There has been much debate around executive pay over recent months. Some of it curious, such as the focus on the relation between CEO remuneration to median pay within the organisation and some logical, such as linking remuneration to increases in shareholder value.
Against this largely political backdrop, the share prices of many AIM companies have fallen sharply with the AIM UK 50 Index falling from 3700 in July 2011 to 2800 at the turn of the year.
Does this, as some political commentators suggest, demonstrate a lack of quality management or does it reflect macro economic problems outside of management’s control? If the latter, there is a significant decoupling of share price performance from management’s actions. This is borne out in the most recent QCA/BDO Small and Mid-Cap Sentiment Survey in which 60% of companies believe that equity markets are hindering their company’s prospects.
However, perhaps this is the lot of the small cap company, to be tossed around in the tides of market sentiment and, therefore, seeking to reward increases in share price is to be ‘fooled by randomness’.
The other specific issue many AIM companies face on remuneration strategy is the need to conserve cash. The ability to attract and retain talent is key, but over the next couple of years preservation will be the priority. How then to marry the objectives of rewarding performance, which is measured by something other than absolute share price, in a cash and tax efficient way which is supported by shareholders?
There are a number of equity-based incentives that may meet these criteria, for example where performance targets focus on outperforming a peer group, or reaching operational milestones. These can be structured in tax efficient ways such as the use of ‘split interest’ schemes which are becoming more popular.
A non-equity solution which is increasingly being considered is contract for difference (CFDs). This involves creating securities (ie the CFDs), that track KPIs such as profits and/or operational milestones such as project development. The gains on these contracts (they also include losses for failure to hit targets) are treated as capital and offer tax efficiencies.
There is, as a general trend, a move away from ‘standardised’ incentives towards incentives with a company-specific design that are clearly explained and consistent with shareholder objectives. BDO are currently working with a number of clients to set up such innovative and relevant schemes.
If you would like to discuss any of the issues raised in more detail please contact your usual BDO adviser or myself.
This article is part of a series written specifically for AIM companies. Follow our series at http://bdoqcasentimentindex.co.uk
25 January 2012