The Purposeful Company is a UK consortium that proposes evidence-based reforms to embed purpose into the heart of business (I serve on its five-person Steering Group). In October 2019, it released a study on reforming executive pay by replacing complex bonuses (known as Long-Term Incentive Plans) with simple, long-term stock (known as restricted shares or deferred shares). The key findings are here and the full report is here. This is the reform also advocated in Chapter 5 of the book. But the report goes beyond the book by interviewing companies and investors on the practical barriers to reform and how to overcome them.
Key themes include:
- The evidence for the reform. In particular, despite their name, Long-Term Incentive Plans actually encourage short-termism
- The widespread support for the reform. Investors and companies both believe that restricted shares should be used in place of LTIPs in 5 times as many companies as they’re being used in at present.
- The barriers to reform. Proxy advisors, and some investors, have a number of concerns with this change.
- One is that restricted shares may lead to payment for failure. As explained in Chapter 5, this concern can be addressed by accompanying a restricted share grant with a decrease in salary (which makes executives more accountable for performance, not less).
- Another is disagreement on the level of the discount required when moving from LTIPs to restricted shares. While the quantum of pay is important, this affects how the pie is split between executives and investors/stakeholders. Far more important is the structure of pay as this affects the incentives to grow the pie (i.e. make long-term investments rather than gaming short-term LTIP targets). Thus, discussions on quantum should not be a road-block to improvements in structure
- Practical tips to reform. The report makes recommendations in two areas:
- Process changes to encourage innovation and adoption – for example, how companies, investors, and proxy advisors should best engage around a potential pay reform.
- Design changes to address the above concerns about payment for failure.
Please also see the blog by Tom Gosling, a partner in PwC’s executive pay practice who leads TPC’s work on executive pay. The blog discusses the report in the context of decades of experience in advising remuneration committees on pay design.