Incentive strategies are programs designed to incentivise management and staff of a company to grow the value of the company by linking their individual benefits to the achievement of certain pre-set targets or behaviours. These programs offer employees the ability to gain financially through an increase in the share price of the company they work for over a period of time.
The principal–agent problem, in political science and economics occurs when one person or entity, is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the “principal”. A conflict of interest is inherent in any relationship where one party is expected to act in another’s best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company’s management and the company’s stockholders. In order to resolve this agency-problem, incentives are introduced to align these interests.
What other benefits do incentives provide?
- Often form a significant portion of the ‘total package’ offered to senior executives to ‘attract’ the best managers.
- Incentives are considered the most important means of motivating and retaining management within a company.
- Both the company and employees concerned benefit when the company performance improves.
- Many share incentive strategies were both tax and cash flow efficient for both the employee and company.
The combination of poor equity performance, high interest rates and lacklustre economic growth has proved a lethal concoction to these schemes. Management are not being rewarded through their share-based payment plans. Leading to turmoil at companies.
Why listed company’s cancelling their share-based payment structures
Companies are acknowledging that current remuneration and incentive plans are no longer fit for purpose. In certain instances, companies have allowed executives to ‘gear’ (i.e. borrow) against these positions with financial institutions thereby increasing their expected gain from a relatively modest number of shares awarded.
What our client’s experiences with current share incentive structures
As a result of poor advice and a lack of understanding, many disadvantageous structures are in place. This is leading to disillusionment by management and wasted costs for company’s and shareholders.
Characteristics of these poorly implemented incentives
Employees often don’t have money to purchase shares in the company they work for. Tax rules have changed dramatically in recent years making all but a very small number of structures efficient. Delaying the purchase of shares results in the employee “losing out” on the growth of the share value. Certain schemes promote the ‘wrong’ incentive which can harm the company and existing shareholders. The rules and compliance required to implement and manage many schemes can be complex, time consuming and risky for the company and employees concerned.
The impact of lock-down and covid-19 on share-based payment structures
- Many executives have taken basic pay-cuts (approx. 10% of total package)
- Likely that their share-based payments will not materialise – which is significant
- But boards also make allowances for these circumstances – which activist are starting to take exception to.
What is the result of the current situation?
- As a result of these ‘poor’ returns earned, executives are demanding greater basic pay. More guaranteed pay with no link to ordinary shareholders returns – contributing to less emphasis on long term value maximising efforts for shareholders in general.
Listen to our webinar
In this informative webinar Marc Ashton and Guy Addison introduced share incentives and how these structures are intended to incentivise key staff without losing alignment with the strategic objectives of the businesses.
Remuneration structures and policy today is largely a commoditized ‘cookie cutter’ approach where the same structures are used across industries and businesses with little thought given to the specific circumstances facing the organisation and its people. Company’ boards are going to have to return to the drawing board for some deep thinking (and action) on their current executive remuneration policy and implementation plans.
Key questions to answer in resolving your incentive program
1. You’ve spoken largely about listed companies, do these same concerns apply to SME’s and private company’s?
Broadly yes, although less regulation like listing requirements make it easier to be flexible here. Take advice where necessary – this is a complicated and risky field!
2. What actions can our listeners take?
If you are a participant, read up on the rules and issuing particulars of your incentives. Speak to your CFO / FD / Board if in doubt. Visit Addisoninc.co.za for resources on remuneration, share incentives and share-based payments.
3. How can we contact you?
If you would like a complementary consultation on your specific incentive structure please contact us today. We enjoy helping clients achieve their business and financial goals and can often unlock seemingly insurmountable challenges. If we can help you complete that all-important transaction, please make contact.
Introduction to Addison Advisory Inc.
Guy Addison is Managing Partner of Addison Advisory Inc, working with businesses and their shareholders on corporate finance, strategy and governance challenges. Addison Advisory have over two decades of experience in business transactions, mergers, acquisitions and share structures. Our solutions are custom designed, with an emphasis on high-impact, value enhancing services that are clearly understood and supported by our clients.