The Trouble with LTIPs…

It was with some consternation that I read this announcement today from one of my investee companies, Gulf Marine Services (LSE:GMS), in which LTIP awards are granted to several directors.

Superficially, the awards seem fairly reasonable and, though I haven’t checked, I’m sure they are in compliance with the company’s remuneration policy. But, there is a fundamental problem with nil-cost option awards such as these…

The announcement states that (for example) the CEO’s award for 2016 represents a maximum of 150% of his salary, subject to performance conditions over the vesting period. This figure, however, is based on the current share price, which I believe to be highly depressed, due to current dire market conditions in the oilfield services industry GMS operates in.

It is not hard for me to envisage that, if there is some recovery in the industry, and in market perceptions of the business, the shares could easily (say) triple over the time period of the award (which is why I remain invested!). Under those circumstances a) the awards would be likely to vest fully, due to good performance by the company over the performance period; b) the value of the awards would similarly triple.

So, in that scenario, the awards would not be worth 150% of 2016 base salary but 450% – a figure that I (and, I suspect, many other shareholders) would consider excessive.

For that reason, ShareSoc considers the whole concept of nil-cost LTIP option awards problematic. We will soon be releasing some draft remuneration guidance for review and comment and following that process we will press for its adoption by the companies we invest in.

Mark Bentley