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.”
Chuck,
Thanks for posting this article. The US is quickly catching up with the rest of the world when it comes to performance-based equity. And that is before we have “Say-on-Pay”, the main driver of these plans around the world. While are now starting to see real growth in this area, as a result of Say-on-Pay nealry all public companies in western Europe and Australia have performance share schemes. They have been hard at work rolling out more complex programs. Multiple interdependent goals are not uncommon. Take a look at the Royal Dutch Shell program or the Caltex program for examples of programs that combine Relative TSR, internal financial Metrics and internal operational metrics.
In the US a great example of your comment regarding a push further down into organizations in HP. Their performance unit program reaches 30,000 employees.
I still have several concerns about these plans including: 1) Many of these plans in the US are not complex enough to truly reflect the metrics that drive performance. (A single goal can create some interesting miss or make scenarios.) 2) Most companies do very little in the way of communicating progress during the performance period.
In response to these issues my firm helps support executive compensation consultants such as you by providing unique tools and services. We provide faster, better modeling of potential results. Our tool, GEMS, is the only solution in the world that is specifically designed to help companies and participants see, understand and account for performance-based equity.
Performensation is currently planning a series of joint webinars with top Executive Compensation professionals and we would like to invite you to present with us on this topic.
Please contact me if you are interested.
Best Regards
Dan Walter
President and CEO
Performensation
[email protected]
As your creative resource, I wish you much success with your new initiative.
Solutions like performance shares — though not right for everyone — provide an elegant, transparent route to better corporate behavior.