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).
Quick Survey on Stock Plan Education
The NASPP and Fidelity Stock Plan Services are pleased to announce a joint survey on stock plan education programs. Take this quick survey today to find out how your education program compares to your peers’. The survey includes fewer than 25 questions; you can complete it in less than ten minutes—do it today, before you forget. The deadline to complete the survey is Friday, December 11.
New Studies
We’ve posted the following new studies to the NASPP website:
Wondering what the hottest topics in stock compensation are today? You can find out at the 19th Annual NASPP Conference, with the session “Today’s Hottest Topics in Stock Compensation.” I happen to have caught a glimpse of the panel’s slide presentation, so, in today’s blog entry, I “leak” a few of the topics that will covered.
Today’s Hottest Topics in Stock Compensation I’ve been saying all year that performance-based awards are red-hot and I’m pleased to see that our expert panel agrees (it’s always nice to be right). The panel plans to discuss a number of tricky issues relating to performance-based pay that have emerged over the past year, including:
Setting long-term performance goals in today’s volatile economy without jeopardizing 162(m) deductibility.
Best approaches for disclosing in the CD&A the use of non-GAAP financials for performance awards.
Trends and emerging practices with respect to double-trigger CIC vesting of performance-based awards.
The panel also plans to discuss whether stock options will become more performance-based in light of ISS concerns.
Next year’s proxy season is also clearly on everyone’s minds these days. Here are the proxy-related topics that the panel plans on discussing:
Under what circumstances might a company defy ISS guidance and how should they prepare for the consequences?
Drafting the CD&A disclosure of the Compensation Committee’s response to Say-on-Pay votes.
How will ISS’s new policy (currently in draft form–see the NASPP alert “ISS Issues Draft of 2012 Policy for Comment“) regarding the evaluation of executive pay affect plan design, benchmarking, and support for management’s Say-on-Pay proposals?
What best practices have evolved for developing a strategy for shareholder Say-on-Pay?
The panel will also discuss clawback provisions (particularly what to do about them if the SEC doesn’t finalize rules before the 2012 proxy season).
Don’t miss “Today’s Hottest Topics in Stock Compensation” at this year’s NASPP Conference. The panel wil be moderated by Art Meyers of Choate Hall & Stewart (and of the NASPP Executive Advisory Committee). Art’s co-panelists will be Mike Melbinger of Winston & Strawn (and author of Melbinger’s Compensation Blog on CompensationStandards.com), Mark Borges of Compensia (and author of Borges’ Proxy Disclosure Blog on CompensationStandards.com), and Paula Todd of Towers Watson (and of the NASPP Advisory Board).
See You Next Week in San Francisco! It’s hard to believe, but the 19th Annual NASPP Conference is next week! I hope to see all of my readers at the Conference, which starts next Tuesday, November 1, in San Francisco. We expect to have around 2,000 attendees–it’s going to be a very exciting event; register today to ensure you don’t miss out (and make your hotel reservations, because the hotel is close to selling out).
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Today’s blog entry is guest authored by Jon Burg of Radford, who will be moderating a discussion on designing performance-based equity programs using market conditions at the 19th Annual NASPP Conference in November. The panel will include Gloria Estrada of Agilent Technologies, Susan Stemper of Biogen Idec, and Kathryn Neel of Frederic W. Cook & Co. We asked Jon to give us a sneak peak at what the panel will cover.
Taking the Difficulty Out of Setting Performance Goals By Jon Burg of Radford
Designing a performance-based equity plan can be one of the bigger compensation challenges companies face. Limited line of sight and unforeseen obstacles impacting financial results make choosing a metric and determining the appropriate target an uphill struggle.
With increased pressure to align shareholder and executive interests, I anticipate that market-based plans will continue to be implemented for the following reasons:
They do not depend on the ability to set long-term operational or financial goals;
The payouts are directly linked to stock price performance (absolute or relative) which allows for higher perceived alignment between shareholders and award recipients;
The accounting treatment is more predictable since the expense accrual is fixed at the time of grant and not adjusted, regardless of eventual outcome; and,
They are simpler to administer than plans with other internal performance conditions, and they are measurable at any time for regular and frequent communication to plan participants and the Board
Agilent Technologies was one of the early adopters of a relative total shareholder return program in 2004. In fact after a brief two-year experiment of using a combination of relative TSR and SAGE (must be present to understand) metrics, Agilent has since focused solely on relative TSR. Relative TSR plans come in many shapes and sizes, but the basic premise is the same–award holders receive a higher (or lower) level of payout for excess (or under) performance in TSR as compared to a peer group or benchmark. Gloria will share with us Agilent’s plan design, the continued evolution, and lessons learned over the past seven years.
