Long term Incentive Plans
Maximising the potential of your long term incentive.
Long term incentives are recognised as a key element of reward strategy and are typically designed to:
- Motivate executives to increase shareholder value over the long term
- Establish a clear link between executive pay and company performance.
Institutional investors and legislators are equally keen to see that LTIPs deliver value to the shareholder and increasingly require that plans should feature financial measures that are demanding both for executives and for the company. Companies therefore need robust performance conditions, which have effective performance measures attached.
Watson Wyatt believes there are three key elements to successful performance measurement:
- The design of your plan’s performance targets
- Selection of the appropriate performance measures
- Frequent and effective communication of plan performance with participants.
Our specialist consultants have the experience to advise and support you in all these key areas.
Present Economic Value - valuing your LTIP
Present Economic Value (PEV) is a proprietary methodology developed by Watson Wyatt to value long term incentive awards. It is designed to place a realistic value on long term incentive plans, including share options, performance shares and restricted shares.
PEV builds on the Black-Scholes principles, but takes account of the distinct features of executive incentive plans, such as performance conditions and vesting periods and assessing their impact on current value.
How can we help?
Watson Wyatt will work with you to ensure the measures you build into your long-term incentive plan design reflect your overall business strategy. Our degree of involvement will clearly depend on your specific needs but we can advise you on any of the following:
Designing performance targets
In helping you to design performance targets we will:
- Work with you to identify the right comparator group
- Model the impact that different possible comparator groups could have on the final outcome of the plan
- Ensure the plan is flexible to allow for mergers, acquisitions and liquidations within your comparator group
- Determine the optimum frequency of the awards and their length of deferment
- Take account of current best practice and other developments in the market.
Selecting the appropriate measures
Total Shareholder Return (TSR) has become a preferred and accepted performance measure for LTIPs over recent years - but it is not the only option. We can also explore alternative measures that may be more relevant to achieving your business goals.
When measuring the success and value of your plan we will:
- Agree an appropriate methodology for valuation drawing on our actuarial and investment expertise
- Analyse your company’s performance at notional key vesting dates
- Review existing performance conditions and analyse possible alternative approaches.
Getting the message across Your executives will need to understand and appreciate what they need to do to gain maximum financial reward from any plan in which they are invited to participate. Good communication will motivate participants, encourage understanding and develop buy-in to the plan. This will create the desired behaviours. In addition, your board or remuneration committee will want to be clear on whether the performance measures are achieving the relevant goals and your shareholders will want to understand the impact of the plan on company performance.
Communication must therefore be tailored to each audience’s needs, but will include:
- A clear analysis of your company’s performance at key dates
- A summary of general stock market conditions.
Communications can be sent directly to participants on a quarterly, half-yearly or an annual basis and also at vesting. They can also be provided to the board or remuneration committee as a formal audited performance measurement tool.
Why Watson Wyatt?
Our clients choose to work with us because:
- We are established advisers to some of the UK’s leading global organisations in the overall design and implementation of executive long-term incentive arrangements
- Our performance measuring service combines the skills of our executive compensation consultants, our actuaries and our investment advisors and embraces broad econometric skills.
- We provide expert advice on communicating proposals and results at institutional, executive and all-employee level.
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