How long is the long-term ?
For most companies operating long-term incentive plans (LTIPs) for executives, it means three years. That's the period over which performance tends to be measured. Qualifying shares are then dished out and recipients are free to turn their paper gains into hard cash by selling.
Three years, though, will not fit many people's definition of the long-term. The great banking bust of 2007-08 was preceded by at least half a decade of boom-time thinking in boardrooms that contributed to the severity of the fall. Or, to take a non-banking example, Punch Taverns' model of massive balance sheet leverage worked splendidly from the turn of the century until about 2007, when the roof fell in. In similar fashion, miners Rio Tinto and Xstrata had to go cap in hand to their shareholders for rights-issue cash in 2009 despite enjoying a bull market in commodities that dated from 2001.
But these examples – and others – have not led to an across-the-board rethink of the nature of the "long term" as it applies to executives' incentives. Some big banks and miners, scarred by experience, have moved but they are the exception. Fund manager Fidelity Worldwide Investment found that only 14 companies in the UK out of 304 surveyed operate LTIPs that extend to five years.
Dominic Rossi of Fidelity suggests a modest reform: keep the vesting period at three years but make executives hold their shares for a further two. So, in effect, a three-year scheme would become a five-year scheme overnight. This is an idea worth supporting. It might have made little difference in reigning in gung-ho boards of old; but it might help to curb the curse of short-termism in future.
Fidelity will back its words with action. From next year, it will vote against the pay report of any company in the UK and the rest of Europe operating an LTIP with a holding period of three years or less; from 2015, it will give support only where holding periods are at least five years. Fidelity is a big beast with £160bn under management, so its threat has to be taken seriously by remuneration committees in the new era of binding votes on pay.
Other big fund managers ought to take notice too. If only a few join the cause, companies would quickly rejig their LTIPs. Schroders, M&G, Legal & General, Blackrock, Aviva Investors, where do you stand?
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