In these turbulent times share plans are unlikely to be at the top of anybody’s list and time and resources will be focussed on the most pressing matters. That said, they should not be forgotten and we have put together a short list of what we believe companies should be thinking about now and in the longer term. If you would like to discuss any of the points, please get in touch.
What to think about now
1. Executive awards – the level of new awards and adjusting existing performance conditions
- Salary multiples: most plans allow for awards up to a maximum multiple of salary based on the share price at grant. This could lead to “excessive” awards and pressure on dilution limits, accounting charges, funding costs and ultimately higher employer social security costs. Short term factors are having an impact on the quantum of awards which are designed for the long term and Remco’s should be proactive in their approach to award levels. It may be appropriate to reduce award levels now and Remco’s should also hold in reserve any power they have to address “windfall” vesting outcomes.
- Performance conditions: the obvious question is whether performance conditions can be adjusted to take account of the market downturn. That will depend on the wording of plan rules and Remuneration Policies which usually require there to be an “event” which justifies the substitution of existing performance conditions with conditions which are no less difficult to satisfy. In spite of the unprecedented spread of COVID-19 and the resulting market downturn, it may be difficult to pinpoint an event and to find a substitute performance condition. Even if Remco were to reach the conclusion that a suitable adjustment was appropriate, it would risk antagonising shareholders who have seen the value of their holding fall and who may query the alignment between executives and shareholders.
2. All employee plans – employees withdrawing from plans and the risk of companies delivering far more shares than they bargained for
- Will employees withdraw from contribution plans? This may happen as a result of some or all of a number of factors, including share price falls, employees becoming nervous of contributing funds to buy shares or a reduction of income as companies impose shorter hours, unpaid leave or similar measures. The situation is likely to be most acute where the purchase price is fixed at the beginning of the contribution period and the share price drop outweighs any discount or free share contribution.
- From the company’s perspective, withdrawals from savings contracts may lead to early and “wasted” accounting costs and falling share prices may lead to the use of many more shares than expected. Some companies may already be in the middle of a plan invitation and the current environment is likely to reduce take-up, particularly if the offer price has already been set.
- All employee share plans are often the only benefits which are offered on the same basis group-wide. Companies cannot give any investment advice but they can communicate. Keeping employees informed about what is going on in these turbulent times has never been more important. Companies should think about contribution holidays or freezing plans until things return to a more normal footing. This may also alleviate any concerns that companies have about upcoming vesting of awards, which would ordinarily lead to a large volume of shares being sold in short order to fund tax liabilities. Private companies may struggle to find the cash to “make a market” for employees who wish to sell shares.
3. Paying employees when cash is in short supply
- Staff turnover is very expensive and retaining the best people to see them through the bad times and into recovery should be a priority for businesses. Long term share awards may provide a solution either as standalone retention awards or in lieu of bonuses for cash-strapped companies.
- Given the uncertainty of performance conditions and volatility of share prices, companies may consider long term retention awards over fixed numbers of shares which vest over time provided employees remain in place.
4. Preventing future problems – what might we do differently?
- Will the current crisis add to the voices already calling for an end to complex performance conditions and a move to simpler long term alignment between executives and shareholders?
- Outside the ranks of executives, employees often have limited disposable cash. Designs which put their money at undue risk and only offer benefits in return for long term holding may be unattractive and lead to early withdrawals and poor take-up in the future. These risks should be “stress tested” at the outset. Companies should be clear about what they are trying to achieve from their all employee plans. They should be especially careful not to import features into them which while they may be appropriate for executives, do not translate to an all employee participant base.
- On a more practical level, companies should consider including limits in their plans to protect against the delivery of more shares than was budgeted for if there is a share price fall or unexpected exchange rate fluctuations. Companies should also consider excluding employees from participation in future invitations if they withdraw early from existing savings arrangements. They would need to make sure that doing so did not breach local employment law and also consider the circumstances in which they would want to enforce such a measure. Rather than taking the “stick” approach, it may be better to offer employees flexibility to take a contribution holiday as a standard feature. This will require careful design but is likely to mean that more employees will participate year on year, safe in the knowledge that they can divert their cash to other more pressing matters should the unexpected happen.