The latest controversy affecting executive pay and LTIPs has focussed on the rewards delivered to Persimmon executives. Under the plan, substantial payments are due to be paid to the Chief Executive and other members of the senior management team. The issue results from a combination of factors which demonstrate the need for careful design, anticipating potential challenges and addressing them in the detailed design and operation of the plan.
With Persimmon, the specific issue has been the absence of a cap on total payments. This, combined with substantial dividend payments (which trigger the payments under the plan) have resulted in the resignations of the Chairman of the Company and its senior independent director.
The controversy highlights a number of important considerations which will influence plan design for other companies:
- Windfall profits – one of the criticisms has been the link between the performance of the Company and the benefit from the Government’s “help to buy” lending scheme which has arguably encouraged property price increases.
- Caps on payments – there was no cap on payments resulting in the potential for the substantial level of payments which have been criticised.
- Distortion of corporate behaviour – payments were triggered by levels of dividends. Arguably, this may have encouraged dividends to be support LTIP payments.
- Phasing of payments – for payments at the level permitted by the plan, consideration might have been given to requiring longer term deferral of payments and reinvestment into the Company’s shares.
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