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The Bell Tolls for the Demise of LTIPs?

One of the more striking recommendations of the BEIS inquiry into Corporate Governance published earlier this year was the suggestion that Companies should no longer adopt LTIPs and should consider replacing those which exist.

In their response to the report, the Government has endorsed the proposal by including as Recommendation 15 that the consultation should “develop guidelines for the structure of executive pay with the following features: –

(a) A simpler structure based primarily on salary plus long term equity, to divest over a genuinely long term period, normally at least five years, without large steps;

(b) Limited use of short term performance related bonuses, which should be aligned, where possible, to wider company objectives or corporate governance responsibilities;

(c) Clear criteria for bonuses; they should be genuinely stretching and be aimed to provide incentives and not just reward”.

Further, the recommendation includes a commentary making a number of points: –

  • Executives should be encouraged to build up long term equity holdings in the companies they lead, to align long term personal success to the longer term success of the company;
  • Noting criticism of the complexity of LTIPs which can lead to outcomes not expected by investors;
  • Also noting concerns that simpler structures may not sufficiently align pay to performance;
  • Recognition that companies should have the flexibility to choose the long term share remuneration policies and models which are put to investors for a binding vote;
  • However, the strictures against too ready an acceptance of traditional LTIP structures is repeated together with an encouragement for companies to be more open to alternatives.

In addition, there is a specific endorsement for awards to vest over at least a five year period and a suggestion that this is included by the Financial Reporting Council (FRC).

There is also a proposal for legislation to be introduced to require companies to set out the impact of share price growth on share based remuneration models that operate over multiple years.

It remains to be seen when and if these proposals are implemented and the effect they will have on long term incentive plans. The response is nevertheless significant in showing that there is a growing consensus recognising the benefits of change in the design and structure of long term employee share schemes. Companies and their advisers will need to be abreast of these developments and ensure that plans and the related documentation are sufficiently flexible to allow them to be adapted as practice changes.

Pett, Franklin & Co. LLP are experts in employee share schemesexecutive incentives and share valuations. To find out more about we how we can help you or your client, please call 0121 281 5798 or email