From Goldman Sachs to American Airlines, equity compensation continues to be a hot topic.

Clarity needed for performance shares: Mr. Steege

Many of today’s discussions are focusing on how to link long-term incentive awards with performance. This is particularly important since shareholders are interested in how companies are positioning themselves for recovery as the economy stabilizes.

In response to growing interest in the role performance shares can play in a company’s executive compensation strategy, author and executive financial coach Chuck Steege just completed and released his definitive report: Five Reasons to Like Performance Shares (and One Reason to Think Twice).

“One of every two organizations has now introduced or plans to introduce new financial performance measures to their 2010 annual incentive program,” Mr. Steege said recently. “Companies want to set credible goals that will motivate employees and satisfy stakeholders,” he added, “But goal-setting remains a challenge with the economic outlook still so uncertain.”

For highly compensated executives and increasing numbers of mid-level managers, the outlook for this long-term trend of “pay for performance” has been unclear, Mr. Steege  noted.

It was this lack of clarity that spurred the executive financial coach to craft his latest report.

“I wanted to write something that would provide insight into the benefits and disadvantages of performance shares,” Mr. Steege concluded.

Designed for c-suite executives as well as senior managers, the report can be downloaded at no charge from www.sfgadvisors.com.

The use of performance shares continues to rise steadily — up 63%, through year-end 2009.

Clearing corporate hurdles: Performance shares offer clear, measurable rewards to worthy C-suite executives.

According to research firm Frederic W. Cook & Co. (FWC), performance shares have continued to rise in popularity when compared to other equity compensation alternatives.

Including findings from 250 surveyed companies in its 2009 Top 250 Report, FWC said that performance shares acceptance has been one of “most interesting trends” in the executive compensation field.

According to the study, most of the companies tracked (59%) use a profit metric, such as earnings per share (EBITDA), in their performance award goals.

The next most popular metric (35%) is total shareholder return, followed by capital-efficiency goals, such as return on equity or capital.

The vast majority of the firms tracked used no more than two performance goals, and half of the companies used just one. A three-year performance period is most common (72%). At 52%, results must exceed the stated performance goal by at least 200% for the maximum payout to be earned, though at some companies the threshold is as high as 350%.

“While these grants come in a much greater variety than stock options or restricted stock,” executive compensation consultant Charles “Chuck” Steege, CFP® said recently, “the structure and details of these grants are so flexible that it is highly unlikely for one company’s stock plan to resemble another.”

The common feature of all performance share grants is a specified goal or metric that must be achieved.

While stock options and restricted stock remain important for corporate recruitment, retention, and motivation, performance shares put a smile on the face of investors and regulators, by creating a stronger transparent link between pay and performance.

For conscientious senior executives, performance shares send a strong signal that a company is trying to improve the alignment of pay, performance, and long-term shareholder value – in other words, that company is trying harder to become a better corporate citizen.

However, performance shares may not be the sole preserve of the C suite set in the near future. “Some companies are granting performance shares to middle management performers,” Mr. Steege continued. “Steering a clear course to long-term success, we know a number of middle managers who have become candidates for performance share grants too.”