The full results from the 2016 Domestic Stock Plan Design Survey, which the NASPP co-sponsors with Deloitte Consulting LLP, are now available. Companies that participated in the survey (and service providers who weren’t eligible to participate) have access to the full results. And all NASPP members can hear highlights from the survey results by listening to the archive of the webcast “Top Trends in Equity Plan Design,” which we presented in early November.
For today’s blog entry, I highlight ten data points from the survey results that I think are worth noting:
- Full Value Awards Still Rising. This survey saw yet another increase in the usage of full value awards at all employee levels. Overall, companies granting time-based restricted stock or units increased to 89% of respondents in 2016 (up from 81% in 2013). Most full value awards are now in the form of units; use of restricted stock has been declining over the past several survey cycles.
- Performance Awards Are for Execs. We are continuing to see a lot of growth in the usage of performance awards for high-ranking employees. Companies granting performance awards to CEOs and NEOs increased to 80% in 2016 (up from 70% in 2013) and companies granting to other senior management increased to 69% (from 58% in 2013). But for middle management and below, use of performance award largely stagnated.
- Stock Options Are Still in Decline. Usage of stock options dropped slightly at all employee levels and overall to 51% of respondents (down from 54% in 2013).
- TSR Is Hot. As a performance metric, TSR has been on an upwards trajectory for the last several survey cycles. In 2016, 52% of respondents report using this metric (up from 43% in 2013). This is first time in the history of the NASPP’s survey that a single performance metric has been used by more than half of the respondents.
- The Typical TSR Award. Most companies that grant TSR awards, use relative performance (92% of respondents that grant TSR awards), pay out the awards even when TSR is negative if the company outperformed its peers (81%), and cap the payout (69%).
- Clawbacks on the Rise. Not surprisingly, implementation of clawback provisions is also increasing, with 68% of respondents indicating that their grants are subject to one (up from 60% in 2013). Enforcement of clawbacks remains spotty, however: 5% of respondents haven’t enforced their clawback for any violations, 8% have enforced it for only some violations, and only 3% of respondents have enforced their clawback for all violations (84% of respondents haven’t had a violation occur).
- Dividend Trends. Payment of dividend equivalents in RSUs is increasing: 78% of respondents in 2016, up from 71% in 2013, 64% in 2010, and 61% in 2007. Payment of dividends on restricted stock increased slightly (75% of respondents, up from 73% in 2013) but the overall trend over the past four surveys (going back to 2007) appears to be a slight decline. For both restricted stock and RSUs, companies are moving away from paying dividends/equivalents on a current basis and are instead paying them out with the underlying award.
- Payouts to Retirees Are Common. Around two-thirds of companies provide some type of automated accelerated or continued vesting upon retirement (60% of respondents for stock grants/awards; 68% for performance awards, and 60% for stock options). This is up slightly in all cases from 2013.
- Post-Vesting Holding Periods are Still Catching On. This was the first year that we asked about post-vesting holding periods: usage is relatively low, with only 18% of companies implementing them for stock grants/awards and only 13% for performance awards.
- ISOs, Your Days May be Numbered. Of the respondents that grant stock options, only 18% grant ISOs. This works out to about 10% of the total survey respondents, down from 62% back in 2000. In fact, to further demonstrate the amount by which option usage has declined, let me point out that the percentage of respondents granting stock options in 2016 (51%) is less than the percentage of respondents granting ISOs in 2000 (and 100% of respondents granted options in 2000—an achievement no other award has accomplished).
Next year, we will conduct the Domestic Stock Plan Administration Survey, which covers administration and communication of stock plans, ESPPs, insider trading compliance, stock ownership guidelines, and outside director plans. Look for the survey announcement in March and make sure you participate to have access to the full results!
– Barbara
Tags: clawback, dividends, domestic survey, incentive stock option, ISO, performance awards, performance plans, Plan Design, post-vest holding, relative TSR, restricted stock, Restricted Stock Award, Restricted Stock Unit, retirement, Retirement Eligibility, RSUs, Stock Plan Design and Administration Survey, Survey, TSR
Last Friday, ISS issued an updated FAQ for its Equity Plan Scorecard. For most companies, the overall scorecard structure remains unchanged: a max of 100 points and 53 points is a passing grade. For companies disclosing three years of equity data, the points available under each pillar also remain the same, but the scores for each test within the pillars may have been adjusted (ISS doesn’t disclose the number of points each test is worth).
Here’s what ISS is changing for 2016 (effective for shareholder meetings on or after February 1, 2016):
New Company Category
The IPO/Bankruptcy category has been renamed “Special Cases” and includes any companies that have less than three years of disclosed equity grant data. This is still largely newly public companies and companies emerging from bankruptcy, but it could include other companies. For example, if a public company implemented a new stock compensation program in 2016 and had not previously granted any equity awards, they would presumably be in this category (because they wouldn’t have any equity grant data to disclose for prior years).
In addition, the Special Cases category is now divided into S&P 500/Russell 3000 companies and non-Russell 3000 companies. The S&P 500/Russell 3000 companies can earn 15 points for the Grant Practices pillar; to provide these points, their max score for the Plan Cost pillar is reduced by ten points to 50 and their max score for the Plan Features pillar is reduced by five points to 35. Scoring for the non-Russell 3000 companies in this category is the same it was for IPO/Bankruptcy companies last year: 60 points for plan cost, 40 points for plan features, and no points for grant practices.
CIC Provisions
The “CIC Single Trigger” category under Plan Features is renamed “CIC Equity Vesting” and is a little more complicated (last year it was pass/fail).
