Share incentives in the economic downturn

As has been well reported, the Financial Services Authority and the Treasury have openly stated that they believe that a culture of high value performance bonuses which rewarded the meeting of short-term goals has contributed to the current banking crisis we now find ourselves in.

On the FSA and the Treasury’s wish-list going forward is a move towards remuneration structures that reward longer term performance and the creation of maintainable value for shareholders.  In practice this is likely to mean share incentives measured over, say, a three year period. 

The remuneration practices adopted by many of the troubled financial institutions seem remote from many of this region’s companies however the focus on long-term stability, recovery, performance and corresponding reward is well worth us giving some consideration to here in the Midlands.

The time for new share incentives

In the current climate where money is tight, keeping key employees locked-in and motivated may not be possible through the age old combination of salary increases and cash bonuses.  Share incentives offer companies the opportunity to reward their employees for meeting longer term business goals and also offer an additional “softer side” in giving employees a stake or potential stake in the businesses they work for.

Coupled with the tax breaks that well designed share incentives may offer, share incentives may well lead to significant cost savings and also aid in employer/employee relations.

For share incentives implemented now, the current financial crisis may well represent something of an opportunity.  Invariably, and in order to obtain any real tax and cost efficiencies, employees will be required to agree to pay the market value of the shares as it stands now.  With current market conditions being as they are, share values are likely to be lower resulting in a reduced acquisition cost to employees and greater potential for growth in value.

Existing share incentives

Shares under incentive awards that have already been made may now be sitting “under water” (that is the price employees are bound or have agreed to pay is less than their current market value).  Any such incentives may therefore have currently lost their motivational effect and could be seen by employees as worthless.  While that may be the case now that is of course not to say that they will not become valuable again in the future. 

Companies may take the view that while shareholders’ interests have suffered employee incentive holders should rise and fall with them.  There may however be scope (assuming shareholders agree) to surrender and re-grant share incentive awards at today’s much lower values.  Alternatively and more likely, further awards of share incentives at today’s lower values could be granted now offering employees the prospect of holding incentives that will (hopefully) soon be of significant value.

Either way, at a time when cash may be in short supply and the need to motivate employees is as important as ever, the time is right to review companies’ existing pay structures and to identify the opportunities that share incentives could offer in recruiting, retaining and motivating key employees.