June 2, 2017
Growing Unrest Over LTIPs
– Liz Dunshee
LTIPs are usually the biggest element of pay – and have grown in complexity over the years. This “Proxy Insights” article (pg. 7) highlights mounting opposition to LTIP structures. Here’s an excerpt:
Growing shareholder unrest over LTIPs is reflected in the data with average support for their approval falling from 92.6% in 2014 to 89.7% in 2016. Of course, this still indicates a very high level of support. Even among the ten investors who vote against LTIPs most often, the majority still support LTIPs over 50% of the time.
Many critics point out that the three-year duration of LTIPs is not enough to truly focus executives on a company’s long-term interest. The real ramifications of any short-term investment in equipment or human resources may not be seen until long after executives have received their payouts. This discourages investments that create long-term value for the company, as it could reduce LTIP payouts over the three-year performance period.
Critics also claim that LTIPs railroad executives towards single outcomes set by targets, rather than the complex patterns of behavior required to run a company. Indeed, many question whether executives are even responsible for reaching their targets, or whether external factors are the real drivers of company performance. Executives often seem to receive their payouts regardless of the actual reasons for company success or failure.
How can LTIPs be more effective? Private equity backers – whose influence is growing – tend to prefer infrequent & meaningful option grants that vest based on the PE firm’s absolute or internal rate of return over their 3-5 year investment period. In their view, annual restricted stock awards are just a favor to executives. Meanwhile, corporate governance advocates are speaking out against short-termism & suggesting LTIP structures that promote a true long-term view.
It’s important to understand these conflicting views so that you can tailor your LTIP to the company’s specific strategy – and clearly communicate to your executives & shareholders.
Our upcoming “Proxy Disclosure/Say-on-Pay Conferences” will tackle proxy advisor views on incentives, perks & other hot topics – with 20 panels spread over two days. Act by June 9th for a 20% early bird rate. You can attend in-person in Washington DC – or watch by video online.