The NASPP Blog

The Dodd-Frank Act that requires companies to disclose the ratio between the CEO’s pay and the median employee pay. As Barb pointed out in her August 5, 2010 blog entry, this could potentially include all employees. The problem with that is that pay, including equity compensation, is adjusted for different economic situations between locations. Even within the same country, the same position in different locations may not garner the same amount of pay–between countries the differences can be even more significant.

This got me thinking about equitable grant size–it’s an issue that companies offering broad-based equity compensation in multiple countries have to address. Generally, the process for localizing salary and benefits is built into both company structure (i.e., a compensation team) and budgeting concerns. But, not all companies allocate the same level of resources to determining the appropriate grant size for those same locations.

On a basic level, it is clear that compensation levels must be relevant to the cost of living in a particular location. It’s part of the reason that companies choose to relocate or outsource certain pieces of their operations. If equity is a component of compensation, then grant sizes should be adjusted as well. But, what are companies doing to address equitable grant size? I talked to several stock plan managers about the approaches their companies have taken and found that, for the most part, companies fall into three basic categories: those that set a ratio close to the salary ratios, those that outsource the recommendation to a consultant or consulting firm, and those that do deeper digging and complete their own analysis. For companies doing internal analysis, here are some key considerations:

Total Rewards

Most companies I spoke with use some version of a total compensation/benefits approach to determining grant size. Considering the total value received by employees helps account for factors such as the mix of grant types, different equity to salary ratios, indirect compensation (e.g., extended vacations, a company car, or housing allowances), and tax burdens or exemptions in specific locations.

Cultural Expectations

General perception of equity compensation impacts how successful an employee stock plan can be. Cultural expectations may not directly influence the size of grants offered to employees of specific locations, but they most certainly will indirectly impact the size of grants if the company takes a total rewards approach to determining compensation structure.

The Competition

It’s important to know what your competition is offering. This is true whether you are trying to sell a product or attract quality employees. It’s also relevant to not just grant size, but also grant type and ratio. That doesn’t mean you should offer exactly what other companies are offering, or try to top it by offering something more attractive. But, it is a good idea to know where the competitive edge is.

Resources

Completing analysis internally doesn’t mean doing so without outside help. There are a number of consulting firms that offer studies and analysis on compensation practices, including equity compensation. Also, participating in market benchmarking surveys can help you with access to the results. A majority of the companies I spoke with took time to talk with peer companies to find out what influences their decisions on grant size.
So, no matter how you look at it, there is no Magic Eight Ball to give you the answer to determine appropriate grant size ratios between different locations. One thing is clear: whatever your company’s approach is, once is not enough. Changes in economic, cultural, and organizational conditions may result in a need to adjust grant size ratios periodically.

Grant size ratios are just one small piece of equity compensation design. For the best feedback on plan design considerations, check out the fabulous sessions in our Plan Design Considerations tract coming up at our 18th Annual Conference–now just 11 days away! Oh, and if you are (like me) wanting more information on reporting the CEO pay ratio, don’t miss the Executive Compensation Conference DOUBLE Session: The New Pay Ratio Requirement and Internal Pay Equity: What to Do AND This Coming Year’s Grants: How to Deal with Last Year’s Inadvertent Gains.

-Rachel