Reward Newsletter July 2009
SIP Tax Advantages are Worth Revisiting
The Share Option Centre's new recruit Giuseppina Vinci discusses whether SIP Tax Incentives are worth revisiting.
Since the 2009 Budget, there have been numerous recommendations as to how those affected by the new 50% tax rate in April 2010 can effectively manage to 'legally' avoid paying tax through implementing share incentive based plans and making the most out of Capital Gains Tax (currently set at 18%). The emphasis has been placed on the effective utilisation of HMRC approved plans such as the CSOP, SAYE and options under the Enterprise Management Incentive plan, but, has anybody really thought about the advantages of implementing the HMRC approved Share Incentive Plan (SIP)?
The SIP allows companies to offer their employees the opportunity to acquire up to £1,500 p.a. worth of shares from their pre-tax salary, and, once the shares have been held for 5 years in a trust, they will also be free from income tax and National Insurance. This becomes even more attractive to employees whereby a typical growth in the shares during the 5 year term could treble the initial investment for higher income tax payers. Also, whilst your shares are held in trust, any increase in value will be protected from Capital Gains Tax.
If the tax saving is not enough of a sweetener for employees, companies may also consider offering a free share award (max. £3,000 p.a.) in conjunction with the SIP (click here for details of SIP). This is commonly being used as an alternative to a cash bonus.
Employers can further incentivise employees through the SIP by awarding a specific ratio of matching shares (limited at 2:1) for partnership shares purchased within the plan. These will be subject to the same holding period as partnership shares and will also come with the same tax advantages.
Observations and Commentary on Current Institutional Attitudes to Executive Pay
Andrew Manktellow a Senior Consultant at MM & K Ltd comments on Current Institutional Attitudes to Exectuive Pay.
The current difficult economic conditions present a number of challenges to remuneration committees. Ensuring that executives remain appropriately incentivised and rewarded for guiding companies through extremely tough times whilst ensuring that the interests of shareholders are adequately considered will be a fine balancing act.
Dialogue with shareholders is critical and a clear case must be made for any changes to executive remuneration, especially if it is necessary to adjust downwards targets for incentives or to suggest structures contrary to the combined code or institutional investors' guidelines.
This has been highlighted by Bellway and Shell whose shareholders voted against the remuneration report. In both cases the issue was the decision to pay incentives despite the fact that performance conditions had not been met.
MM & K has had discussions with some of the main institutional investors on these issues and we have outlined below what we understand to be their views.
Relaxing performance conditions on existing incentive plans
Whilst it is typical for incentive plan rules to allow remuneration committees discretion to change performance conditions on existing incentive plans in exceptional circumstances, the view of the institutions is that the current downturn does not necessarily constitute "exceptional circumstances".
As such all are opposed, in general, to the resetting of performance conditions on existing incentive arrangements. Even so, the majority of institutional investors do accept that there may be cases in which the resetting of targets is appropriate.
Both the ABI and Schroders accept that, in some cases, it will be appropriate to review the performance conditions attached to existing incentive schemes.
However, they were very clear that companies should speak to key shareholders in advance of making any such decision and that a compelling case needs to be made over and above the current tougher economic climate.
In contrast, Aviva Investors appear to be taking a much harder line on this issue.
In a communication sent out by their Regional Head of Corporate Governance the retrospective changing of performance targets was described as 'unacceptable'.
The general view is that the preferred way of "dealing with" unachievable performance criteria applying to outstanding awards is the granting of new awards with achievable targets. Much store is set in the principle that LTIPs should have phased annual grants and whilst the last two grants may never pay out, ones granted now should create sufficient incentive going forward.
Size of awards and performance conditions for future incentive plans
Structuring future incentive plans is an area in which the institutions allow greater flexibility. Their view is that a significant proportion of remuneration should remain linked to performance. Whilst it is accepted that lower performance targets may be necessary both the ABI and Aviva Investors have the view that this should be combined with lower potential rewards for meeting these targets.
On this subject Aviva Investors have stated: 'Just as companies argued for increased quanta in the good times and when targets were increased, reduced targets should mean reduced quanta'.
