.

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