The configuration of long‐term executive directors incentive schemes

Abstract

Purpose

The Article seeks to identify the configuration of executive directors conditional option and LTIP arrangements used to align the interest of the company’s directors and shareholders.

Design/methodology/approach

The article presents an empirical study of the option and LTIP arrangements (current and previous) of 51 major UK companies. The article focuses on the configuration of option schemes and LTIPs in respect of three critical elements: the performance target selected, the comparator used to benchmark performance and the quantitative performance target level requirement to be achieved to trigger rewards. The period 1989‐2002, covered by the research indicates a substantial degree of “experimentation” with many companies amending their original option schemes and LTIPs and a larger number of other companies introducing new arrangements. A substantial number of schemes can be characterised as being “undemanding” rewarding average rather than excellent performance.

Research limitations/implications

It is It is proposed (in a follow up paper) to econometrically test for associations between particular configurations (identified in this article) and actual corporate financial performance, i.e. which configurations have the most robust impact on performance.

Practical implications

The author makes a number of recommendations aimed at making option schemes and LTIP, more “stretching”, rewarding only excellent rather than average performance.

Originality/value

This is the first paper to explicitly look at the components of option schemes and LTIPs in a detailed way, questioning the merits/demerits of the targets and comparators commonly used to evaluate performance.

Citation

Pass, C. (2006), "The configuration of long‐term executive directors incentive schemes", Handbook of Business Strategy, Vol. 7 No. 1, pp. 299-304. https://doi.org/10.1108/10775730610618972