Blanket ban on executive long-term incentives is ill-advised, says Mercer

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The FINANCIAL — Mercer has welcomed many of the proposals made by the BEIS (Business, Energy and Industrial Strategy Department) Select Committee report into the UK’s corporate governance regime but has cautioned against a blanket ban on the use of Long-Term Incentive Plans (LTIs). The consultancy says that LTIs are essential in the management of risk ensuring that executives are accountable for their decisions over the longer-term.

In February 2017, the UK Government issued a green paper, “Corporate Governance Reform” seeking views on a broad corporate governance agenda including how to address a perceived lack of fairness and trust on the issue of executive pay. The BEIS Committee’s response to this green paper makes numerous recommendations to help create a more equitable society and address public perception that executive pay is excessive.

Gordon Clark, Partner at Mercer Kepler said, “Whilst we welcome many of the recommendations in the report, we feel that abolishing LTIs are too prescriptive. Many companies seeking to replace LTIs with Restricted Shares in this AGM season have received resistance from institutional shareholders and proxy advisors, with some companies even pulling their resolutions before the AGM. Some institutional shareholders welcome the restricted share model but others oppose it on the basis that it rewards failure.

“Long-term incentives remain an effective tool, linking executive pay and long-term company performance; this is vital to shareholders and executives. LTIs do need to be carefully designed with measures and time horizons which reward the ‘right’ performance and behaviour that support company – and UK – financial health over the long-term. Many companies use LTIs effectively so a blanket ban would be counter-productive.”

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The report highlights LTIs as being complex and unpredictable and concludes that long-term incentive plans should be phased out as soon as possible.  BEIS prefers that they are replaced with non-performance share awards vesting over a five year period.

The BEIS report also recommended that companies publish the pay ratios between the CEO and both the senior executive team and the median of all UK employees.  Mercer views this as being fraught with difficulty and may result in companies being incentivised to off-shore low paid roles to improve the ratio. The consultancy believes that average pay, not the median, should be used as it will prove to be more transparent and less onerous for companies. The consultancy recently stated that CEO pay and employee pay should be compared to the National Living Wage – rather than with each other, according to Mercer .

Mercer also welcomed BEIS recommendations that a new code for larger private companies should be developed to raise standards and improve public trust beyond listed companies. The consultancy supports proposals that the Government should consult upon new requirements that more information is provided on the role of advisors (including lawyers, investment bankers, pay advisors etc.) on certain transactions.

Mr Clark concluded: “Advisors bring expertise and a perspective of the broader market which can be helpful to companies in guiding decision-making. Increased transparency enforces professional standards and improves public perceptions, so this is very welcome”.


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