Performance-based, full-value shares are becoming the norm in executive compensation as companies still feel the sting from market volatility in 2008.
Recent years have seen a 20% jump in companies granting performance-based equity, a trend that has been seen across all major sectors of the economy.
But according to recent analysis by Equilar of more than 1,300 S&P companies, the median number of options granted has fallen almost 28% since 2012 to 181,000, while the restricted shares or restricted stock units grant of a company stock that must typically be vested has seen a slight uptick from 433,000 to 440,000.
While experts debate several reasons for the compensatory changes, there are two points most can agree on. First, during the recession many employees saw the value of their options decline and/or disappear, cuts that still sting today, says Adam Colon, vice president at E*TRADE Financial Corporate Services.
Second, Colon notes, performance-based shares allow companies to tie rewards to individual performance creating a tighter link between performance and compensation.
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Companies prefer the use of shares as a currency over cash for a number of reasons, including shareholder alignment, additional leverage, compliance with ownership guidelines and noncash expense, according to a report from consulting firm Meridian Compensation Partners.
Equity compensation models can help steer and drive a business, says Colon. We are now in a far more complex space, he believes. In short, the need for thoughtful and deliberate planning before, during and after rolling out a new equity comp structure is more important than ever.
Although the sting from the market collapse is still being felt, markets today are healthier than ever, Colon notes, and employee attitudes toward stock options are changing.
Corporate governance of compensation has increased significantly over the past 10 years as a result of legislation like Dodd-Frank, which is driving more companies to link executive compensation to performance, he says. Performance awards provide companies with flexibility to establish this link while creating vesting metrics specific to their unique company goals.
