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

Brian Main

Accounting and Business Research, 2006, vol. 36, issue 3, 191-205

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.

Date: 2006
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/00014788.2006.9730021

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