The Long View on Long-Term Incentives

Many of us who have worked in financial services understand that the mindset of the retail investor is often little different to the employer’s when it comes to long-term investment. Private investors have a disturbing tendency to sell in regret at the bottom of the market and to buy in greed at the top of the market. Much the same seems to be true for the behaviour of employers and employees in relation to long-term incentive plans.

At this point in the cycle there is plenty of evidence that employers and senior employees alike are attaching too little value to their long-term incentive opportunities. This is understandable when the typical long-term pay-out levels for Directors of FTSE250 firms are now lower than the maximum annual bonus potential. Added to this finding, is the knowledge that one in four of these companies are currently making no pay outs whatsoever from their long-term incentive plans.

Meantime, HMRC statistics tell us that the number and value of awards in approved schemes is down by as much as two-thirds since 2000. Some of that change can be explained by the substitution of Sharesave with the Share Incentive Plan and the decline in popularity of Company Share Option Plans but the declining use of Enterprise Management Incentives and the sheer scale of decline in usage in Approved Share Schemes in recent years remains perplexing.

Alongside these trends in listed companies is the sharply contrasting practice of privately owned firms, private equity backed enterprises and family businesses. where new forms of long-term incentive plan are increasingly widespread. Schemes based on jointly owned equity or similar contracts for difference (CFD) have proliferated in recent years, largely unnoticed by HR professionals in listed companies.

The implications of these below the radar developments in companies outside the main FTSE350 listing and the neglect or over-regulation of long-term incentive plans in the listed sector is obvious. It serves to widen the potential earnings gap and thus attraction, for those working in smaller high growth firms compared to long established and less entrepreneurial listed companies. Such people will be hard to dislodge from the current employers and all the more so when much of that long-term gain is accumulating in a capital gains tax environment rather than the income tax regime applied to most listed company schemes.