In the last three years there has been a growing trend towards something called the MTI or medium term incentive. This is where a portion of the cash bonus amount (from the short term incentive) is automatically deferred into shares. It applies to senior management only and they have no choice about whether there is deferral into shares or not, i.e. it is mandatory.
The individual first has to meet the performance conditions for the short term incentive to get anything (these tend to be a mixture of individual and company based targets).
Commonly 30 – 50% of the STI is deferred into shares. The shares are commonly only subject to tenure vesting, i.e. the employee must stay with the company for a further 2 year period or the shares will be forfeited in most instances.
The tenure period is usually 1 – 2 years but most commonly 2 years. So this vehicle has a 12 month testing period and then a further 2 years in which the employee must stay with the company to get the full benefit. It is effectively a 3 year plan.
The philosophy behind this was that short term focus was impacting company and global performance and in part led to the GFC. Shareholders wanted the focus for key people to be longer term. So if you perform in the short term (12 months) the value of what you eventually get is based on the long term performance of the company. Your benefit is determined by the share price and performance of the company for a further 2 year period.
How is the MTI different from the LTI? Both commonly have a 3 year at risk period, both are delivered in securities (in full or part) and both tie the employee’s value to the performance of the company over the long term.
That is all true but there are still some differences and the emergence of the MTI has led to some changes in the LTI:
- MTIs are still not widely prevalent outside the larger listed companies;
- MTIs have a 1 year performance period (with performance conditions) and a 2 year tenure target. LTIs have a 3 year performance period;
- The LTI 3 year performance period is increasing for some companies to 4 years and where there is staggered vesting instead of being vesting at year 1,2 & 3 it is now at years 2,3 & 4 or years 2,3,4 &5;
- LTI have fairly consistent performance conditions which usually include Total Shareholder Return or TSR. For MTI/STIs the variance is much greater and more specific to the company or individual.
Confused about our terminology, please see our glossary of terms.