- 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.
What has happened to executive remuneration?
- The combination of poor equity performance, high interest rates and lacklustre economic growth has proved a lethal concoction to these schemes – they are permanently impaired.
- a result, management are looking for new ideas and shareholders want better answers.
- Share based-remuneration often forms a significant portion of the ‘total package’ offered to senior executives to ‘attract’ the best managers.
- Both the company and employees concerned benefit when the company performance improves.
- But, as we see now in listed markets, many executives will experience significant value destruction in their net worth.
Why are 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 are your clients experiences with these structures?
- As a result of poor advice and a lack of understanding many disadvantageous structures are in place.
- Leading to disillusionment by management and wasted costs for company’s and shareholders.
Why does Executive compensation fail during times like this?
- Not built for major market moves.
- Tries to model an outcome based on consistent (fair) remuneration based on a benchmark. But these ALL fail during these times because the premise (base) being share prices steadily increasing no longer holds.
- Executive performance is not directly linked to share price performance. It may take years (even decades) for the share price to catch up to the actions of management. Look at Steinhoff, Enron and GE for extreme bad examples and Berkshire-Hathaway for a good example.
- There is turmoil at company’s, within board rooms and across the remuneration landscape as
Why should we care, surely they have enough money anyway and can afford to live on their ‘basic pay’.
- Simply, yes that is true, however many executives have significant obligations on the other side of their incentive structures which can place extra-downward pressure on share prices. Recent examples of this include Mediclinic and EOH where derivative positions were closed out when the collateral no longer covered the loans taken.
- Many share incentive strategies were both tax and cash flow efficient for both the employee and company.
- And there is another VERY IMPORTANT reason why we should care…
- Just because the structure is ‘under water’ doesn’t mean the Executive ignores it. They are entirely focused on achieving that share prices performance. That is the difference between a ‘meagre’ salary and making tens even hundreds of millions of Rands in compensation.
- It is the unintended consequences of these structures that everyone should be aware of – especially company boards and those responsible for the remuneration policies of listed companies. After all, these companies are largely responsible for the savings of most ordinary people in the form of pensions and life investments.
- Executive Remuneration is a crucial element of governance – how organisations make decisions. The ramification of zombie-incentives cannot be under-estimated.
Actions to take now
There are several moves that CEOs can take right now to help mitigate the eﬀects of the crisi and come through stronger on the other side.
So what is the final analysis?
- Boards will take advice on their structures.
- Likely that structures will be unwound / cancelled in the coming cycle.
- Same structures (at new strike values)
What can be done about this?
- Look at alternative answers available.
- Engage with stakeholders – Board, Rem. Consultants,
- There are new structures to complement the corporate governance best practice.
Do you have any answers?
- The ABI is an efficient mechanism for management to purchase shares in the company they work for.
- Hugely efficient nature of the accelerated participation and the low entry cost, these structures are significantly better than any scheme which involves any form of borrowing and the purchase of full-value ordinary shares, even ignoring the tax benefits.
- Relatively simple administration, accounting and compliance and alignment of management with existing shareholders are considered significant benefits when compared with existing LTI schemes.
What are the benefits
- Benefits of a new incentive for participants and companies include
- Goals of management and shareholders are aligned.
- An effective and efficient incentive for management.
- Flexible for new participants and early departures.
- Easy to understand and administer.
- The structure creates value for participants and the company.
INTRODUCTION TO ADDISON ADVISORY INC.
Addison Advisory is a professional services firm based in Sandton, South Africa providing insight, advice and direction to senior executives and shareholders on matters of remuneration and executive alignment structures. We help clients achieve their business and financial goals, providing custom designed solutions, with an emphasis on high-impact, value-enhancing work that is clearly understood and supported.
For further insights on remuneration and the Accelerated Buy-In structure click here.