Editor's Note: On this Classic Friday, we interrupt our regular programming and Dan Walter's ongoing "Stock Options on the Precipice" series (installment 8 here) to bring us this Classic post on the ruler of all equity trends, first published in May of 2013 ... but with an update on how the trend has continued.
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. (Update: Note that Equilar has since reported that the number of S&P 1500 companies granting performance shares has grown, since the original publication of this post and the chart above, to 68.9% in 2013 and 69.5% in 2014.)
Like so many in the throes 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, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several industry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.
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