Long-Term Incentive Plans

Abstract

In 1995 the Greenbury report¹ recommended that UK companies should adopt performance-related long-term incentive plans (often known simply as “LTIPs”) for senior executives, preferring them to traditional share options. The report pointed out that stock options had a number of shortcomings: they sometimes led to windfall gains simply as a result of general movements in share prices and did not encourage directors to build up significant shareholdings in their employing companies. Reuters Group plc was the first UK listed company to adopt the new style of LTIP in 1993. Many other UK companies followed suit after 1995, influenced by the Greenbury report as well as the withdrawal of tax relief for share options granted over shares with a market value in excess of £20,000 in the 1995 budget. Since that time, LTIPs have become a major component of senior executive reward systems in UK listed companies. By 2012 long-term incentives comprised nearly 50% of the total earnings of executives in the FTSE 350, up from just under 40% in 2006.²