On the subject of share based incentive schemes, the ABI and Aviva Investors have expressed the view that, for companies where the share price has dropped significantly in recent months, this should be taken into account when determining the number of shares granted under future awards rather than granting a number of shares linked directly to a percentage of salary.
This is, however, by no means a universal view. Schroders for example, whilst acknowledging that remuneration committees need to be sensitive to this issue, have expressed the view that the granting of greater numbers of shares is not unreasonable in creating an appropriate incentive to executives managing businesses through these difficult times just as investors accepted as reasonable the fact that executives would receive grants over fewer shares in rising markets.
Schroders have, in the past, advocated annual awards based on a fixed number of shares, in effect creating an additional incentive if the share price increases. This would be very similar to the approach taken by many private companies to share incentives, where it is more typical for an agreed proportion of the share capital of the company to be awarded to executives but linked to absolute rather than relative performance measures.
HR Beating Recession – 5 things to do
HR Beating Recession by Pam Kennett of Chiswick Consulting Suggests 5 ways in which HR can help beat the recession
During recessions it is often HR and in particular, OD and Learning and Development, who find themselves 'cut' early in the redundancy process, that is unless they have particular skills or know how in redundancy procedures. Seen as a costly overhead divorced from the business, HR is an easy target. As an HR professional, how do you make yourself indispensible during times of redundancy ensuring you and your function, remain relevant?
Speak language of CEO and FD – talk strategy and cost
A major criticism of HR is that it is seen to be too soft and wishy washy and fails to understand hard business issues. Although this may not be true in every case it is a sad reality that the number of senior HR taking their rightful place on the Board of organizations has not grown significantly over the past 20 years. One step away from the Board puts you one level away on influence and impact. Change people’s perceptions of you by speaking the language of the CEO and Finance Director. Start talking in hard numbers – talk about costs – hidden costs, capital costs, and ROI, investment. Initiate and lead top team workshops to revisit the business goals in response to recession. If you're not on the Board, offer to facilitate the workshop or meeting to understand the issues and get closer to the decision makers.
Be proactive in cutting your own costs
Play the good corporate citizen and revisit your own budget before anyone else does. Identify areas of saving – for instance, suggest using internal facilitators such as senior managers to deliver training courses. This not only saves costs but it means the courses are usually more relevant and specific to the business. Encourage and facilitate online training and distribute free resources and material readily available. For instance, subscribe to McKinsey quarterly and provide weekly or monthly synopses on each article. Better still, send targetted articles to the relevant departments – for instance, an article on how to reshape a customer department to the Customer Services Director. Measure ROI on each and every HR intervention using established models such as Kirkpatrick's Model (1959). Reject every intervention which does not reach level 4 – "impacting the performance of the organisation".
Focus on the longer term
During times of economic uncertainty it is typical for individuals and organisations to focus on the short term – getting cash in the door is critical. This short termism which develops means that it is easy to forget the deep skills and know how that has developed over the years and is critical to day to day delivery of the business.
Understand the core competencies the business needs to deliver its strategy over the longer term and then undertake an audit of the skills out there in the business. Highlight those individuals who have those core competencies and ensure they are not the first ones to be made redundant.
Ask how long it will take the business to replace an engineer with 15 years experience in a particular expertise area as opposed to a new graduate with 6 months experience? Take a strategic approach to redundancy by focusing on the longer term and speaking in business terms.
Get close(r) to your customers
HR is rightly criticized for developing and maintaining closer associations and networks with other HR folk than with their own customers. Getting close and personal with customers is critical in a recession. Customers don't stop buying during a recession, they just buy more cleverly. HR needs to understand what service / info / skills they are looking for, get these in writing and develop a business case for why HR still has a relevant role to play.
Encourage use of experienced interims or consultants who have worked in recessionary times
It's been nearly 18 years since our last recession. A generation of workers does not have the skill set or the experience to lead their organisation safely through a recession and out the other side.
Identifying this and having an action plan to counteract this will mean you are seen as proactive, strategic and indispensible and definitely too valuable to lose as we move into recessionary times.
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