Fund management group Fidelity Worldwide Investment has attacked long-term incentive plans (LTIPs). With these, executives can cash in shares if they hit particular targets and hold the shares for a certain amount of time, typically three years. Fidelity wants them to hold them for five years.
It says this should reduce the temptation for executives to “maximise short-term financial performance” in order to get their hands on the share awards, and instead make them concentrate on promoting sustainable growth and long-term investment. Fidelity has threatened to vote against remuneration reports at firms that ignore this suggestion.
What the commentators said
“Any proposal that aligns executive pay and long-term performance more closely at companies is welcome,” said Lex in the FT. And the group’s threat to vote against pay packages it doesn’t like “has teeth”, because such votes will be binding on companies from October in Britain. They must change their pay policy if over half of investors reject it. For this proposal to be implemented, however, Fidelity will have to work with other big fund managers, some of whom operate three-year LTIPs. “They need to cast the beam from their own eyes first.”
One issue they need to focus closely on, as Robert Peston pointed out on BBC.co.uk, is the nature and complexity of the targets in these LTIPs. They typically “run to many pages of formulae and clauses, such that they are impossible to understand”. So naturally the suspicion is that this makes it far easier for directors, and the remuneration consultancy industry that supports them, to game the system and thus add huge amounts to their basic pay under shareholders’ noses. Even if that’s not the case, why can’t we have pay agreements that “someone who isn’t a grandmaster in 3D chess might be able to grasp”?
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