Hybrid LTIPs: pricing retention without abandoning performance

Hybrid incentive plans are moving up the UK Remuneration Committee agenda because the standard LTIP is being asked to do two jobs at once: drive stretch performance and provide retention through volatility, inside a governance environment that is increasingly exacting on rationale, discipline and disclosure.

A hybrid LTIP is the UK market’s attempt to price retention without abandoning performance.

What a hybrid is, in UK terms

A UK “hybrid LTIP” is typically a split long-term award:

• a performance-conditioned element (performance shares / PSP), and
• a time-based element (restricted shares / RSP),

usually delivered under one plan and one annual grant cycle.

A good UK hybrid keeps the majority of value performance-based, discounts the restricted element and hard-wires the guardrails.

Ellason’s governance lens: what investors are really asking for

Ellason, a leading UK reward and human capital consultancy specialising in executive remuneration, is consistent on one point for the 2026 AGM season (click here): hybrids are not a structural trend that can be adopted by reference to market practice alone. Hybrids succeed or fail on the quality of the company-specific case.

Whilst hybrid plans are permitted within the IA's Principles of Remuneration, IA members remain cautious. Introduction should be for companies with a meaningful overseas footprint and those who compete for global talent. Justification should be company-specific and clearly demonstrate alignment with strategy and long-term performance.

Why hybrids have become a UK conversation

The UK governance ecosystem shapes both design and narrative.

1. Long horizons are built in

UK expectations around vesting and holding periods mean equity is structured for sustained alignment. That is a strength. But it can also create long stretches where the next meaningful value moment feels distant, especially when performance outcomes are uncertain. A hybrid can improve the continuity of value at risk while keeping the overall alignment horizon recognisably UK. 

If you want to see me do a deeper dive into some of these themes, click here.

2. “Reward for failure” is the live wire

UK stakeholders remain structurally sceptical of certainty without a performance story. That is why UK hybrids typically rely on three disciplines:

• discounting (the restricted element is sized lower because it is more likely to vest),
• underpins and/or malus-style gates on the restricted element, and
• an explicit discretion framework to reduce outcomes where underlying performance or shareholder experience does not justify vesting.

This is not take-it-or-leave-it decoration. It is what makes the structure governable.

3. Policy votes force clarity

In the UK, executive pay structure changes sit inside binding policy votes. That intensifies the central risk: if a hybrid is introduced alongside increased quantum, it can look like more pay with more certainty. Even where that is not the intent, the optics can dominate the vote.

The execution lesson is simple: separate the rationale for structure from the rationale for quantum. If you cannot explain those decisions independently, you are likely to lose control of the narrative.

4. Alignment mechanics are moving centre-stage

Ellason also flags the continuing importance of bonus deferral and shareholding. The Principles continue to permit a reduction in bonus deferral requirements for executives with significant shareholdings, but complete removal of bonus deferral is not supported given its role in applying malus and clawback. For hybrids, the practical point is that Remco's will be expected to show how any increase in certainty is counterbalanced by alignment tools (shareholding requirements, holding periods, underpins and discretion).

5. Consultation is becoming more process-driven

Investor engagement is not a box-tick. Ellason highlights the importance of the consultation process, including mechanisms intended to facilitate engagement (such as investor meeting formats and improved points of contact). If a hybrid is proposed, the consultation trail becomes part of the governance evidence.

What hybrids are really solving: retention architecture

Many UK LTIPs still assume performance conditions automatically deliver retention. They do not.

Retention is behavioural and practical. People respond to:

• what they lose if they leave,
• how far away the next meaningful vest is, and
• whether they can explain the plan without it sounding like a black box.

A restricted element - properly discounted and constrained - can create a more robust stay incentive without removing stretch. The point is not comfort. It is keeping key leaders engaged through the messy middle, when strategic execution is hardest and outside options are most attractive.

A UK vignette: the transformation problem

Consider a UK listed company in year two of a multi-year strategy reset. The operational story may be improving, but market conditions, sector rotation or regulatory headwinds are dominating share price and metric outcomes. A pure performance LTIP can then create a retention trap:

• if vesting looks unlikely, the LTIP stops functioning as glue; and
• if discretion is used to rescue outcomes, the plan risks credibility.

A hybrid offers a third route: keep the PSP genuinely stretching, but add a discounted restricted layer to retain leaders through the messy middle - subject to underpins and discretion that prevent reward for failure.

How UK hybrids will converge: five design disciplines

If hybrid structures become normalised in the UK, they will need to converge around some governance must-haves:

1. Split and discounting that is defensible

Restricted shares must be meaningfully discounted relative to performance shares. If the restricted element is too large, the plan is quickly read as a certainty upgrade.

2. Underpins that are credible

The restricted element will increasingly be expected to carry an underpin and a clear decision framework. The more qualitative the underpin, the more important it is to explain how it will be applied.

3. Time horizons that remain recognisably UK

Hybrid design needs to work with UK vesting and holding expectations, not against them. The point is to make the LTIP less brittle, not to shorten alignment.

4. Leavers: retention must survive the edge cases

The restricted element only functions as retention architecture if leaver treatment is coherent. If good leavers are routinely accelerated or value is routinely preserved on resignation, the structure reads as certainty. If leaver treatment is too harsh, the restricted element loses credibility as glue. The plan has to be internally consistent.

5. Disclosure that treats the narrative as part of the design

Hybrids fail when the rationale is generic. They succeed when the company can articulate, plainly, why this structure fits its strategy, risk profile and talent market - and how it avoids paying for failure.

The forward view

Hybrids are likely to become a standard option in the UK toolkit, but the market will draw a clear line:

• hybrids as retention architecture, priced and governed properly, will become familiar; and
• hybrids as packaging for higher certainty and higher quantum will keep attracting opposition.

At Burges Salmon, we support Remco's and in-house teams on hybrid plan implementation end-to-end - policy drafting, investor engagement support, plan rules and award documentation, underpin/discretion frameworks, and the tax and legal mechanics - so the structure is UK-compliant, strategically coherent and credible to stakeholders.