By Paul Hodgson – CCO and Senior Research Associate
As reported in the Financial Times a few days ago, a group of institutional shareholders including Standard Life are pushing for the spread of a new “hold till retirement” share retention plan that is being contemplated by HSBC. It is said that the lengthy retention clauses attached to vested and exercised equity has been inspired by HSBC’s new chairman and former Goldman Sachs executive John Thornton. Goldman Sachs executives are required to hold three-quarters of net equity awards until retirement.
The shareholder groups have indicated that such long-term retention is a badge of ethos. Calling something that is practiced at Goldman Sachs a badge of ethos might be a contradiction in terms, however. Clearly such retention is intended to make managers behave like long-term shareholders and avoid overly risky practices. While Goldman came through the financial crisis with more aplomb than most investment banks, it hardly came through unscathed and was as exposed at one time to at least as much risk as any other bank. So why did the hold till retirement clause not prevent such risky behavior? As I have already said in a white paper for the CII Wall Street Pay, executives at all the investment banks, including Goldman, were paid so much in cash and short-term equity that their long-term holdings were icing on the cake and failed to deter risky behavior.
It is to be expected that such is not the case at HSBC.
Shareholders in the UK are also pushing to have the standard performance period for long-term awards extended from three years to five years, something we have been preaching about at GMI Ratings for some time. However, in a move that goes against this best practice, though reflective of typical practice at Goldman until a year ago, it appears that Mr. Thornton is suggesting that the performance period for such “long-term” incentives be shortened from three years to one year because of the longer vesting period. Soon, we’ll hear that he is suggesting that the equity be offered at a discount to take account of the risk of forfeiture…. Shortening the performance period is not a suggestion that will be contemplated by UK shareholders.
Objections to this level of retention tend to focus on executives need to diversify their holdings. However, such an argument is likely to fall on deaf ears. Primarily because it is only if excessive numbers of shares are awarded in the first place that any executive can plead that “too much” of their personal fortunes are tied up in company stock. In any case, since they did not purchase this stock on the open market with their own money, then no complaint is justified.