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.
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!
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).
Retirement provisions constituted the most anticipated area of results in the 2013 Domestic Stock Plan Design Survey. I received several requests for a peek at the preliminary results in advance of our release of the final results. Now that the final results are available, I thought a summary of the data might be of interest to my readers.
The 2013 Domestic Stock Plan Design Survey Results
Automatic Payouts to Retirees: Just over 50% of respondents provide some sort of automatic payout to retirees–either full or pro-rata accelerated or continued vesting. Depending on the type of grant, another 5% to 17% provide a discretionary payout or some other type of payout.
Accelerated vs. Continued Vesting: For time-based restricted stock/units, acceleration of vesting (28%) edges out continuing to vest awards after retirement (23%). But, for stock options, the opposite is true–continued vesting upon retirement (27%) just edges out accelerated vesting (24%). And, for performance awards, continuing to vest (in other words, paying the awards out to retirees only at the end of the performance period rather than at retirement) wins by a landslide (44% vs. 8% or respondents). This makes sense–performance awards that pay out at retirement are problematic for a host of reasons: for starters, they provide the wrong incentive to potential retirees and don’t qualify as performance-based compensation under Section 162(m).
Full vs. Pro-Rata Vesting: For time-based awards, full vesting (vs. pro-rata vesting) is most common: 30% vs. 21% of respondents for RS/RSUs and 41% vs. 10% of respondents for stock options. But for performance awards, pro-rata vesting is more common (34% of respondents vs. only 18% that provide full vesting).
To be continued…tune in next week for the exciting conclusion to our foray into the world of retirement.
This week I look at a section of the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) that came as a big surprise to me–the design and usage of stock ownership guidelines.
Trends in Stock Ownership Guidelines Maybe I haven’t been paying attention, but the significant increase in companies that have ownership guidelines was a big surprise for me. 73% of respondents in the 2011 survey report having ownership guidelines, up from only 54% of respondents in the 2007 Domestic Stock Plan Design and Administration Survey (also co-sponsored by Deloitte), a 35% increase. Back in 2007, we also asked how many respondents were considering implementing ownership guidelines in the next two years. Based on the responses to that question, I would have expected around 65% of respondents in the 2011 survey to have ownership guidelines, quite a bit less than 73%.
In case you are wondering, 25% of respondents to the 2011 survey that don’t currently have ownership guidelines said they are considering implementing them in the next three years. That would add around 35 companies to those that have guidelines, so I’d expect the percentage of respondents with ownership guidelines in 2014 (the next year the survey is planned for) to be close to 80%. All the cool kids are doing it, is your company one of them?
What Counts?
Everyone counts shares owned outright, whether purchased on the open market or through some type of compensatory or private arrangement. Of the respondents that offer the following types of arrangements, here’s the percentage that count them toward their guidelines:
70% count unvested restricted stock
60% count unvested phantom stock and RSUs
93% count vested phantom stock and deferred RSUs
Only 31% count unvested performance shares
72% of respondents indicated that they offer stock options but don’t count them toward the guidelines.
We asked about a bunch of other types of arrangements in the survey, but the ones I list above are the most interesting.
Who Counts?
Ownership guidelines are largely applied only to top executives–98% of respondents said that the guidelines apply to their CEO and CFO and 95% apply the guidelines to their other NEOs. Only 71% apply the guidelines to other senior executives. From there, application of the guidelines drops off sharply, with only 12% applying the guidelines to other management.
How and When to Count
Most, or 78%, of respondents base required ownership levels on a multiple or percent of compensation. 68% allow up to five years to meet the guidelines; another 13% percent require guidelines to be met in three years.
How Much to Count
For CEOs, required ownership levels are pretty high. 74% of respondents require the CEO to own stock equal in value to five or more times his/her compensation (49% of respondents require exactly five times compensation). That is perhaps reflective of how much CEOs get paid in stock. For the CFO and other NEOs, the requirement is a little lower, with 78% of respondents indicating that their requirement for these positions falls in the range of two to four times their compensation.
See You in San Francisco in Two Weeks! It’s hard to believe, but the 19th Annual NASPP Conference is just two weeks away! I hope to see all of my readers at the Conference, which is scheduled for November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance–and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong–on track to reach nearly 2,000 attendees–this year’s event promises to be just as exciting; 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.
October 20 is a popular day for local NASPP chapter meetings; the Chicago, Los Angeles, Phoenix, and Twin Cities chapters are all meeting on this day (separately, not one big meeting). Make sure you attend your local meeting!
For today’s blog entry, I highlight results from the NASPP’s 2011 Stock Plan Design and Administration Survey (co-sponsored by Deloitte). If you missed our webcast highlighting the results, you can still catch the audio archive (and the transcript will be up in a couple of weeks). The full results will be published later this month; I’ll cover more highlights from the results in future blog entries.
The 2011 Domestic Stock Plan Administration Survey The last time the Domestic Stock Plan Administration Survey was conducted was in 2007, when it was part of the Domestic Design survey. This is the first time the Domestic Administration survey has been conducted and published independently.
Respondent Demographics
We received 603 responses, compared to 428 responses in 2007. High-tech companies still comprised the single largest industry in the survey, but dropped from 43% of the respondents in 2007 to only 34% of respondents in 2011. We picked up respondents in the “other” industries categories, which is a mish mash of industries that don’t fit into any of the other categories (one thing I like about writing a blog is that I can use words like “mish mash” that I can’t use in anything else I write). Respondents from the western region also dropped from 35% in 2007 to only 29% in 2011. We picked up respondents primarily in southeast and a little in the northeast. 37% of respondents are Fortune 500 companies (this was almost the same as in the 2007 survey).
