The ABI Guidelines for Share-Based Incentive Schemes. Setting the hurdle too high?

Abstract

This paper examines, from the perspective of the pay-performance connection, the guideline principles recently issued by the Association of British Insurers (ABI) in connection with the operation of share-based incentive schemes. The four main dimensions to these guidelines concern: (i) phasing of issue by use of regular awards; (ii) setting of performance criteria (hurdles) against a peer group or bench-mark; (iii) restricting any re-testing of satisfaction of such performance criteria; and (iv) instituting a sliding scale of reward contingent on the performance out-turn against criteria. Emphasis is also placed on the accounting recognition challenge of reporting to shareholders the expected value of such rewards. Results are derived from a simulation over a 14 year period of the implementation of such guidelines in a sample of companies traded on the London Stock Exchange. Empirical results suggest that the pay-performance connection is not always made stronger by setting the hurdle ever higher, and that higher hurdles are best tempered by generosity in terms of re-testing and re-issue of options. The saving of expense on such packages may be bought at the expense of a weakened pay-performance connection at board level.