Cash rebounds as long-term incentive of choice

It would appear cash is king once again as a long-term incentive of choice for U.S. companies, yet equity-based incentives such as stock options are still an attractive retention tool, according to research from Buck Consultants.

The firm’s annual Global Long-Term Incentive Practices Survey confirmed that companies are substituting cash LTI for equity-based awards where it is appropriate. Additionally, the use of cash LTI awards increased in the U.S. at all employee levels (except CEO) and more than doubled over the past two years for vice presidents, directors and managers.

“Equity long-term incentives are generally being cut back to be more for senior executives who can really impact the bottom line and thus the stock price,” says Sandra Sussman, a director in Buck Consultants’ compensation practice. “That said, equity-based incentives in particular are very much an attraction and retention tool and that’s what companies generally use them for.”

The survey examined the global long-term incentive compensation practices of more than 130 participating companies in 40 countries. Multinational companies considering the use of equity-based LTI on a global basis must consider, among other things, the culture, local market conditions, regulatory challenges and tax implications of each country where employees are located. 

In the U.S., use of cash as a long-term incentive rose from 1% in 2011 to 10% in 2012 to 14% in 2013. 

“In looking at the total package, longer term incenctives – whether they’re cash-based or equity-based – are definitely going to be more of a total rewards philosophy that keep employees where they are,” says Sussman. “Where stock options were once the big no-brainer because they didn’t cost anything, as the accounting rules have changed, the playing field has been leveled for all types of equity awards,” says Sussman. “Over time companies have started realizing equity compensation or stock options or restricted stock units [that] one thing may not be the best thing for everybody everywhere and they really need to take a look at the cost, the regulatory regime, the cultural issues in terms of how well an employee is going to understand this.”

As for future trends, Sussman believes employers may increasingly look to employee stock purchase plans as a motivational and retention tool. The vehicles “are going to be one way companies will get employees to be owners, if you will, and create that employee ownership without dealing with those other issues, whether it’s cost or regulatory,” she says.

The effects of the Affordable Care Act, meanwhile, on the compensation mix in general are being somewhat overlooked, says Sussman.

For example, if a company chooses to drop some employees’ hours to under 35/week in order to not have to offer health insurance, “that goes to compensation and what are you going to do to make up for that?” she says. “Are employees looking for other reasons to stay at companies? Probably. But if you flip that around, companies need to look at other ways to compensate employees because benefits have always been part of that overall total rewards mix.”