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The ABI guidelines for share-based incentive schemes: setting the hurdle too high?

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  • Brian Main

Abstract

This paper examines, from (he perspective of the pay-performance connection, the guideline principles issued since 1984 by the Association of British Insurers (ABI) in connection with the operation of share-based incentive schemes for executives. In particular, attention is paid to the marked change in emphasis that emerged in the 1999 guidelines. 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. 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 some latitude in terms of re-testing. The results also highlight the importance of the choice of method of reporting the performance of Executive Share Options when communicating with shareholders and other stakeholders.

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  • Brian Main, 2006. "The ABI guidelines for share-based incentive schemes: setting the hurdle too high?," Accounting and Business Research, Taylor & Francis Journals, vol. 36(3), pages 191-205.
    • Handle: RePEc:taf:acctbr:v:36:y:2006:i:3:p:191-205
    DOI: 10.1080/00014788.2006.9730021
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    References listed on IDEAS

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    1. M. Ali Choudhary & J. Michael Orszag, 2003. "Are Performance Conditions On Executive Options Driven By Fundamentals?," School of Economics Discussion Papers 1103, School of Economics, University of Surrey.
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    Cited by:

    1. Liu, Lisa Shifei & Stark, Andrew W., 2009. "Relative performance evaluation in board cash compensation: UK empirical evidence," The British Accounting Review, Elsevier, vol. 41(1), pages 21-30.
    2. Voulgaris, Georgios & Stathopoulos, Konstantinos & Walker, Martin, 2014. "IFRS and the Use of Accounting-Based Performance Measures in Executive Pay," The International Journal of Accounting, Elsevier, vol. 49(4), pages 479-514.
    3. Ian Gregory-Smith & Brian G. M. Main, 2016. "Testing the Participation Constraint in the Executive Labour Market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(4), pages 399-426, September.

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