Mod 5 - Executive Share Plans Flashcards
(23 cards)
Overview:
This module will look at share plans which operate on a discretionary basis. These plans are usually for selected executives and other senior management, rather than all employees.
These plans operate with a view to rewarding particularly good performance, and incentivising participants to perform even better in the future.
Recent changes to Listing Rules
The Listing Rules were amended with effect from 29 July 2024.
The distinction between a premium and standard listing has now been removed, and a single class of listing has been created called the Equity Shares (Commercial Company) category (ESCC).
What are the two key executive share PLANS focussed on this course?
- Long term incentive plans (LTIP)
- Deferred bonus plans (DBP)
Name some of the key AWARD types under this course:
- Conditional share awards
- Options (nil-cost or market value)
- Restricted shares
- Phantom awards
- UK tax advantaged options (CSOPs)
- UK tax advantaged management incentive options (EMIs)
REMINDER:
Executives of a UK listed company will typically receive:
- a LONG TERM incentive in the form of awards under an LTIP; and
- a SHORT TERM incentive in the form of a cash bonus, where all or some may be deferred into share awards under a DBP
REFRESHER: LTIP
- May be called PSPs (Performance Share Plans);
- Part of an exec’s variable remuneration and designed to reward company performance over a longer period of time;
- Execs receive the shares for no cost or nominal cost;
- Usually minimum of 3 years vesting period, and lapse if they leave the business.
REFRESHER: DBP
- Deferred share bonus plan;
- Often linked to the company’s annual bonus scheme;
- Part of all is paid in shares instead of cash;
- Typically structured as a conditional share award so that the participant doesn’t receive the shares until the end of the deferral period.
- Not usually subject to performance conditions.
TAX: Can be structured as:
- Pre-tax = the employee does not get taxed on the deferred bonus until they receive the shares
- Post-tax = the bonus is declared, tax is paid and the net amount is used to buy shares.
REMEMBER: KEY AWARD TYPES
1) CONDITIONAL SHARES AWARDS (also Restricted Stock Units): Employees are given the right to receive shares for no payment usually on satisfaction of a performance condition measured over a specified performance period.
2) NIL COST OPTIONS: Similar to conditional awards but the employee is given the conditional right to acquire shares for no payment (or nominal cost). Usually on satisfaction of a performance condition.
KEY DIFFERENCE:
Employee must exercise their nil cost option in order to receive the shares, where as a conditional share award, the are delivered automatically to the employee on vesting.
REMEMBER: KEY AWARD TYPES CONTINUED
3) MARKET VALUE OPTIONS: Give the employee the right to acquire shares on payment of the option exercise price.
4) RESTRICTED SHARES: Employees are given upfront free shares on terms that the shares are subject to restrictions. Usually held by a nominee and may receive Dividends and voting rights.
5) PHANTOM AWARDS: Receive a cash payment, linked to the value of the underlying shares. Rare for executives as shareholders like to see longer term incentives for execs.
6) CSOP: Companies can grant market value options to employees on a tax favoured basis provided certain conditions are met. Increased from £30k to £60k.
ElIgibility
Eligibility and participation are different.
The plan rules will normally say that the Remuneration Committee of a Company decides who will be granted an award as well as the terms.
The RemCo is a committee of the board of directors that is responsible for setting and overseeing the remuneration of exec directors. Exec directors will not usually be on the RemCo as under the UK Corp Governance Code, Directors should not be involved in setting their own remuneration packages.
How wide is the discretion?
It is normal for the RemCo to have complete or ‘absolute’ discretion in the selection of participants and in other decisions to be made by them throughout the operation of the plan.
REMEMBER:
* The employer cannot normally act in a way that would be likely to damage or destroy the relationship of mutual trust and confidence that it has with its employees.
- The discretion must be exercised in good faith and not ‘irrationally, arbitrarily or
capriciously’. - Exercise of the discretion must take into account all relevant factors and no irrelevant ones.
- Exercise of the discretion must follow appropriate processes and the reasons for decisions should be documented.
