It’s restricted stock and unit week here at the NASPP. For today’s blog, I have five trends in the usage of restricted stock and units, from the 2016 Domestic Stock Plan Design Survey, co-sponsored by the NASPP and Deloitte Consulting.
Trend #1: Use of time-based stock grants and awards is still on the rise.
The percentage of companies issuing stock grants and awards increased by 10 percent since our last survey (up from 81 percent in our 2013 survey to 89 percent in 2016). In addition, among those companies that use restricted stock and unit awards, close to 40 percent of respondents report that their usage of these vehicles has increased at some level of their organization over the past three years, while only 18 percent report decreased usage over the same time period. Overall, that nets out to greater usage of restricted stock and units by more companies than in past surveys.
Trend #2: Time-based stock grants and awards are the equity vehicle most frequently granted to lower-ranking employees.
Stock grants and awards are the equity vehicles most commonly granted to lower-ranking employees, with 77 percent of respondents granting awards to middle management (approximately three times the percentage of respondents that grant either stock options or performance awards at this employee rank). Fifty-two percent of respondents grant restricted stock/units to other exempt employees (compared to 13 percent for stock options and 11 percent for performance awards) and 19 percent grant these awards to nonexempt employees (compared to 7 percent for stock options and 3 percent for performance awards).
Trend #3: Time-based stock grants and awards are also common at the top of the house.
Stock grants and awards are even more common for senior-level employees with 79 percent of respondents granting awards to the CEO, CFO, and named executives, and 84 percent granting awards to other senior management. The five-point drop in usage of restricted stock/units at the CEO, CFO, and NEO level as compared to other senior management is likely due to the increased usage of performance awards in the C-suite.
Trend #4: Restricted stock units are the vehicle of choice among various types of time-based full-value awards.
The 2016 survey saw a continuation in the shift away from restricted stock awards toward restricted stock units. Respondents reporting that they currently grant restricted stock awards* dropped from 44 percent in 2013 to 31 percent in 2016, while respondents currently granting restricted stock units* increased from 77 percent in 2013 to 83 percent in 2016.
* Awards not in lieu of cash.
Trend #5: Awards are most commonly granted on an annual frequency.
The overwhelming majority of companies that make grants of stock and units do so on an annual basis (ranging from 95 percent of respondents for CEOs, CFOs, and named executives to 75 percent of respondents for nonexempt employees). In addition to annual grants, stock/units are most frequently awarded upon hire, promotion, and for retention purposes.
Free lunches (not too mention breakfasts, dinners, and snacks), open offices, games and nap rooms, shuttle services for commuting employees—we all know Silicon Valley operates a little differently than the rest of corporate America. But just how different is the Valley when it comes to stock compensation?
Last week, I attended a presentation hosted by the Silicon Valley NASPP chapter on how Silicon Valley differs from the rest of the United States when it comes to stock compensation. Tara Tays of Deloitte Consulting ran special northern California cuts of the results of the NASPP’s 2013 and 2014 Domestic Stock Plan Design and Administration Surveys and compared them to the national results. She was joined by Sue Berry of Infoblox and Patti Hoffman-Friedes of Seagate Technology, who provided color commentary.
As it turns out, not as different as you might think. In many areas, the northern CA data aligned fairly closely with the national data. These areas included the use of full value and performance awards, overhang levels, timing of grants, termination and forfeiture provisions, and performance metrics. But here are five areas where Silicon Valley does its own thing:
Burn Rates
This probably isn’t a big surprise to anyone, but burn rates are higher in Silicon Valley. Nationally, 77% of respondents report a burn rate of less than 2.5%. In northern California, only 56% of respondents report burn rates below this level. Interestingly, however, the higher burn rates did not translate to higher overhang; in this area the northern California numbers align closely with the national data.
Clawbacks
In the national data, 60% of respondents report that equity awards are subject to a clawback provisions, representing an almost 90% increase in the use of these provisions since our 2010 survey. But this trend doesn’t appear to have taken hold yet in Silicon Valley; only 34% of companies in northern California report that their awards are subject to clawbacks.
