The One Equity Compensation Trend to Rule Them All

Performance equity has taken a long journey. Initially, its use was inhibited by accounting rules that made it far more advantageous to grant equity with time-based vesting. Those rules went away at the start of an incredibly volatile decade for the stock market. The path to this trend has been an adventure requiring a fellowship of disparate groups and events. Stock options lost their luster after the end of Equity Compensation’s Golden Decade™. Dodd-Frank joined the fray after the financial mess of 2008-2009. Even time-based restricted units slowed in growth as companies worked to rebound. Finally, the incredible recovery of the stock market over the past several years has all led to a major shift in how companies, investors, the media and politicians view equity compensation.

As I went through 2013 Equity Trends Report from Equilar, I found several interesting morsels of information. The report discusses some of the trends in stock options, restricted stock and performance-based equity. At more than 30 pages, I would be able to little more than summarize it here. But, there was one section where I called and requested more data.

The report shows most data in time-ranges from 2007 through 2012, the one exception was the chart on performance shares granted to the S&P 1500. This chart shows only 2010 through 2012. As you may know, Say on Pay became a reality in the US in 2010. Assuming that Say on Pay had a direct impact on plan design, I asked for the data empirically showing the change in performance equity use from 2008 through 2012.

While the data speaks for itself regarding the impact of Dodd-Frank and Say on Pay, I believe the story is far from over. Performance-based equity is entering the troublesome “tween” stage. Most of the companies with these plans believe they are almost ready to be left alone for a while, but many investors are just starting to see newly developing issues. At the recent WorldatWork conference, there were sessions trumpeting the success of Total Shareholder Return (TSR) as a metric for equity compensation. At the same time, there were sessions that explained that TSR was clearly flawed and did not reward performance consistently. I predict we will continue to see rapid evolution in the use of internal financial and operational metrics. We will even see growth in metrics more qualitatively measured, like customer service scores.

Like so many in the throws of adolescences, the full potential and fate of long-term performance awards is not yet known. What data does show is that this is the one equity compensation trend that currently rules them all.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Comments

[Bill Dillhoefer]

I agree with Dan. The performance grant (shares and options) revolution is just beginning. Companies will need to utilize effective performance measurements, but recipient barriers must also be addressed for wide spread acceptance. Performance grant recipients will have to fully understand these more complicated awards and be able to establish effective diversification strategies.

[Joe Rice]

Thanks for the insight and digging a little further.

I think with the "tween" phase and with performance shares increasing at the top, companies will struggle (are struggling) with how far down in the organization this vehicle should be used and what equity-at-risk mix is appropriate at certain levels.

[Dan Walter]

Joe,
You are right about the struggle, but I think it will end in these programs getting pushed increasingly deeper into organizations over the next 10 years. They will become a part of a "portfolio" of equity instruments that serve to balance different scenarios and drivers.

Once executives have these as their main tool (2-3 years from now), they will start to ask why everyone else isn't being given something similar.