Most technology and life science companies report that they continue to offer long-term incentives to employees. However, the types of LTI plans used, the number of eligible employees, and the size of equity awards have changed dramatically in recent years.
Are Stock Options Losing Their Grip?
Historically, stock options were the LTI vehicle of choice, used by nearly all companies offering long-term incentives. However, the use of stock options has declined significantly over the past three years, with only 59 percent of companies now offering options to employees. Accounting rules requiring companies to expense options, backdating scandals and declines in the stock market have had a dramatic impact on the use of options and other types of LTI awards.
As the use of stock options continues to fall, the prevalence of other types of LTI plans is rising. Restricted stock (51 percent), performance-based LTIs (38 percent), stock appreciation rights (11 percent), and phantom stock (8 percent) are all gaining ground on stock options.
Table 1. | |
Type of | Percent of Companies |
Stock Option Plan | 59% |
Non-Qualified Stock Options (NQSOs) | 44% |
Incentive Stock Options (ISOs) | 28% |
Restricted Stock Plan | 51% |
Restricted Stock Shares (RSSs) | 32% |
Restricted Stock Units (RSUs) | 22% |
Performance-Based LTI Plans | 38% |
Performance Cash Awards | 18% |
Performance Share Awards | 17% |
Performance Units | 5% |
Other LTI and Equity Plans | |
Stock Purchase Plans (ESPPs / MSPPs) | 15% |
Stock Ownership Plans (ESOPs / KSOPs) | 11% |
Stock Appreciation Rights (SARs) | 11% |
Phantom Stock | 8% |
Unrestricted Stock Shares | 2% |
Diversification of LTI Plans
Instead of using a "one-size-fits-all" approach, over half of the surveyed companies (53 percent) diversify their long-term incentives with a mix of different types of plans.
Only 17 percent use stock options as their sole long-term incentive, while 42 percent offer stock options with a mix of other types of LTI plans.
Restricted stock and performance-based plans have both gained popularity in recent years; however, only 19 percent of companies offer either of these types of plans as their only LTI option.
Table 2. | |
Type of | Percent of Companies |
Combination of LTI plans (with stock options) | 42% |
Stock option plan (only) | 17% |
Combination of LTI plans (without stock options) | 11% |
Restricted stock plan (only) | 11% |
Performance-based plan (only) | 8% |
Phantom stock (only) | 3% |
SARS (only) | 2% |
Criteria to Determine LTI Eligibility
The most common criteria used to determine whether an employee is eligible for long-term incentives is job level. Individual employee performance, salary grade/level and job title are also frequently used as factors to determine eligibility for LTI awards.
Table 3. | |
Percent of Companies (respondents could select more than one response) | |
Job level | 63% |
Employee performance | 41% |
Salary grade or level | 36% |
Job title | 34% |
Discretionary | 27% |
Tenure | 10% |
Group/unit/organization performance | 9% |
Other | 8% |
LTI Trigger Events and Award Frequency
The most common event triggering LTI awards is at the time of hire. Seventy-two percent of companies offer long-term incentives to newly hired employees. Although hiring someone may trigger an LTI award, eligibility requirements or waiting periods may apply.
The second most common situation to trigger an LTI award is an annual grant process. Sixty-two percent of companies grant new LTI awards as part of an annual grant process.
Table 4. | ||||
Percent of Companies (respondents could select more than one response) | ||||
New hire | 72% | |||
Annual grant process | 62% | |||
Job promotion | 46% | |||
Retention purposes | 38% | |||
Recognition of outstanding performance | 37% | |||
Discretionary | 25% | |||
Meeting performance goals | 18% | |||
Year-end bonus | 5% | |||
Initial grant fully vested | 5% | |||
Other | 5% | |||
While nearly three-quarters of companies offer long-term incentives at the time of hire (Figure 3), only 2 percent restrict LTI awards to only at time of hire (Figure 4). Most companies continue to grant new LTI awards to eligible employees on an annual basis.
Table 5. | ||||
Percent of Companies | ||||
Only at time of hire | 2% | |||
Monthly | 4% | |||
Quarterly | 8% | |||
Semi-annually | 4% | |||
Annually | 63% | |||
Every two years | 2% | |||
Every three years | 1% | |||
Varies | 13% | |||
Other | 5% | |||
Alternatives to LTI Plans
Organizations without long-term incentive plans were asked to report what other rewards and incentives they use to attract, retain and motivate employees. The most common strategies for companies without LTI plans are to offer above-market benefits plans, non-cash awards/perks, and short-term cash bonuses/incentives).
Table 6. | |
Percent of Companies (respondents could select more than one response) | |
Above market benefits plan | 69% |
Non-cash awards & perks | 50% |
Short-term cash bonuses & incentives | 50% |
Above market base salary | 44% |
W. Leigh Culpepper, CCP, GRP, CBP, is president and CEO of Culpepper and Associates Inc., which conducts worldwide salary surveys and provides benchmark data for compensation and employee benefit programs. Jeremy Greenup, CCP, is a research analyst at the firm.
Reposted with permission
Source: Culpepper Pay Practices & Policies Surveys, July 2008, www.culpepper.com
Data source: Breakdown by industry sector: Breakdown by number of employees: Breakdown by corporate status: |
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