According to a new survey, equity compensation continues to be popular, companies are continuing to emphasize performance in their compensation programs and shareholders continue to be more vocal about compensation.
These are among the findings from the PricewaterhouseCoopers’ 2007 Global Equity Incentives Survey.
Following are the findings from the survey.
-Despite all its complexity, equity continues to be a popular way for companies to compensate and reward employees.
Despite the fact that the costs of equity compensation have become more visible than ever before, 97% of respondents said that the benefits to be gained from providing this type of compensation outweigh the costs. The demise of stock options has been greatly exaggerated. Despite their complexity and the difficulties in administration, they still work. Companies did not want to take them away.
-Increased emphasis on performance.
40% of participants said they tie increases in overall CEO pay to performance over the short and long
term. Additionally, there is an increasing prevalence of performance-based metrics in equity plans. The trend toward performance based pay in overall compensation and in equity plans in particular is likely related to feedback from shareholders that executive pay should be tied to company performance, as well as the shift to fixed accounting for performance based plans.
While performance based equity has been prevalent for many years in the United Kingdom, it is
becoming more popular in the United States, a sign of convergence in compensation design.
-Shareholders are becoming more vocal about compensation issues. Although shareholders are still generally approving equity compensation plans submitted to them, approval margins are declining.
The survey shows an increase in the number of shareholders voting against compensation plans in 2007 compared to 2006. For example, in 2007 more than a third of companies reported "no" votes of 20% or higher, compared to one-fifth of companies reporting this level of "no" votes in 2006.
-While stock options are still the most popular equity compensation vehicle in virtually all industries and among companies based in every country surveyed, respondents in this year’s survey were only half as likely to grant stock options as those in the 2003 survey.
Many appear to have replaced their option plan with service-based restricted stock or restricted stock units or performance-based plans. There were likely two main reasons for this: the cost became explicit on income statements in the middle of this decade and, second, the stock market decline in many industries in the early part of this decade caused options to lose their retention value to employees.
-Executives, VPs, directors, sales and technical staff have suffered stock option grant size cuts on par with cuts to the broader employee group.
Initially it was thought that rank and file employees would "take it on the chin" but no one has escaped these cutbacks. Two key factors likely driving these cuts are concerns that equity compensation dilutes shareholder earnings, and the increased transparency of executive compensation as mandated by the new Proxy disclosure requirements.
-Companies have significantly changed the type of equity compensation they offer. More types of equity rewards are now being offered. Now that new accounting rules have removed the favorable accounting for stock options, companies are conducting a cost-benefit analysis on all types of equity compensation and becoming more discriminating in the types of plans they offer to various employee groups and for each particular business and compensation objective.
53% of the participants have switched from stock options to another equity compensation vehicle. Many companies also report granting equity compensation only to employees who are in a position to achieve specific company-based performance goals. Some companies are also increasing short-term, cash bonuses as a substitute for equity-based rewards.
-The majority of companies surveyed still rely on market benchmarks to determine reward for executives.
When setting CEO pay levels and components of pay, virtually all participants report using market-based benchmarks. Between a quarter and a third of participants, particularly those based in the United States, also use tally sheets or some measure of internal equity within the company, allowing them to diversify the analytical tools used to understand the full picture of executive pay. For companies that are publicly traded in the United States, the increased reporting requirements related to executive compensation disclosed in the Proxy statement has also played a role in driving the use of nonmarket-based analytics related to executive pay.
-Compliance issues are becoming thornier.
Tax authorities in many countries have begun programs to audit all equity compensation plans offered by multinationals in their country for potential violations of relevant tax rules, in particular, income tax withholding. But, surprisingly, only 45 percent of participants in the survey report having done a compliance review in all countries where equity compensation grants are made, and 24 percent report having done so in a few or none of the countries where equity compensation is offered. Companies must start to conduct compensation reviews in anticipation of—not in reaction to—audit activity.