Module 5 - Exec Share Plans Flashcards
In a set of executive plan rules for a UK listed company, who is usually described as eligible to participate?
Executive plans can be drafted so that all employees of the group are potentially eligible to participate. For fully listed companies, sometimes executive directors are excluded so that shareholder approval does not need to be obtained where existing shares are used to satisfy awards.
Name a category of the workforce that may not be eligible to participate in an executive plan.
Any of:
* Non-executive directors or NEDs;
* Employees of JVs or associated companies;
* Self-employed contractors and consultants; and
* People employed through a third-party (e.g., a professional employer organisation).
Give an example of circumstances where a Remuneration Committee might exercise discretion to override a formulaic vesting outcome
Any of:
- If overall company or individual performance does not support the vesting level that would otherwise be attained;
- If there have been unexpected or unforeseen events, especially if these have had a negative effect on stakeholders, clients or the wider workforce; and
- If it would result in the individual receiving a windfall gain – this one has gained particular significance since the COVID-19 pandemic began, as share prices saw sharp drops in March 2020 when many awards were being granted and share prices have generallybecome more volatile since.
Why do companies use performance conditions?
- To incentivise the participants to focus on a particular goal.
- As part of demonstrating a link between executive remuneration and the successful delivery of
the company’s long-term strategy, as required by the Code. - Institutional investors often expect performance conditions.
How might tax and National Insurance contributions be funded when a conditional share
award vests?
- The participant could simply pay them out of other funds that the participant has.
- Alternatively, the company could net settle the awards.
- The most common method in the UK, however, is ‘sell to cover’, where the participant sells
enough shares to cover the tax and NICs payable.
What happens to awards held by a good leaver?
Where the executive is a good leaver, awards should be:
* Settled in shares;
* Subject to normal performance conditions and timings (except in the case of death or takeover
where early vesting is appropriate and performance should be measured by reference to the
period to date); and
* Time pro-rated.
What are the three different ways of sourcing shares to satisfy awards?
- Issuing new shares;
- Buying shares on the market (often through a trust) ; or
- Using shares a company holds in itself – treasury shares.
Which of the sources of shares has an impact on dilution limits under the IA principles of
remuneration? (Notes – 6.2 - 6.3)
New shares and treasury shares.
Which plans require shareholder approval under the UK Listing Rules? (Notes – 7.1)
Generally, the Listing Rules require a share plan to be approved by shareholders if the plan:
* Involves or may involve the use of newly issued shares or treasury shares; or
* Is a ‘long-term incentive scheme’ in which one or more directors can participate.
Do deferred bonus plans require shareholder approval? (Notes – 7.1, 7.2 and 7.4)
Yes, if the plan involves or may involve the use of newly issued shares or treasury shares. If the plan
will use market purchased shares only, and meets the definition of ‘deferred bonus’ for the purposes
of the UK Listing Rules, shareholder approval is not required (as a ‘deferred bonus’ is not a ‘long
term incentive scheme’).
In which documents might you find malus and clawback provisions? What is the preferred approach? (Notes – 11.3)
Malus and clawback provisions may be included in plan rules. However, it is increasingly common for companies to have their malus and clawback provisions included in a separate malus and clawback policy. This can then apply consistently across all of their executive plans, which helps
ensure compliance with the IA’s requirements
What are the two ways in which a holding period can be structured? (Notes – 12.1)
There are 2 ways companies can structure their holding periods:
- After delivering the shares to the participant - the shares are delivered to the participant at vesting – but there is a restriction on selling or disposing of the shares until the end of the holding period. The shares are usually held by a nominee on the participant’s behalf during the holding period.
- Before delivering the shares to the participant - the shares aren’t delivered to the participant until after the holding period ends. This means the holding period is more like an extended vesting period, as the shares don’t actually belong to the participant until the holding period ends.
Although SAYE plans and SIPs are very different from each other, they do have some common
features:
broadly all UK tax resident employees must be invited to participate;
- they must be invited to participate on the same/similar terms (subject to some specific exceptions under the SIP legislation);
- both plans have potential beneficial income tax and National Insurance contributions (‘NICs’) exemptions;
- they both have strict rules about the sort of shares that can be used;
- they are both subject to legislation which contains a number of compulsory provisions that must be included in the plan rules; and
- new SIP and SAYE plans must be self-certified and registered with HMRC online by 6 July following the end of the tax year in which the first awards are made. Annual returns must be filed online by 6 July following the end of each tax year
What are the two key plan types?
