Managing the equity current: why listed companies need a stock policy, not just an EBT

This article has been co-authored by Nigel Watson, Partner at Burges Salmon, and David Edwards, Head of Corporate Secretariat & Shareholder Services at NatWest Group.

In our previous article, How to hedge a promise: the new economics of EBTs, we focused on the first question every listed company eventually faces on employee share plans: how do you fund the promise?

Do you issue shares? Buy in the market? Use treasury shares? Overlay the exposure synthetically?

However a company answers that question, the underlying point is the same. Employee share plans are not just reward design issue. They are a capital-management issue.

Sourcing the shares is only the start. 

The harder and more persistent challenge starts once awards begin vesting and stock starts moving. At that point, the issue is no longer simply how the company gets the stock in. It is how the company manages the recurring flow of stock back out through the system, without repeatedly solving the same problem under pressure.

That is why listed companies don't just need a funding answer, they need a stock policy.

The equity current

Most listed company equity plans are designed around long-term alignment. That's fine as far as it goes, but the operational reality is much messier than the policy language often suggests.

Awards vest. Tax has to be funded. Some participants sell enough shares to cover withholding. Others sell more to diversify. Some retain and unwind later. 

At the same time, new hires require buyout or replacement awards. Leavers depart with residual holdings. Sharesave maturities arrive. Deferred bonus awards settle. Another cycle starts before the previous one has fully cleared.

That repeating movement is what we call the equity current: the recurring stock flow created by the company’s own employee equity arrangements. 

Like a fast-flowing body of water, stock moves continuously through a system, from sourcing to EBT, from EBT to participant, from participant to market, while the next wave of demand is already building. 

That matters because listed-company equity does not behave like a static ownership model. It behaves like a cycle of release, settlement, sale, retention, replenishment and reset. The question is whether the company is navigating that cycle deliberately or simply being swept along by it.

Put bluntly, the issue is not “do we have an EBT?” It is “do we have a joined-up system for forecasting, sourcing, releasing and replenishing stock across our plans?”

From event management to stock policy

Many companies still manage this area as a sequence of events. A vesting date approaches. A sharesave maturity is coming. 

Treasury is asked what stock is available. Legal reviews the dealing framework. Payroll works through any tax withholding concerns. Cosec considers disclosure. The EBT is then used to execute what has already become an immediate requirement.

That can work. But it is reactive.

A stronger model starts from a different premise: stock demand under employee share plans is recurring and can be usefully forecast. 

Under that model, the company therefore takes a forward view across:

• anticipated vesting dates;

• expected sell-to-cover behavior;

• likely participant sell-down;

• recruitment and buyout demand;

• leaver patterns;

• sharesave and other plan maturities; 

• the EBT's available position.

Sourcing decisions are then taken against that wider horizon, rather than against the next deadline.

That does not eliminate judgement. It does not remove the need for trustee independence, MAR discipline, board oversight or Remco involvement. But it materially improves the quality of decision-making.

The company stops treating each vesting or exercise window as a standalone event and starts treating it as one point in a continuous cycle.

That is the shift from fragmented execution to stock policy.

A familiar listed-company example

Take a FTSE 250 company with a conventional annual LTIP cycle, deferred bonus awards and a steady pattern of senior hiring and attrition, plus a sharesave maturity.

In March, a large LTIP tranche vests. Some participants sell only what they need. Others sell more. A minority retain.

In April, deferred bonus awards for a separate population begin to settle.

By June, the sharesave exercise window opens, just as modelling begins for the next annual grant.

In September, two external senior hires are recruited and require buy-out awards.

By year-end, former executives still hold shares from earlier cycles, while Treasury is considering whether the EBT position is sufficient for the following spring’s vesting calendar.

None of this is unusual. But it creates a very specific operating problem. The company is no longer just granting equity. It is standing in the middle of a rolling stock cycle. The same questions recur:

• How much stock is likely to be needed over the next 12 months?

• How much is already available?

• What proportion of vested stock is likely to be sold immediately for tax?

• How much further participant sell-down is likely?

• What does that mean for replenishment?

• And who is actually joining up those decisions?

In a deliberate stock-policy model, the March vesting is not treated as a standalone event. It is one point in a broader cycle. The EBT functions as a reservoir before vesting, a controlled release point during settlement and a reference point for replenishment afterwards.

Scale that up to a FTSE 100 issuer with multiple plans running concurrently and the equity current is no longer one cycle. There are several, all overlapping.

The problem is usually fragmentation, not failure

Most companies think they have this under control. Usually there is a model somewhere. It may well have been built competently, answering the specific question it was originally designed to answer.

The difficulty is that the assumptions behind it often go untested. Leaver rates shift. Participant sales behaviour evolves. Plan design changes. Recruitment patterns move. Shareholding guidelines alter retention decisions. Yet the model remains anchored to an earlier version of reality.

More fundamentally, ownership of the full cycle is usually fragmented.

Reward designs the plan. Treasury funds the trust and manages sourcing. Finance books the IFRS 2 charge and reports costs. Legal holds the trust deed, plan rules and dealing framework. Payroll operates PAYE. Company secretariat manages governance timetables, committee papers, disclosure and is often part of the interface with MAR and dealing controls.

Each function may be doing its job well. The issue is that, in many issuers, no one owns the cycle end-to-end.

That is where the cost sits.

The cost of reactive sourcing

Why every function should care

Reward should care because plan design creates the demand profile. 

Each function has a legitimate interest. Few own the whole system.

Final thoughts - managing the current