The introduction of restricted shares to replace traditional LTI performance shares got a boost last Wednesday and Thursday as it received overwhelming shareholder support at two UK blue-chip companies, Burberry and BT. The 95% vote in favour presents a sharp contrast to contested votes on previous introductions of restricted shares e.g. at Lloyds Bank and Whitbread in the UK or at SBM Offshore and TomTom in the Netherlands.
The remuneration policy proposals of BT and Burberry were supported by positive recommendations by leading proxy agencies ISS and Glass Lewis, that have been sceptical of restricted shares in the past. We feel that in view of the swing in both shareholder and proxy advisor opinion gives restricted shares a new lease on life, provided critical characteristics of a restricted share plan are taken into consideration.
The restricted share plans of both BT and Burberry follow three crucial guidelines of the UK Investment Association (IA) to the letter:
- They apply a discount of 50% on the value on the restricted share grant compared to the face value of the preceding performance share grant, set as a minimum standard by both IA and Dutch investors association Eumedion.
- Vesting of the grant is subject to performance underpins that, if not achieved, allow the Board to discount or withhold vesting.
- Thirdly the vesting and holding period is extended to three to five years.
The arguments for introduction are not new. The Remuneration Committees point to the simple and transparent structure and the long-term focus it encourages in companies that are bound to make large long-term investments in a fast-changing market environment. BT’s committee adds that the lower face value of restricted share awards recognises growing sentiment in society to see a reduction in executive pay and that the potential payouts from restricted shares are less extreme and less variable than conventional long-term incentives. The committee at Burberry expects that moving to restricted shares will allow the company to compete for the best talent in the market and enhance retention.