Name 4 main types of people who are not strictly employees within the group but might be regarded as suitable for receiving awards or incentives under exec plans:
1) NEDs - They are officeholders but they are not employees from a legal
perspective. Shareholders are often supportive of non-executive directors owning shares in the company, as it shows loyalty and commitment but SHOULD NOT be geared to company performance as they are supposed to be ‘independent’ directors.
2) Employees of joint ventures (JVs) or associated companies - For UK share plan purposes they are often not considered as sitting within the group (and therefore not strictly group employees) because of the underlying company law definitions.
3) Self-employed contractors and consultants - Still part of the team
4) People employed through a third-party: This third-party service is often provided by a ‘professional employer organisation’/‘professional employment organisation’ (PEO) or ‘employer of record’ (EOR). This can be attractive where a company first branches out into a new country, when it might not be fully established there. For UK share plan purposes, they will not be considered as sitting within the group.
What does POE and EOR stand for?
PROFESSIONAL EMPLOYER ORGANISATION
EMPLOYER OF RECORD
Name three circumstances where the Remuneration Committee can use their discretion to adjust award outcomes
The discretion to override formulaic outcomes in determining vesting of awards may be expressed to address certain circumstances, including if:
- overall company or individual performance does not support the vesting level that would otherwise be attained; and/or
- there have been unexpected or unforeseen events, especially if these have had a negative effect on stakeholders, clients or the wider workforce; and/or
- it would result in the individual receiving a windfall gain (sudden/unexpected gains) i.e. significant changes in share price.
Contractual rights – in the contract of employment
It would be unusual for an employment contract to contain the right to be granted an award – the right to the award should not arise until the time it is actually granted.
- to avoid the value of the award being regarded as part of the employee’s contractual salary, for the purposes of calculating employment-related benefits, such as the damages the employee could potentially recover on dismissal; and
- to try to reduce the risk of local employment laws applying to the award – this is particularly important in a global plan context.
Contractual rights in an offer letter
Companies might make an offer to a potential employee, to persuade that person to join the company, and this offer might include a promise to allow the individual to participate in the executive plans.
It is sometimes possible for a contractual right to arise out of custom and practice, often called an ‘acquired right’. This could happen if a company regularly granted awards to a particular individual, but then stopped. The individual could argue that a contractual right to receive regular awards had been acquired through custom and practice.
5.4 Transferability
It is normal for plan rules to provide that a participant CANNOT transfer their award to anyone else.
Typically, awards can be transferred to personal representatives on death but cannot be transferred to anybody else during the participant’s lifetime.
Why would companies not want the awards to be transferable?
- Incentive effect would be lost;
- Most institutional investors require that awards are not transferable for the same reason;
- Legally, there could be problems for all the reasons discussed above with offering awards to non-employees, for example the transferee could not be a beneficiary under the company’s employee trust;
- it can give rise to securities laws considerations; and
- Delivering shares to a non-employee is unlikely to fit with the existing tax and administration processes established by the company in relation to the plan.
What are the three ways of sourcing shares?
- issuing new shares;
- buying shares on the market (often through a trust); or
- using shares a company holds in itself – treasury shares
Reminder: Issuing new shares
- Under UK company law, somebody has to pay the nominal value.
- This works well to satisfy options, paying an option price as nominal value can be deducted from the option price.
- If a company is issuing new shares to satisfy conditional share awards (i.e. RSUs), generally somebody else will have to pay the nominal value (given the participant won’t be paying anything to receive the shares so would not be able to pay the nominal value). Often, this means newly issued shares will be routed through a trust, so that the trustee pays the nominal value before the shares are delivered to participants.
Reminder: IA principles on issuing new shares
Issuing new shares also creates dilution, which in turn risks reducing the value of all the existing shares.
IA Principles therefore restrict companies’ power to issue new shares
by requiring dilution limits to be included in plans. Shareholders might not approve plans unless the rules contain these limits. These are:
- Commitments to issue new shares or re-issue treasury shares under ALL share plans must not exceed 10% of the company’s issued share capital in any rolling 10-year period and 5% under discretionary share plans.
6.3 ONWARDS
