An investigation into recent developments in employee incentive schemes used by companies listed on the Johannesburg Stock Exchange

Master Thesis


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University of Cape Town

For several decades equity-based compensation has been used as a tool to align the incentives of company executives and employees with those' of the company shareholders. For instance globally, during the 1990's, there was an explosion in the issuance of employee stock options. This served several purposes, namely - to motivate managers, in the pursuit to increase company value and achieve long-term goals as a retention tool for talented staff and also as a way for cash strapped young companies to reward employees without the need to divert cash from operating activities. The global financial crisis, accompanied by a multitude of very costly high profile bailouts, has led to significant shareholder and tax payer dissatisfaction, and has succeeded to highlight the inherent deficiencies of traditional share-based incentive schemes such as stock options. Increased scrutiny and calls for better corporate governance, together with evolving accounting and tax treatment, have ultimately led to a shift in share-based incentive schemes practices. Globally, several important developments have emerged. For instance, there has been a marked move away from simple stock option-type schemes towards less dilutive Share Appreciation Rights and also full quantum share schemes. In addition, performance conditions (relative as well as absolute) have become increasingly prevalent in terms of grant vesting (PWC, 2011). The objective of this study is to examine the current long-term share-based incentive schemes used by JSE listed companies based on data from 50 large and mid-cap companies. It aims to identify, trends in terms of prevalent scheme types, average scheme size relative to issued share capital, settlement methods, valuation models used, construction of model inputs and the use of performance conditions. These trends are framed in the context of South African tax legislation and IFRS2 accounting standards. The analysis indicates that in recent years South African listed companies have followed the global approach towards share-based incentives, namely: * Share Appreciation Rights are being used more frequently * Full quantum schemes are ,also becoming more popular * There is increased use of performance conditions embedded in grants * Companies are moving away from the 'one size fits all' approach and are starting to use combinations of schemes to simultaneously address issues such as staff retention, preventing excessive risk taking by managers and attaining short, medium and long term strategic targets.