Executive Pay in Kenyan Firms: Does Pay Structure Link To Shareholder Value?

Executive pay and employee share-based compensation continue to be a key topic among various stakeholders, gathering steam recently following the release of various listed firms’ 2022 annual reports as well as recently announced employee share ownership plans by two banks (Equity Group and Housing Finance Group).

Looking at the executive compensation of the top 13 traded listed counters over the last three months constituting over 90 percent of traded activity at the bourse; with the list comprising commercial banks, Safaricom, EABL, BAT, Centum & power utilities, does this move has any value?

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The Equity Group Board of Directors recommended the establishment of a Group Employee Share Ownership Plan (ESOP) that has been ratified by shareholders in the 19th Annual General Meeting.

The plan mirrors the previous plan initially introduced in 2005 where employees of Equity Bank obtained roughly 3.0 percent shareholding in the Group.

The new scheme will result in the creation of a maximum of 198,613,463 ordinary shares of Kenya Shillings fifty cents (KES 0.50) each in the Company which will result in a five percent (5%) dilution to shareholders – with the share issuance expected to last around 10 years.

The shares will vest after three years of award which means the full dilutive impact will last a considerable period of over 13 years.

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The structure adopted by the bank appears somewhat novel in Kenya – with a potential variability between the awarded and vested shares under the scheme.

The price of KES 0.50 does create apparent value to employees immediately – although the actual shares vested to an employee adjust depending on the performance conditions set out.

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While management did give an explanation of tax impact as the reason for pricing the low figure of KES 0.50, there would have been structures that would have matched the issuance of shares with the current share price (or a slight discount), and while at it also raise capital for the business at vesting.

While we are unsure of why this structure was adopted, we suspect an alternative structure to the one proposed may have necessitated the issuance of more shares to the scheme, with other uncertainties around the share price potentially reducing the value of variable pay, causing uncertainties about the overall objective of the share-based pay structure. Clawback also applies but does not exceed 3 years after vesting (which is roughly 2 years).

Looking at the ESOP structure proposed, higher paid and senior employees are likely to be most impacted by the upside and downside – as desired by shareholders. We would therefore recommend that shareholders vote in favor of the resolution.

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Content From: Standard Investment Bank (SIB)