Share-based compensation schemes

Over the past two years, the Malta Stock Exchange recommended the introduction of partial share-based compensation for C-suite executives of equity issuers in Malta. This proposal was part of a number of initiatives mentioned during the first MSE Capital Markets Roundtable event in June 2024 and further explored at a second roundtable convened in January 2025.

The C-suite comprises the most senior executives that run a company. They are ultimately responsible for the overall management of a business and ensure that a company’s strategies and operations are aligned with the strategic direction established by the board of directors. While all equity issuers and large companies would have a chief executive officer (CEO) and a chief financial officer (CFO), the other roles depend on the business model and operations of each company. A software or technology business, for example, could have a chief technology officer (CTO).

The rationale for having partial share-based compensation for some members of senior management is to align the interests of executives with those of all shareholders which, over time, could help improve investor sentiment towards the equity market when coupled with other initiatives to drive improved trading activity.

Why alignment matters

In public companies, ownership vested in the general body of shareholders is separated from management control. As such, minority shareholders may at times perceive that management or C-suite executives may not always act in the best interests of shareholders, particularly when the personal financial rewards of the C-suite executives are disconnected from the returns generated for shareholders which is the case for most companies in Malta as remuneration for executives is purely through salaries and monetary compensation. The only meaningful protection for alignment is a well-designed governance framework that ensures management’s interests run parallel to those of all shareholders via share-based compensation.

Across most international equity markets, share-based executive compensation has been standard practice for decades, and the evidence of its efficacy in aligning interests is well-established.

When a CEO or CFO holds a personal equity stake in a company, the share price performance of that company should be of ultimate importance since share price movements have direct personal financial consequences for the C-suite executives.

The role of share buybacks within compensation schemes

Unlike companies operating in the major international bourses where newly issued shares or options over unissued shares can be used to compensate C-suite executives, the MSE’s initiative was intended to be constructed around a mechanism of commencing with a corporate share buyback.

Essentially, an issuer would first acquire shares from the market which are held in treasury rather than cancelled. The presence of an issuer standing in the market as a buyer of its own shares helps to create a more liquid secondary market. The shares acquired via the buyback would eventually be used to be granted to C-suite executives as part of a share-based compensation scheme.

A traditional share buyback such as that being conducted by Malta International Airport plc reduces the share count permanently since the repurchased shares are cancelled on a periodic basis. This is the most common method used by overseas multinationals as it effectively serves to not only inject liquidity in the market, but it also benefits the remaining shareholders as it increases their ownership of the company and typically leads to a rise in the earnings per share over time.

One of the most extraordinary examples cited by many international commentators is that of Apple which has bought back over 40 per cent of its share capital since 2013 valued at over USD800 billion on the back of the significant strong cash flow over the years.

Instead, the corporate share buybacks being conducted by Bank of Valletta plc, AX Real Estate plc and APS Bank plc, will have a dual-purpose – that of enhancing market liquidity in their own equity by acting as a regular buyer in the market within the parameters granted by shareholders and simultaneously, as an instrument to improve corporate governance and alignment with shareholders once these are awarded to management executives.

This dual-purpose approach is important since it transforms the buyback from a capital return tool into a dynamic instrument for corporate governance improvement and market liquidity enhancement.

The minority shareholder as the ultimate beneficiary

Malta’s equity market remains characterised by a high proportion of retail investors who had originally invested in shares of companies listed on the MSE as a regular source of dividend income and as a long-term store of value. While the track record was very positive until the breakout of the COVID-19 pandemic in early 2020, the situation since then has been less rewarding since a number of equities have not yet recovered to their pre-COVID levels and retail investors are becoming increasingly frustrated seek an orderly exit.

Thankfully, the major exception to this is Bank of Valletta plc which is the largest capitalised company on the MSE having the highest number of investors at over 20,000. BOV’s market cap has jumped from a mere €473 million at the end of 2022 (€630 million in early 2020) to a current level of €1.4 billion while at the same time distributing over €200 million in dividends.

The MSE deserves due credit for being vocal on such an important proposal which has an important dual role within the domestic equity market. If most companies listed on the MSE agree to perform share-based compensation schemes by first performing a share buyback it will assist to create an orderly exit for some minority investors and more importantly, this could be an important step to improve the governance culture across Malta’s capital markets that invariably suffered over recent months and years and which, in some cases, is a major detriment in attracting new investors.

Meanwhile, reforms by the Malta Financial Services Authority to the procedures for share buybacks in view of the dynamics of the domestic equity market could instigate an increasing number of issuers to consider share buybacks and also having a share-based compensation scheme in place.

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