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.