RSUs
While usage of full value awards (vs. stock options) in northern California aligns with the national data, practices vary with respect to the type of award granted. Just over 90% of northern California respondents grant RSUs but, nationally, RSUs are granted by only 77% of respondents. Restricted stock is granted by only 26% of northern California respondents but 44% of national respondents.
Vesting Schedules
For full value awards, graded vesting is more common in northern California (88% of respondents) than it is nationally (65% of respondents). But vesting schedules for full value awards appear to be slightly longer in Silicon Valley. 57% of northern California respondents report a four-year schedule and 37% report a three-year schedule, whereas this trend is flipped at the national level. There, 60% of respondent report a three-year schedule and 30% report a four-year schedule.
For stock options, monthly vesting is far more common in Silicon Valley than nationally. 53% of northern California companies report that options vesting with a one-year cliff and monthly thereafter; only 11% of respondents report this in the national data (27% for high-tech companies).
ESPP Participation
When it comes to ESPP participation, Silicon Valley comes out on top. Close to 60% of northern California companies report that their participation rate is between 61% to 90% of employees; nationally only 20% of companies were able to achieve this. ESPPs are also more generous in northern California, with more companies reporting that their plans offer a look-back and 24-month offering than nationally. This may account for some of the increase in participation but I’m not sure it accounts for all of it (note to self: must do quick survey on this).
The NASPP’s 2014 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte Consulting LLP) is now open for participation. This is the industry’s most comprehensive survey on stock plan administration, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 25 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
The Latest Trends in ESPPs: Rumor has it that companies have been implementing new ESPPs and have been enhancing the benefits (discount, lookback, etc.) in their existing ESPPs. We saw a decline in both the number of ESPPs and the benefits offered under ESPPs in the last survey, so I’m very excited to see if this trend really has turned around.
Automatic Exercise on Expiration: For the first time ever, the survey collects data on this emerging practice. I think it makes a lot of sense so I’m very interested to see what percentage of respondents have implemented this program.
Rule 10b51 Plans: Has the recent negative attention that Rule 10b5-1 plans have received from academics and the media impacted the use of these plans? My money says no; if anything, I expect usage to have increased a bit; we’ll see if I’m right when the survey results are published.
Stock Ownership Guidelines: The 2011 Stock Plan Administration survey saw a 35% increase in the percentage of companies that have stock ownership guidelines, a remarkable increase–far higher than we expected based on responses to the 2007 survey. If everyone that said they were considering implementing stock ownership guidelines in 2011 survey did actually implement them, close to 80% of all respondents will now have these guidelines in place.
Social Media: The topic du jour when it comes to educating employees these days is the use of social media (Facebook, Twitter, LinkedIn, etc.) I think these tools have significant potential for reaching younger employees. I look forward to finding out what percentage of respondents use them now and setting a baseline that we can use for comparison purposes in future years.
April 25 will be here before you know it and you are definitely going to want to have access to the full survey results. If you are an issuer, register to participate today. (Service providers that are not eligible to complete the survey can access the full survey results at no cost, provided they are members of the NASPP. This access is available to service providers only; issuer companies must complete the survey to access the full survey results.)
For our Meet the Speaker interview this week, we feature…me…discussing the session I’m co-facilitating with Tara Tays of Deloitte that will highlight the results of the 2013 NASPP and Deloitte Domestic Stock Plan Design Survey. Yes, that’s right–I interviewed myself!
NASPP: Last week the Wall Street Journal ran an article predicting the demise of stock options. Based on the data in the 2013 survey, is this true?
Barbara: I’m not sure I would go quite that far, but we did see a marked decline in the prevalence of stock option plans this year. Only 68% of respondents report having a stock option plan, down from 92% in 2010. But that’s still well over half of the respondents that have stock option plans, so I think that option plans still have their place and will continue to be utilized by some companies, particularly start-ups and high-growth companies.
NASPP: If stock options are declining in use, what is taking their place?