For time-based awards:
- Full points for 1) no acceleration, or 2) acceleration only if awards aren’t assumed/substituted
- No points for automatic acceleration of vesting
- Half points for anything else (does this mean half points for a double trigger?)
For performance-based awards:
- Full points for 1) forfeiture/termination, or 2) payout based on target as of CIC, or 3) pro-rata payout
- No points for payout above target (ISS doesn’t say if this applies if performance as of the CIC is above target)
- Half points for anything else
Post-Vest Holding Periods
The period of time required to earn full points for post-vest holding periods increased from 12 months to 36 months (or termination of employment). 12 months (or until ownership guidelines are met) is still worth half credit.
Happy Thanksgiving!
– Barbara
Tags: Equity Plan Scorecard, ISS, post-vest holding, proxy advisors, proxy advisory firm, shareholder approval
In a prior installment of this blog, I explored the renewed interest in mandatory holding periods for equity compensation post vest. In today’s blog, we’ll look at some of the scenarios where this makes the most sense.
To catch everyone up, make sure you read Post-Vest Holding Periods – Part 1 (February 19, 2015).
We’ve looked at some general reasons why companies may find it attractive to implement a requirement for a participant to hold shares after they are vested. Among the top considerations are ease of facilitating clawbacks, good corporate governance, points on the ISS Equity Plan Scorecard, and the possibility of a reduced fair value accounting expense. I now want to dive into the nuances of where these holding periods seem to make the most sense.
Does One Size Fit All?
While there are many compelling reasons to implement a post vest holding period, a closer look suggests that this may not be a one size fits all approach. This means that not all employees and not all forms of equity compensation are considered “equal” in determining if and how to apply mandatory holding periods. Let’s cover the “who” first, and then the “what.”
Who Should be Subject to Post-Vest Holding Periods?
In contemplating the intent behind the post-vest holding periods (ease of clawbacks, good governance, ISS scorecard points, etc.) it becomes clear that the ideal target for mandatory holding is the executive population. Not only are they the subject of most of the logic behind the holding periods, but this is also a population that tends to have significant amounts of equity compensation. Beyond that level within the organization, there are likely to be varied opinions about who else should be subject to mandated holding periods. There may be a case to include other levels of management, such as middle or senior managers who receive equity compensation. Should post-vest holding periods be broad based? Probably not. Employees who have no equity have nothing to “hold” and those with limited equity (such as only via participation in the ESPP and/or a limited amount of stock options) don’t appear to fit the profile that supports the “why” behind implementing holding periods. Additionally, employees within the non managerial ranks of the organization have tend to have no influence over governance practices, are not subject to clawbacks, and don’t typically represent a significant piece of the accounting expense pie.
What Types of Equity Compensation Make the Most Sense?
We’ll explore three major categories of equity compensation: restricted and performance awards, employee stock purchase plans (ESPPs) and stock options. According to the sources I’ve heard from on this topic, stock options are the least likely candidate for a post-vest holding period. Any mandatory holding period would be tied to the shares post exercise and since the vast majority of stock options are exercised in a same-day-sale transaction, there are most often no shares to tie to a holding period.
With stock options generally off the table, we are left with ESPP shares and restricted stock and performance awards. In my opinion, ESPPs fall into the “maybe” category. Certainly a company could implement a post purchase holding period. However, a key question is whether the population most engaged in ESPP is the same population that would be targeted by post-vest holding periods. We’ll explore the “who” should be affected shortly, but that is a key question in determining whether ESPP shares should be subject to such a mandated holding. Even if executives participate in the ESPP, they are most often likely to have other forms of equity compensation that would be more significant targets for holding periods. Additionally, employees contribute their own funds to the ESPP, and this may be an additional concern in evaluating whether a holding period makes sense (not so much at the executive level where it’s usually deemed good to have skin in the game, but at the mid or lower levels of the company).
The last category is restricted stock and performance awards/units. This appears to be the most likely area of focus for post-vest holding periods. In considering subjecting these types of award to mandatory holding post-vest, companies will need to consider the timing of taxation for awards and units. Restricted stock awards (absent an 83(b) election) are taxed upon vest, and the existence of a mandatory holding period can complicate matters if the participant is not permitted to sell shares to cover the taxes. Restricted stock units are subject to income tax when the award is distributed, making it more attractive to attach these types of awards to post-vest holding. Since income tax isn’t due until the shares are released to the employee, companies could delay settlement until after the post-vest holding period, eliminating the question of how to pay taxes if shares can’t be sold. FICA/FUTA taxes will still be due at vest for both awards and units, but there are ways to collect those taxes over time (such as using the IRS’s Rule of Administrative Convenience) or via payroll deduction from other cash compensation.
Scratching the Surface
This blog can only be so long, and I’ve only scratched the surface on the considerations for post-vest holding periods. One significant evaluation that I left out is the potential for a discount on the fair value for equity compensation subject to mandated hold after vest. This week I was fortunate enough to catch the DC/MD/VA Chapter meeting which (by pure coincidence) was on this exact topic. Terry Adamson of Aon Hewitt and Gustavo Dalanhese of E*TRADE did a great job of bringing companies up to speed on all of these considerations, including a deeper dive into the fair value savings. One thing I learned is that (several factors considered, including stock volatility) the discount can be significant. This is not a minor perk, but could be a strong driver in a company’s evaluation of whether or not to implement a post-vest holding period. We’re out of time today, but the good news is that next week’s NASPP webcast (March 11th) will explore this in much more detail. Be sure to tune in. And, for a quick run down, check out our Hold After Vest podcast episode (it’s much shorter than the webcast, so not as much detail, but definitely a great primer on this topic).
-Jenn
Tags: accounting discount, clawback, corporate governance, hold after vest, holding period, post-vest holding