Perverse LTIPs and Alliance Trust (ATST)

To follow up on my previous blog post on the subject of the BEIS Committee report which recommended scrapping LTIPs, another example of a perverse consequence has just come to my attention.

We know that LTIPs at WPP and Persimmon are enabling directors to receive bonuses worth not just millions, but tens of millions of pounds. This is partly because of the unforeseen consequences when shareholders voted in favour of the schemes that will end up awarding such amounts. Another example is at Alliance Trust.

In February 2016, CEO Katherine Garrett-Cox left the company after a revolution prompted by Elliott Advisors and supported by ShareSoc – or to put it more politely, she was made redundant as her job disappeared after a restructuring of the Trust. Under her leadership the Trust had underperformed in comparison with its peers and there was a general view that she was overpaid and her strategy for the company had proved to be unsound – at least that is what many shareholders felt.

But both Katherine and former CFO Alan Trotter, who departed in 2015, were the beneficiaries of an LTIP scheme and as they were classified as “good leavers”, being made redundant, they will still receive the benefits of those LTIPs. According to the latest Annual Report for the company, not only will awards vest in 2017, but there will be a further vesting of shares in 2020.

So in 2020, Katherine could receive a maximum award of 400,985 shares (worth over £2.7 million at the current share prices let alone what they might be worth then). Alan Trotter could likewise receive up to 139,121 shares.

The share awards are subject to performance conditions, namely based on relative TSR and NAV performance to a peer group. But even based on median performance they would achieve 25% of the maximum bonus.

But why should executives receive such bonuses long after they have left the company and when they can have had little impact on the fund performance outcome by 2020? In reality the improvement in the performance of the company, assuming it continues, is surely the result of the changes made by their successors as directors so as to rectify the past strategic mistakes.

So this is a typical example of the perverse consequences of complex LTIPs where people vote for schemes that have unanticipated outcomes and where the duration over which they run leads to these unusual results.

So I welcome the call by the BEIS Committee to scrap LTIPs. Although encouraging a long-term approach to incentives is sound, and using share options with required holding periods is one alternative approach, the sheer magnitude of the bonuses is clearly a problem. And when employment is terminated, even when those departing are treated as “good leavers”, options should crystallise so that those departing cannot benefit from the work of those remaining.

The previous blog post on the proposals of the BEIS Committee is present here: https://sharesoc.wordpress.com/2017/04/05/hard-hitting-beis-report-on-corporate-governance-and-pay/

Roger Lawson

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