Five trends in stock compensation

Five trends in stock compensation

Posted by Tara Tays and Barbara Baksa on March 20, 2014

The current environment is one of unprecedented change for long-term equity incentives. External pressures to reign in dilution and align pay more closely with performance have never been higher. The 2013 Domestic Stock Plan Design Survey, co-sponsored by Deloitte Consulting LLP and the National Association of Stock Plan Professionals (NASPP), provides key insights into how companies are responding to these pressures.

Published since 1996, this survey is the most comprehensive analysis of equity incentive plans (over 250 stock plan design questions), covering stock options, restricted stock/units, and performance awards. Over 400 companies completed the survey and full results were published in late 2013 to survey participants. Following are the top five key trends in stock compensation that can be drawn from the survey.

  • Restricted stock and unit awards have now emerged as the most common form of equity compensation and are even more prevalent than stock options at all employee levels. At the very top of the organization (CEO, CFO, and other name executive officers), 72% of respondents grant time-based restricted stock or units, while only 52% grant stock options. At the lowest level participants (non-exempt employees), 16% of respondents grant restricted stock/units, twice the percentage of respondents that grant stock options at this level of the organization. This is the first time since this survey was first conducted in 1996 that use of restricted stock and units has outpaced stock options; it represents a sharp shift in stock compensation practices.
  • Performance awards saw a sharp increase in prevalence for senior managers and above and are almost as common as time-based restricted stock and unit awards for CEOs, CFOs, and named executive officers, with 70% of respondents granting these awards at the highest level of the organization. For other senior managers, use of performance awards (58% of respondents) lags behind restricted stock and units (76% of respondents) but still outpaces stock option usage (47% of respondents). In light of the current environment — in which there is unprecedented pressure from shareholders, the media, and regulators to link executive pay to performance — we expect use of performance awards to continue to increase, especially for senior-level executives and the C-suite.
  • With the growth in usage of performance awards, we are beginning to see common practices emerge in terms of how awards are structured. Use of TSR (total shareholder return) as a performance metric grew by almost 50% since the last survey in 2010, up to 43% of respondents. EPS (earnings per share) is the second most prevalent metric (27% of respondents). Just over half of respondents indicate that performance is measured relative to the company’s peers and 60% indicate that their performance awards are subject to more than one goal. In addition, approximately 70% use a three-year performance period; 70% also indicate that they grant awards with overlapping performance periods. A full 86% of respondents indicate that performance is measured solely at the corporate level.
  • More and more companies are monitoring their burn rate and overhang levels annually due to the cost of granting equity awards and guidelines provided by proxy advisory firms and/or institutional investors. Some 79% of respondents averaged less than 15% overhang for the past 3 years, while 77% of companies reported their 3-year average burn rate was less than 2.5%. As the stock prices across all industries continue to increase, overhang and burn rate levels will likely continue to decrease.
  • In comparison to the 2010 survey results, there has been a dramatic increase in the number of respondents that subject equity awards to a clawback provision, which is now reported by 60% of participants — this represents an increase of 28 percentage points. This trend is consistent with the adoption of clawback provisions in annual incentive plans, as companies have adopted these provisions rather than wait for the SEC to provide rules as required under the Dodd-Frank Act.

Deloitte Consulting LLP and the NASPP will be releasing the questionnaire to the 2014 Stock Plan Administration Survey by April 7, 2014. This is the industry’s most comprehensive survey on stock plan administration practices, covering stock plan administration, employee stock purchase plans, insider trading compliance, stock ownership guidelines, and non-employee director stock grants. Don’t miss your chance to participate in the survey and receive access to the latest trends in stock plan administration practices. Only those who complete the survey will have access to the full survey results.

Click here to register to both download the Executive Summary of the 2013 survey and to be notified when the 2014 survey opens for participation in April.

Tara Tays is a Senior Manager in Deloitte Consulting LLP’s Human Capital Practice, working with companies on a wide range of compensation issues, such as employee market compensation levels; annual and long-term incentive programs; and shareholder proposals on Say-on-Pay and long-term incentive plans.
Barbara Baksa serves as Executive Director for the NASPP and oversees all NASPP member programs and services. The NASPP is the premier membership association for stock plan professionals, providing timely, practical resources on stock compensation and unparalleled networking opportunities to over 6,000 members.

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