LTIP (most common reward structure for the last 20 years) and,
Deferred Share Bonus Plan
What are the two ways a Deferred Bonus Plan can be structured?
Pre-tax, employee is not taxed until they recieve the shares, or
Post-tax, tax is on paid and the net amount used to buy shares which are then held for the participant
Name the 6 key award types
- Conditional Share Awards
- Nil-Cost Options
- Market Value Options
- Phantoms Awards
- Restricted Shares
- Tax Approved CSOP
What is the limit associated with tax approved CSOP
£60,000, as at 6 April 2023 (was previously £30k)
In 2019, what did the Purposeful Company criticise about LTIPs?
Thought they were too complex, allowing large payouts - and payouts not linked to OVERALL company performance.
Who decides who participates in a LTIP
Plan
Renumeration Committee - made of the board directors. Executive Directors CANNOT be part as the UK Corporate Governance Code says this population cannot be involved in deciding their own renumeration.
Which laws prevent non-employees participate in Plans?
Trust law - beneficiaries are limited to employees
Securities law - prospectus exemption
Financial Assistance
Companies act - using newly issue shares to satisfy awards , exemption for employees only
Name the four ways discretion should be applied
- Not to damage mutual trust or confidence
- In good faith and not irrationally, arbitrarily or capriciously
- Take into account all relevant factors, and no irrelevant ones
- Follow appropriate processes and reasoning should be documented
Why would a company include wording in award documents that state the awards are not part of the employees contract?
- Avoids the value of the award being regarded as part of contractual salary (avoids it being recoverable on dismissal)
- Reduce the risk of LOCAL employment laws being applied
What is an LTIP?
An arrangement which involves the receipt of any asset by a director or employee of the group,
A) which includes perf / service conditions to be satisfied over MORE than one financial year…
B) which creates a cost or liability to the group
How can you avoid the shareholder approval requirement?
- Only use market purchase shares, AND
- Exclude directors of the listed company from participating in the plan (avoiding being an LTIP)
How can you avoid the shareholder approval requirement?
- Only use market purchase shares, AND
- Exclude directors of the listed company from participating in the plan (avoiding being an LTIP)
Whose performance might be measured (5 answers)?
- The Group
- The Division
- The Employing Company
- Team or group of employees
- Individual employee
What are the two types of methods which can be applied to performance conditions?
Absolute - set targets for profit/ EPS
Or
Comparative / Relative - comparing the company with other companies (e.g TSR versus the FTSE 100)
What does EBITDA stand for?
Earnings Before Interest, Tax, Depreciation and Amortisation
What does EPS mean?
Earnings per share (total earnings / number of ordinary shares)
What does ROCE mean?
Return on capital employed
What does TSR mean?
Total shareholder return, taking into account share price AND dividends paid
Name the two financial market based performance conditions
- Share Price, and
- Total Shareholder Return
Name three financial non-market performance condtions
- EBITDA
- EBIT
- EPS
- ROCE
What is an example of non-financial performance conditions?
Environmental, Social and Governance (ESG) Goals.
Should the same performance measure apply to everyone?
No, although that can be simpler and more transparent.
Different rules to set different goals per population = cascading
What triggers malus/clawback? 5 answers
- Payments made on erroneous or misleading data
- Misconduct
- Misstatement of accounts
- Serious reputational damage
- Corporate failure
Why have holding periods? 5 answers
- The Corporate Governance Code requires it (vesting and holding of 5 years or more)
- Expected in the Investment Association principles (as above)
- Helps to enforce clawback
- Helps with ownership guidelines
- May result on favourable tax treatment
What are the two ways a share plan could be “settled” by a change of control?
- Vesting, either immediate or within 6 months so the acquiring company can hold 100% of the shares
- Awards could be rolled over into an equivalent award in the acquiring company
Name the seven key documents typically used in the context of an executive plan..
- Deed of grant
- The Plan Rules
- Participant award document ( letter incl acceptance)
- Performance conditions
- Explanatory booklet
- Vesting / Exercise documents
- Electronic document ( portal etc)
Identify the requirements of the Investment Association principles of remuneration in relation to malus and clawback.
- The circumstances in which malus and clawback can be applied need to be agreed and documented before awards are made.
- Remuneration Committees should establish a list of specific circumstances in which the malus and clawback provisions would apply.
- To help the enforcement of clawback, it is important that the terms are clearly set out and accepted at the time of grant by the participant.
- Remuneration Committees need to establish clear and robust processes for enforcing malus and clawback
