Long-term incentives come under fire; Push to narrow worker-chief divide
One in 10 of Britain’s top 100 companies are considering ditching “long-term incentive plans” as shareholders push back against excessive executive pay, according to consultants and investor groups.
The shift, which would favour simpler share-based bonuses, could help reduce the gulf between highly paid chief executives and their mainstream workers, according to pay experts.
Investors said retailers and financial services companies were among the groups considering scrapping LTIPs, which have driven executive pay inflation over the past decade and account for the largest chunk of remuneration at Britain’s biggest companies. Royal Bank of Scotland is looking at overhauling its pay scheme to alter the terms of its LTIP, which would nearly halve the amount that senior executives, such as chief Ross McEwan, receive.
The move comes amid efforts by Theresa May, the prime minister, to reduce the pay gap and tackle other signs of a growing divide between the country’s elite and ordinary citizens. A green paper on reforming executive pay, which recommends publishing pay ratios comparing chief executive pay with that of average workers, will close to consultation this week.
Investors, including Schroders, Aberdeen, M&G and Hermes, have led the reform effort, focusing their attention on LTIPs. WPP last year revealed that Sir Martin Sorrell, the UK’s best paid chief executive, had earned £63m from a now-discontinued LTIP.
“LTIPs are not the whole problem. But they are a significant part of it,” said Rupert Krefting, head of corporate finance and stewardship at M&G.
LTIPs typically pay out after three years if targets are met. The average boss in the UK now earns about £4.3m, according to data provider Manifest, compared with an average national wage of £28,000. Chief executive pay in Britain lags behind only Switzerland and the US, according to data from Bloomberg.
Investor groups said some companies might completely drop LTIPs, while others would alter LTIP mechanisms to oblige them to be held for several years after their vesting date. Some shareholders are pushing for restricted shares as an alternative. Such schemes, which may grant shares with few or no targets, are longer term, obliging a chief to hold the stock for seven years or longer, sometimes to retirement.
Pay experts warned many companies were likely to be nervous of radical reform, given that some initiatives had come unstuck in recent years. Plans last year by engineering group Weir to swap half of the chief executive’s LTIPs for restricted stock were supported by reformist investors but voted down by shareholders. Others, such as Kingfisher, have successfully introduced restricted share schemes.