Staffing and Outsourcing
A question I am asked a lot is what department stock plan administration is located in. 60% of respondents reported that HR/Comp & Benefits has primary responsibility for administering the company’s stock and option plans. This was up from 57% in 2007. I was surprised to see the number of companies that locate primary responsibility for stock plan administration in Treasury/Finance drop from 16% in 2007 to just 5% in the current survey. 9% of respondents task accounting with primary responsibility for stock plan administration, which did not change from the 2007 survey.
The percentage of companies that have no personnel dedicated solely to administering their stock and option plans increased from 31% in 2007 to 39% in 2011. At the same time, the number of companies outsourcing more than 75% of stock plan administration increased to 41%, up from 33% in 2007. Perhaps the increase in outsourcing contributed to the decline in staffing.
The Electronic Age
Companies continue to move to electronic processes. The percentage of respondents distributing grant agreements in paper format dropped to 33%, from 47% in 2007. 47% of respondents permit a digital signature on grant agreements for some or all employees, up from 34% in 2007.
Participant Communications
76% of respondents require employees to accept their grant agreements, which did not change significantly from 2007. Enforcement practices also did not change significantly, but an additional 4% (19%, up from 15% in 2007) of respondents cancel grants if they aren’t acknowledged within a specified period.
We are seeing more companies notify employees of expiring in-the-money options. Only 20% of respondents don’t provide this notice, down from 25% in 2007. And more companies are relying on a third-party to provide the notice (45% of respondents, up from 31% in 2007). I expect that this is the result of the brokers and other third-party administrators developing the functionality to provide these notices to employees and more companies getting comfortable with relying on the brokers to provide this notice.
See You in San Francisco! I hope to see all of my readers at the 19th Annual NASPP Conference, which is scheduled for November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance–and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong–on track to reach nearly 2,000 attendees–this year’s event promises to be just as exciting; 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.
Attend your local NASPP chapter meetings in Florida, Houston, Ohio, San Diego, Silicon Valley, and Wisconsin. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting and I’ll be at the Silicon Valley meeting; we hope to see you there!
I recently completed an analysis of how ESPPs in the western United States compare to plans nationally and I thought my readers might be interested in how the results came out. I’ll be presenting the data during my panel “Pumping Up Purchase Plans: Re-Thinking the ESPP” at the Silicon Valley NASPP Chapter All-Day Conference, but I thought I’d give you a sneak peak.
ESPP Match-Up: The West vs. the Rest The data I’m comparing is from the NASPP’s 2007 Domestic Stock Plan Design and Administration Survey (co-sponsored by Deloitte). I asked Deloitte to run a special cut of the data that just includes companies in the west and I compared that to the national data we published. While the data are several years old, I don’t think ESPP design has changed significantly. We’ll know for sure later this year, when we publish the results of our 2010 Domestic Stock Plan Administration Survey. Hopefully you participated, so you’ll have access to the results.
First, a Note About the Participants
Of the companies in the western region:
71% are high-tech companies (vs. about 46% high-tech for the national data).
74% are companies in CA and 12% are companies in WA. The remaining companies are in CO, OR, ID, NV, WY.
21% are Fortune 500 companies.
Now, For the Results
93% of respondents in the western region that offer an ESPP, offer a Section 423 plan, compared to only 77% of respondents nationally. Because the incidence of Section 423 plans is so high in the west (and non-423 plans so few), the remaining data I present here are for Section 423 plans only.
Of those western region companies that offer a Section 423 ESPP:
89% offer a 15% discount (compared to 79% nationally)
81% base their purchase price on the lower of the beginning or ending FMV (compared to 66% nationally)
22% of western region companies have a 24-month offering period (compared to 19% nationally). Six-month offering periods are also more prevalent in the west (58% of western region respondents compared to 48% nationally).
So what offering length is used more frequently nationally than in the west? A whopping 18% of respondents in the national data have a three-month offering period, compared to only 9% of respondents in the western region. I had no idea three-month offerings were so popular nationally–I actually went back and checked the data again, just to make sure. Yep, 18%. That’s almost as many respondents as offer a 24-month offering at the national level (although it’s still less than half the number of national respondents that have a six-month offering). 12-month offerings are also slightly more popular in the national data than in the western region (11% nationally vs. 8% in the western region.)
Given that ESPPs are more frequently used and more generous in the west, does that translate into higher levels of participation? You bet it does! 48% of companies in the western region report participation levels of greater than 50%, whereas, in the national data, only 29% of companies report achieving this level of participation.
Learn More at the Silicon Valley NASPP Chapter All-Day Conference
If you are thinking that you’ve heard my whole presentation, so now you don’t need to come to the chapter conference next Thursday, June 23–think again! This data represents only three slides in my panel’s presentation, so we have lots more to “re-think” about ESPPs. (Spoiler alert: We still think ESPPs are a great idea.) There will be lots of other great panels throughout the day and you can’t beat the price of admission–register by this Friday, June 17, for the early-bird rate. I hope to see you there.
Only Ten Days Left for NASPP Conference Early-Bird Rate The 19th Annual NASPP Conference early-bird rate expires next Friday, June 24. This deadline will not be extended–register for the Conference today, so you don’t miss 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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.