Recently we wrote about the potential benefits of using share schemes during the COVID-19 pandemic to decrease remuneration costs while retaining and motivating employees
Having followed the market's response to the use of share schemes and similar remuneration in response to the COVID-19 crisis, we have flagged some key considerations that companies, particularly PLCs, need to bear in mind when considering establishing or extending share schemes.
Using share scheme, particularly tax advantaged share schemes like CSOP and EMI schemes can be a lifeline to many businesses. However, there can be reputational risks associated with them depending on how they are established. In particular, there has been growing negative press around the use of share scheme, such as long term incentive plans ("LTIPs"), to compensate executives for reductions in remuneration during the COVID-19 crisis.
The investment association's recent COVID-19 guidance states that remuneration committees should ensure that executives are not insulated from shareholders' experience and that taking advantage of the low share price to award long term share incentives is to be discouraged. Further, the investment association's guidance also suggests that performance targets for executives should remain stretching and that companies should delay setting performance targets relating to share awards until the post COVID-19 position is better known.
Given the prevalence of these attitudes amongst investors and the public, it is important that companies, particularly PLCs, consider potential reputational and shareholder impacts of adjustments in their remuneration provisions and policies. This may include reviewing and amending planned awards to the extent possible and considering revising future remuneration plans.
For example, it may be advisable to broaden out share incentive offerings to a wider pool of employees to avoid the perception that executives are being insulated from, or are in a position to indirectly benefit from, the economic issues arising from COVID-19. Share option schemes such as EMI and CSOP can be awarded to significant numbers of employees and can be set-up so as to be sensitive to different roles and performance requirements. Equally, "all employee" share schemes like qualifying Share Incentive Plans, can, due to their universal nature, demonstrate that employees and executives are "in it together" while also providing long term, tax advantaged remuneration.
Whatever remuneration is chosen, care should be taken to ensure that any such awards do not appear improper in the present circumstances.
The Importance of Transparency
As a related concern, it is particularly important at the present time for remuneration committees and other key decision makers to be as transparent as possible with shareholders and employees about executive remuneration. This should inform how executive remuneration, including share award schemes, are structured and the kind of performance conditions and hurdles included. It may also impact decision making procedure to include a greater involvement and input from shareholders.
Share awards can be of significant benefit in difficult times and can ensure that employees are motivated to achieve and benefit from a recovery following the COVID-19 crisis. However, the response to some market practices has made it clear that PLC's cannot afford to ignore stakeholder interests when considering them.
The DWF Tax Team has significant experience in advising on and establishing a variety of employee share schemes. Please contact James Cashman or your usual DWF contact if you would like to discuss the implications of establishing a new share scheme for your employees.
Authors: James Cashman, John Toon, Caroline Colliston and Alex Tolcher.