Shifting Markets: Adoption of Hybrid LTIPs on the Rise

In recent years, a growing shift among companies, shareholders, and proxy advisors toward more flexible and tailored approaches to executive remuneration has occurred. One of the emerging themes coming out of this AGM season is the increased consideration and adoption of hybrid incentive plans.

A hybrid plan combines performance share awards (PSPs) and restricted share awards (RSPs) within a long-term incentive plan (LTIP). While both PSPs and RSPs can provide shareholder alignment, they each have unique purposes within a hybrid approach. RSPs provide a safety net in challenging environments – whether that relates to the lows for cyclical companies or to protect all companies in industry-specific and/or wider economic downturns. With this safety net, PSPs can be genuinely performance based and focus on rewarding outperformance.

Linked to these benefits, there are three key drivers encouraging Remuneration Committees to consider implementing hybrid plans:

• Market alignment: Hybrid plans are already the most common approach in the US, adopted by over two thirds of the S&P 500. Given the debate about the competitiveness of the UK market – and particularly for companies with significant operations in the US – companies will look to hybrids as a way to compete
• Increased uncertainty: The new norm is uncertainty. The retentive benefit of an RSP, without the need to sacrifice the performance drive and potential upside that comes with a PSP, is therefore likely to be appealing to Remuneration Committees
• Alignment with other senior employees: Hybrid incentives are already commonly adopted below board level in many companies. Where this is the case, moving executives to hybrid plans will provide alignment across LTIP participants

Despite increasing company and shareholder appetite, hybrid incentive plans continue to be relatively uncommon in the FTSE 350. As part of the broader debate around the competitiveness of the UK market against global peers, early UK adopters have generally been limited to companies with a significant market presence in the US.

To date, seventeen FTSE 350 companies have adopted a hybrid LTIP structure, of which three have been in place for over five years, six were introduced during the last two AGM seasons, and eight have been proposed as part of the 2025 AGM season.

Shareholder Reaction and AGM Voting Outcomes

ISS reports have been released for seven proposed hybrids, with six companies receiving an ‘Against’ recommendation on their Remuneration Policy. The only company to receive a ‘For’ vote, St. James’s Place, proposed a delayed adoption of the hybrid structure until 2026 and without an increase in quantum. ISS is generally recommending votes ‘Against’ where a quantum increase is being proposed alongside a hybrid structure, as was the case for all against votes recommended this year. The trend is consistent with ISS’s stance in 2024.

Seven of the eight proposed hybrids have held their 2025 AGM, with a median vote in favour of the Remuneration Policy of 78%.

Overview of UK Market Practice and key considerations for Hybrid LTIPs

Remuneration Committees are increasingly considering implementing hybrid incentive plans. Based on our experience supporting in this process, there are numerous considerations which need to be thought through as part of any review:

Rationale:

A compelling rationale is essential for the proposition of a hybrid LTIP. As hybrids remain atypical market practice in the UK, the strongest justification is significant US presence – whether through revenue contribution or a concentration of senior executives. Companies are expected to provide a rationale beyond executive benchmarking analysis against global peers. If supported by this rationale, shareholders are likely to give a hybrid structure due consideration – a factor that underpins six of the eight proposed hybrid plans.

Quantum:

Given the argument for implementing a hybrid plan is typically based on increasing competitiveness with the US market, consideration is often being given to whether quantum should be increased as part of the revised Remuneration Policy. To make an informed decision, market benchmarking against a relevant peer group – including both UK and global industry peer groups – is key to ensure that the introduction of a hybrid plan does not cause executive pay to become misaligned with the market. There is still significant sensitivity in the UK market for implementing quantum above typical UK market norms and therefore, where this is considered appropriate, the rationale presented to shareholders needs careful consideration. In addition, to further align executives’ interests with those of shareholders, companies should consider increasing the minimum shareholding requirement for executives in conjunction with a quantum increase.

In the current AGM season, seven companies proposing a hybrid structure also put forward an increase in quantum for at least one executive, with a median increase of 150% of salary. Of these, six companies propose increases greater than 100%, and three above 200%. Five of the seven have also increased the minimum shareholding requirements alongside the proposed increase in quantum.

Ratio of RSP to PSP:

Consideration will also need to be given to the split between RSPs and PSPs within the incentive plan. We expect shareholders to have a strong preference for the majority of long-term incentives to be performance based.

In hybrid incentive plans operated to date, the RSP award typically makes up 25%, though this proportion ranges from 16% to 33%.  This is lower than the approach typically seen in the US, where RSPs make up between 25% and 40% of the LTIP.

Time Horizons:

The UK Corporate Governance Code states that share awards granted should be subject to a total vesting and holding period of five years or more. This has dictated the approach taken in the UK, with RSPs almost always based on a total vesting and holding period of five years. In the US, by comparison, awards are mostly released in tranches over the three-vesting period, with no post-vesting holding period. One UK-listed company that mirrored the US-style approach to executives based in the US, was met with significant pushback from shareholders.

Underpin:

Introducing underpins to the RSP element of long-term incentive awards remains majority practice and will be a shareholder expectation. The Committee will need to consider what type of underpin they want to implement for the RSP award. The key design choice is the use of quantitative vs. qualitative. Quantitative underpins offer greater transparency to shareholders by clearly outlining how the underpin will be tested against pre-determined performance criteria, while qualitative underpins provide more flexibility, setting out areas the Committee will consider when reviewing the RSP pay-out, without clearly defining what these measures are.

Under both designs, the underpin provides the Committee with the ability to exercise discretion and adjust the vesting outturn based on the assessment of the underpin. The most common approach adopted to date in the UK is for qualitative underpins to apply. In the US, underpins are rarely used, if ever.

Shareholder Consultation:

When considering the implementation of a hybrid LTIP, shareholder consultation is essential. As the implementation of hybrids remains unusual in the UK market, it is important that shareholders are consulted early in the process on the proposed details of the hybrid LTIP, to allow for the Committee to fully consider their feedback in determining the final proposal

As noted above, compelling rationale for the proposed approach will be essential. Without this, it is unlikely that shareholders will support the proposals.

Future Outlook

Farient continues to expect that Committees will increasingly look to hybrids as a potential incentive structure given their benefits. As the most compelling rationale to date has been the ability to compete with US competitors, we expect many early adopters to have significant presence in the US and/or compete for talent in the US market.

We expect ISS to review its policy for the 2026 AGM season  in relation to voting against hybrid proposals that include an increase in quantum. To increase the likelihood of gaining support, our view is that companies will need to provide compelling rationale for why a hybrid is appropriate and, independently, why an increase in quantum is appropriate. Nonetheless, we expect hybrid plans to become the new gold standard incentive schemes eventually adopted by most of the UK market.

Farient Advisors will continue to track and report on AGM voting outcomes, and any emerging trends. Hybrid plans are expected to be on this year’s agendas for many Remuneration Committees. With industry-leading experts in both the UK and US., and with experience implementing hybrid plans in the UK market, Farient Advisors is well positioned to support companies in considering the adoption of hybrid LTIPs.

Should you wish to discuss our thoughts on hybrid LTIPs or your specific circumstances, please contact either myself (stephen.cahill@farient.com) or David Cohen (david.cohen@farient.com).