But relative TSR is not necessarily the answer for all companies. Biogen Idec considered relative TSR as a primary metric for their performance-based plan before opting for a Market Stock Unit (“MSU”). An MSU is a unique equity instrument that effectively combines the upside opportunity of a stock option with a limited downside protection of a restricted stock. Given Biogen Idec’s business model and market position, MSUs were considered a more appropriate replacement of stock options, which are not viewed as performance-based by ISS. Susan will take us inside the compensation committee discussions as well as share a wealth of experience she has gained over the years from literally hundreds of one-on-one executive meetings about equity awards.
Kathryn has worked with numerous companies to perform an assessment of business strategies and performance in order to identify optimal performance metrics that drive sustainable performance. This often involves a balancing act of setting goals that are fair to executives and shareholders. While not always the end result, market-based performance metrics are always a central component of the discussion and the fastest growing area. Kathryn will share her perspective on why she believes the pace has quickened the past few years and possibly even prognosticate on where we are headed.
Collectively, this panel will demonstrate that a well-designed market-based program can both mitigate the most troublesome flaws with traditional equity vehicles, and provide better compensation delivery.
Learn Even More About Performance Awards Round out your knowledge of performance based awards by attending the pre-Conference program, “Practical Guide to Performance-Based Awards,” offered on Nov 1, in advance of the NASPP Conference. This intensive one-day program will cover everything you need to know to implement and administer this complex emerging form of compensation.
The popularity of performance-based equity compensation is growing. If your company is adopting a new performance plan, these are the top 5 things you’ll need to know in order to administer and communicate it to participants.
Performance criteria
Companies can spend a lot of time hammering out the best performance criteria to motivate employees as there are seemingly endless possibilities. The stock plan management team needs to have a very clear understanding of the performance measures being tracked for the grant (e.g., target EPS, milestones, or relative TSR) and how performance will impact the grant (e.g., will it determine the payout date, payout amount, or strike price).
These unique parameters determine how performance-based grants should be valued and how their expense is amortized. For example, if the performance goals are considered market-based, then the valuation takes the likelihood of vesting based on those conditions into consideration. Expense for awards that are not paid out due to not achieving the market condition is not reversed. You can find more on the valuation and amortization of performance-based grants in the article “Accounting for Performance and Market Awards” from Equity Methods.
Performance period(s)
With performance-based grants, the vesting period and the performance period may not be the same (in fact, it’s recommended that the vesting date be far enough after the end of the performance period to allow for approval of performance goal achievement). Some grants even have multiple performance periods within one grant. If the performance and vesting schedules differ, it is important that each is well-documented and tracked. It may not be possible to track separate periods within the same database, so detailed documentation is essential.
Performance attainment
It will also need to be very clear when performance measurement will take place and who will be responsible for determining the degree to which performance targets have been achieved. In order to qualify as “performance based” grants under 162(m), the compensation committee will need to certify that the performance targets have been met. To facilitate a smooth certification process, the other groups and individuals involved must be ready to report to the compensation committee as cohesively and promptly as possible. It may be just one group or person who can verify the performance target(s); in which case the company should develop a process to insure that that group or individual is prepared to evaluate performance at the end of the performance period. On the other hand, the evaluation may require multiple groups; in which case there should be a process in place to coordinate.
Terminations (and other details)
There are many important grant parameters that are not necessarily unique to performance-based grants. For example, the inclusion of dividends or dividend equivalents, the details of change of control provisions, and how terminations will impact the grants. I highlight terminations because there are additional considerations for performance grants, and because they are the most likely scenario to consider.
The trickiest termination consideration is what to do about grants where one or more performance periods have been met prior to termination; particularly for termination due to death, disability, or retirement.
Grant input and tracking
After all the details of a performance plan are in place and understood by everyone involved, there is still the challenge of how to get as much of the specifics of plan into the stock plan administration software. Many stock plan administration databases have some degree of tracking and reporting capabilities for performance-based grants. However, due to the amount of variation among existing performance plans, it is likely that there will be some degree of “outside the box” thinking around how to input each company’s performance plan.
If you are getting ready to input performance grants into your stock plan administration software, be sure to meet with your software provider to determine what can be entered in the database and what must be tracked outside the database or otherwise customized. You’ll need to be sure that you’ve found the best balance between the way the grant reflects in the participant interface, on expensing reports, and even how it impacts plan reserves.
Planning
Of course, the best way to have a manageable performance plan is to have the stock plan management team be an integral part of the planning process! The best way for the stock plan management team to get invited to the planning table is to be knowledgeable regarding performance plans prior to the adoption of a new plan.
Whether you’ve just been asked to manage a performance plan or your company is exploring the possibility, we have a fantastic program designed to get you prepared. Offered for the first time this year as a one-day intensive program preceding the 18th Annual NASPP Conference, “Practical Guide to Performance-Based Awards” will give you the substantive knowledge necessary to implement or administer this unique and emerging form of equity compensation.
Early bird rates for the pre-Conference sessions end on April 15th. If you are planning to attend both the Conference and the “Practical Guide to Performance-Based Awards”, you get a double-discount if you register before the early-bird rates for both end on April 15th. Register today!