Earlier this year, I presented five trends in restricted stock and unit awards. For today’s blog, I present a second installment in what I can now officially call a “series”: six trends in performance awards from the 2016 Domestic Stock Plan Design Survey cosponsored by the NASPP and Deloitte Consulting.
Trend #1: Performance awards are on the rise for executives.
Over the past four survey cycles, we’ve seen a more than 100% increase in the use of performance awards at the NEO and senior executive levels. For NEOs, usage has risen from 37% of respondents in 2007 to 80% in 2016. For senior execs, usage has risen from 32% of respondents in 2007 to 69% in 2016. Very few companies grant performance awards below the ranks of senior execs.
Trend #2: Performance-based options are not popular.
The vast majority of respondents (95%) issue full-value performance awards paid out in stock. Only 19% issue awards paid out in cash and only 8% issue performance-based options. I suspect this because when performance options are underwater, they don’t provide much of an incentive.
Trend #3: TSR is hot right now.
Usage of TSR as a performance metric has increased 80% since our 2010 survey, up from 29% to 52% of respondents. There is a lot of variation in practice when it comes to choosing performance metrics; this is the first time in the history of the survey that any performance metric is utilized by more than half of our respondents.
Trend #4: Three is the magic number when it comes to performance periods.
The majority of respondents (78%) measure performance over a three-year period. I suspect this is because ISS (and possibly other proxy advisors/investors) encourage use of a three-year performance period.
Trend #5: Multiple metrics are common.
Just over 60% of respondents report that their performance awards are subject to more than one metric: two metrics is most common but 19% use three or more.
Trend #6: Performance is typically measured at the corporate level.
Just under 90% of companies report that they measure performance at the corporate level only, rather than incorporating departmental, team, or individual goals. At 62% of respondents, the metrics for performance awards are different than those used for the company’s annual incentive plan (another 20% use a combination of annual incentive plan metrics and other metrics).
– Barbara
Tags: metrics, performance awards, performance criteria, TSR
The United States doesn’t have the monopoly on the demand for “pay for performance” compensation strategies for executives. In countries like Canada and the UK we also see a serious interest in whether or not executive compensation reflects the relative success of the company. The Canadian advisory firm, Global Governance Advisors (GGA), published an interactive pay for performance tool this week that allows Canadian investors–or any interested party–to see how CEO pay stacks up against different performance measures. This week there were also announcements from UK companies Vodafone and Telecoms regarding how CEO pay will be more closely linked to performance going forward.
Ride the Wave
One of the problems with limiting performance measures to internal comparisons is that overall company performance can be seriously impacted by general market performance. When the market is heading down and relative success means less dismal earnings than peer companies, don’t expect much support for failing less than the next company. In an upwardly mobile market, however, when peer companies are also realizing profit increases and positive shareholder return, just providing a more attractive financial report than in prior years may not be enough.
Relative Success
When the overall economic picture is sunny, the link between relative performance and executive compensation is more valued. Shareholders want to know that they have made the right decision to invest in your company’s stock instead of another similar stock–linking your executive compensation to the relative success of your company can provide that added assurance. If every other company in your industry is reporting 50% profit growth and your company is only reporting 10% growth, it’s not so great. Relative performance is absolutely a factor that RiskMetrics considers when making recommendations to shareholders, as CME recently felt first hand. Don’t expect to dance your way out of pay for performance, either. With the new Say on Pay requirements, determining how to align executive pay with company performance going forward is essential. Using a relative measure for performance awards gives them the extra edge when marketing pay packages to your shareholders.
NASPP Conference Pre-Session
Of course, as Barbara Baksa highlighted this week, the NASPP has many Conference sessions lined up that can help you better understand pay for performance strategies, Say on Pay and shareholder approval issues, and executive compensation best practices. But, if your company is initiating or updating performance awards this year, the one thing you won’t want to miss is the NASPP pre-conference session, Practical Guide to Performance-Based Awards on November 1. This extensive one-day program has everything you need to tackle performance awards from creating performance metrics to effective administration and even essential global considerations.
-Rachel
Tags: metrics, Performance, RiskMetrics, Say-on-Pay, Shareholder