Barbara: It’s pretty clearly full value awards, both time-based and performance-based. Prevalence of time-based award plans is at 91% of respondents, up from 89% in 2010. Performance plans are where we’ve seen the most growth, with 87% of respondents reporting a performance plan, up from 71% in 2010.
These numbers are even more dramatic when we look at the results from ten years ago: at that time only 52% of respondents reported a time-based full value award plan and only 30% reported a performance plan, but 99% reported having a stock option plan. Over the last decade, the landscape for stock compensation has completely shifted.
NASPP: We been hearing for years now that the future is in TSR awards. Where do these come out in the survey?
Barbara: I think the predictions about TSR awards might be bearing out. In our 2010 survey, EPS and TSR were tied as the two most popular performance targets but with this year’s survey, TSR has really moved into the lead. 43% of respondents report that TSR is a target for their performance awards; the only other targets that were remotely close to that in terms of prevalence were EPS (27% of respondents) and revenue (21% of respondents). It’s clear that there’s been an increase in usage of TSR awards over the past three years. There are a lot of very compelling reasons to choose relative TSR as a target and I expect that we’ll see this trend continue.
NASPP: What are three things people don’t know about you:
One of my high school math teachers, Mr. Cieply, told me I was “wasting my brain” because I didn’t take calculus. In retrospect, however, I have to say that Mr. Cieply vastly overestimated my aptitude for math.
I am a big fan of Rex Stout’s Nero Wolfe novels. I’ve read the entire 46-book series multiple times. As a leading man, Archie Goodwin beats the pants off both Edward Cullen and that guy from the Shades of Gray books.
I really just don’t like pork belly. I will be very glad when the foodies move on to another trend, hopefully one that doesn’t involve animal fat. Ew.
I hear it everyday (okay, just about everyday) – companies ask about what the other companies are doing. What types of equity are being issued? How are they handling overhang? What new performance related trends are emerging? I’ve come to an astounding conclusion (yes, I’m exaggerating) – drum roll please – I don’t think the “need to know” about what everyone else is doing is ever going to go away. For all you companies who find yourself in a “want to know” status, there’s new information coming, in the form of the NASPP/Deloitte 2013 Domestic Stock Plan Design Survey. In today’s blog I’ll tell you what you need to do to get the full survey results, and I guarantee you won’t want to miss out on such valuable information.
Data Doesn’t Lie
Results from industry surveys are one of the most valuable acquisitions you can make for your stock administration toolbox. I would say this no matter where I work – it’s the plain truth. It’s often suggested that, as plan administrators, we insert ourselves into plan design and other key discussions involving the use of equity compensation. Fighting for a seat at the table is one thing, but once you get there you need to establish sound credibility with your peers and higher ups. How do you do that? You do it two ways: first by sharing your personal experience (which is no doubt important) and second, you come with data – data on your plans and industry data. How great would it be to hear a proposed plan design element, and be able to respond by saying “actually, the majority of companies are not implementing that type of feature”, or, alternatively “that’s exactly the trend we’re seeing in the industry – 70% of companies report having that feature.” The same scenario rings true for service providers. More and more, issuers are calling on their third parties for opinions and a general “lay of the land” when it comes to considering key decisions. I Want It, How do I Get It?
NASPP members will be able to access the results of the 2013 Domestic Stock Plan Design Survey in the following ways:
Issuers: You must complete the full survey by April 5, 2013 in order to access the results.
Service Providers: Those providers that are not eligible to complete the survey will be able to access the survey results for free, if they are NASPP members. This only applies to service providers – issuers must complete the survey in order to receive the results.
Not an NASPP member? Non members who complete the survey get a 10% discount off an NASPP membership.
How to Get Started
Don’t delay – you only have until April 5th to complete the survey. To get started, register to complete the survey today. Upon registering, you will receive an email within three business days that contains your login to the survey. Once you receive your login, you can immediately begin to complete the survey.
Now is your chance to participate in this important survey and end up with solid data to aid in your plan design efforts.