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Trend Toward Diversifying Long-Term Incentive Mix Continues
 

By Culpepper and Associates  5/7/2010
 

The 2010 Culpepper Equity Compensation & Long-Term Incentives Practices Survey reveals that an increasing number of companies are diversifying their equity compensation and long-term incentive (LTI) programs for U.S. employees with a portfolio mix of plans.

Key Survey Findings and Trends

Below are the key findings of the 2010 survey, which focused primarily on technology and life science companies:

Changes for 2010. Fifty-five percent of companies reported making one or more significant changes to their 2010 LTI plans. The most common changes included reducing the number of employees eligible for LTI plans and increasing the size of LTI grants to eligible employees.

Most companies ride out the storm of underwater stock options. Despite facing challenges with underwater options (the exercise price of the stock option exceeds the fair market value of the underlying stock), most companies have chosen to hold steady with their option plans and not take action to address underwater options or drop options in favor of another type of LTI plan. (See Bringing Underwater Stock Options Back to the Surface.)

Stock options continue reign as LTI king. For most companies (65 percent), stock options remain the LTI vehicle of choice.

Restricted stock plans. Restricted stock plans continue to gain in popularity, with over 50 percent of companies offering them to employees.

Performance-based LTI plans. Nearly one-third of companies use performance-based LTI plans. However, few companies rely solely on performance-based LTI plans because of challenges caused by economic uncertainties in setting performance targets.

LTI portfolio mixes increase. An increasing number of companies with LTI programs are diversifying their LTIs with a portfolio mix of different types of LTI plans. Seventy-four percent of companies provide a combination of LTI plans.

Eligibility rises with job level. The most common criterion used to determine whether an employee is eligible for long-term incentives is job level. In most companies, executives and management-level employees are significantly more likely to be eligible for long-term incentives than non-management employees.

Stock ownership guidelines. Most companies do not require their employees or board directors to own company stock. However, large public companies are much more likely to have stock ownership guidelines for executives and board directors than small and mid-size companies.

Clawback provisions. On average, about one-third of companies reported having clawback provisions in their LTI plans allowing the company to recoup performance-based compensation if events demonstrate that the compensation was excessive (such as failure to meet long-term goals because of short-term risk taking). Over 50 percent of large companies have clawbacks.

Stock plan evergreen provision. Only 9 percent of companies have stock plans with an evergreen provision that gives the board of directors a renewable pool of stock shares automatically each year to distribute to employees.

ESPPs increase. An increasing number of companies are turning to employee stock purchase plans (ESPPs) as an alternative vehicle to provide broad-based employee ownership.

Recent Changes to LTI Plans

Respondents were asked to report significant changes to equity compensation and LTI plans over the previous two years. Fifty-five percent of companies reported making one or more significant changes to their 2010 LTI plans. The most common changes were reducing the number of employees eligible for LTI plans and increasing the size of LTI grants to eligible employees.

Table 1.
Recent Changes to LTI Plans

 

Percent of Companies

2008 to 2009

2009 to 2010

Reduced number of LTI eligible employees

29%

29%

Increased size of LTI grants

16%

24%

Added performance plans/features

8%

9%

Increased number of LTI eligible employees

4%

7%

Decreased size of LTI grants

10%

4%

Other changes

7%

10%

No significant changes

47%

45%

Participants could select more than one response.

Types of Equity Compensation and LTI Plans Offered

Stock options continue their reign as king of long-term incentives and remain the LTI vehicle of choice for 65 percent of companies. Restricted stock plans continue to gain popularity, with 52 percent of companies offering them to employees.

Nearly one-third of companies use performance-based LTI plans. However, few companies (6 percent) rely solely on performance-based LTI plans because of challenges caused by economic uncertainties in setting performance targets.

An increasing number of companies are turning to employee stock purchase plans as an alternative equity vehicle to provide broad-based employee ownership.

Table 2.
Types of Equity Compensation Plans Offered

Type of Plan

Percent of Companies
Offering

Stock Option Plans

65%

Non-qualified stock options (NQSOs)

56%

Incentive stock options (ISOs)

28%

Restricted Stock Plans

52%

Restricted stock units (RSUs)

38%

Restricted stock shares (RSSs)

28%

Performance-Based LTI Plans

31%

Performance-based cash or cash unit awards

21%

Performance-based share awards

21%

Employee Stock Purchase Plans (ESPPs)

26%

Qualified ESPP (section 423)

19%

Non-qualified ESPP

7%

Other LTI and Equity Plans

Stock appreciation right (SAR) plans

9%

Phantom stock plans

10%

Unrestricted stock plans

4%

 

Mix of Equity Compensation and LTI Plans

Instead of using a “one-size-fits-all” approach, nearly three-quarters of companies (74 percent) diversify their long-term incentive programs with a mix of types of plans. Restricted stock and performance-based LTI plans have gained popularity in recent years; however, only 8 percent of companies offer either of these types of plans as their only LTI option.

 

Table 3.
LTI Plan Mix

Types of LTI Plans Offered

Percent of Companies
Offering

Combination of two or more types of LTI plans

74%

Stock option plans (only)

14%

Performance-based LTI plans (only)

6%

Phantom stock plans (only)

3%

Restricted stock plans (only)

2%

Stock appreciation right (SAR) plans (only)

< 1%

Employee stock ownership plans (only)

< 1%

 

Only 14 percent of companies use stock options as their sole long-term incentive, while 63 percent offer stock options with a mix of other types of LTI plans. The most common LTI portfolio combination is stock options and time-based restricted stock plans.

 

Table 4.
LTI Portfolio Mix Combinations

LTI Portfolio Mix Includes

Percent of Companies
Offering

Stock options + Restricted stock plans

32%

Stock options + Restricted stock plans + Performance-based LTI plans

18%

Stock options + Performance-based LTI plans

6%

Stock options + Other types of LTI plans

7%

Restricted stock + Performance-based LTI plans

6%

Other types of LTI plans
(phantom shares, SARs, ESPPs or unrestricted stock)

5%

Only one type of LTI plan

26%

-----------------------

Data source:
Culpepper Equity Compensation & LTI Practices Survey
of 180 participating organizations.

Survey Dates:
Dec. 1, 2009 through March 21, 2010.

Participants by size:
Up to 100 employees: 22%.
101 to 500 employees: 23%.
501 to 2,500 employees: 27%
2,501 to 10,000 employees: 18%
Over 10,000 employees: 10%

Participants by industry sector:
Technology: 68%.
Life science: 16%.
Other: 16%.

Breakdown by Ownership/Corporate Status:
Public: 54%
Private: 22%
Other: 2%

Culpepper and Associates conducts worldwide salary surveys and provides benchmark data for compensation and employee benefit programs.

Reposted with permission

Source: Equity Compensation & LTI Practices Survey, May 2010, www.culpepper.com

Related Articles:

CEO Pay for Performance Hits a Bump in the Road, SHRM Online Compensation Discipline, April 2010

Financial Firms Jettison Short-Term Incentives, Adopt Performance 'Scorecards,' SHRM Online Compensation Discipline, January 2010

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