What it means
The older meaning belongs to company law and share structure. A deferred share class receives no dividend, or only a residual dividend, until ordinary shareholders have been paid a defined amount, and it typically sits last in the queue if the company is wound up.
Founders sometimes hold such shares deliberately to signal that outside investors get paid first. The modern and more widely encountered meaning is a deferred share award, often called a deferred share unit or a restricted share unit.
The company grants a number of notional shares that convert into actual shares, or into their cash value, after a vesting period of typically three to five years. Until then the holder owns a promise rather than a share.
Companies use deferred share awards to tie reward to long-term value rather than to a single year's results. Because the payout depends on the share price at settlement, a poor decision that boosts this year's profit but damages the company later reduces what the holder eventually receives.
Financial regulators in several markets require part of senior banker pay to be delivered this way for exactly that reason. There is usually an economic detail worth checking: dividend equivalents.
Many plans credit the holder with additional units equal to the dividends they would have received had they held real shares, which are then settled alongside the original award. That can add meaningfully to the final value over a multi-year vesting period.
The nuances that matter most are voting and risk. A deferred share award normally carries no vote and no shareholder rights until it vests, and it is generally forfeited if the holder resigns before vesting or if a malus or clawback provision is triggered.
It is genuine value, but it is contingent value.
In practice
Real-world examples.
Example
A listed retailer pays half of its chief executive's annual bonus in deferred shares vesting over three years. When a product recall damages the share price in year two, the value of the unvested award falls with it. The board points to this as the deferral mechanism working as intended.
Example
A private company issues a small class of deferred shares to its founders that receive nothing until outside investors have recovered their original investment plus a fixed return. The structure lets the founders retain long-term upside without competing with investors for early distributions.
Example
A bank's remuneration committee defers a portion of trader bonuses into share units with a clawback clause. Two years later, a compliance breach surfaces and the committee cancels the unvested units. No cash has to be recovered because none was ever paid out.
Formula
Calculation
Grant value = units granted x share price at grant
Settlement value = (units granted + dividend equivalent units accrued) x share price at settlement
A non-executive director is granted 4,000 deferred share units when the company's shares trade at $25, giving a grant value of 4,000 x $25 = $100,000. The award vests three years later, and over that period the plan credits dividend equivalents that add 600 further units, bringing the total to 4,000 + 600 = 4,600 units. At settlement the share price is $34, so the value delivered is 4,600 x $34 = $156,400. The director therefore receives $156,400 - $100,000 = $56,400 more than the value at grant, driven partly by the $9 rise in the share price and partly by the accrued dividend equivalents.Case study
Seen in the real world.
Aldermere Group is a fictional listed company used here as an illustrative example. Its executive team had been paid almost entirely in cash bonuses driven by annual revenue growth, and after a heavily discounted sales push produced a record year followed by two weak ones, shareholders lost patience at the annual meeting.
The remuneration committee restructured the package so that 60% of variable pay was delivered in deferred shares vesting over four years, with dividend equivalents credited during the vesting period and a clawback provision for conduct failures. Executives kept the same headline package value but received far less of it immediately.
Behaviour shifted within a year. The discounting stopped, the sales team's targets were rewritten around contribution rather than volume, and the executives began asking longer questions in investment reviews. In this illustrative account, the change in pay structure did more to alter decision making than any amount of strategy discussion had achieved.
Watch out
Common mistakes.
- Assuming a deferred share award is already owned, when it is a conditional promise that can be forfeited before vesting.
- Confusing a deferred share class in a company's capital structure with a deferred share award used to pay employees, since the two are unrelated in purpose.
- Valuing an award at the grant date price and forgetting that the eventual value depends entirely on the share price at settlement.
Questions
People also ask.
Do deferred shares carry voting rights?
A deferred share award normally does not until it vests, while a deferred share class may have limited or no voting rights by design.
What are dividend equivalents?
Additional units credited during the vesting period to reflect dividends the holder would have received on real shares, settled together with the award.
Are deferred shares taxed at grant?
In most regimes tax arises when the award vests or is settled rather than at grant, though the rules vary by country and by plan design.
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