Download - Esop centre davos
Performance Plans in Current US Compensation Practice Davos 2013 14th Global Employee Equity Forum
07 February 2013
Fred Whittlesey Compensation Venture Group, Inc.
206.780.5547 www.compensationventuregroup.com [email protected]
Blog: payandperformance.blogspot.com
Compensation Venture Group and the World of Equity
Equity Interests and Advisory Roles
Professional Roles
Online Content
Pay and Performance: The Compensation Blog
Conscious Compensation: The Impact Compensation Blog
Effective Equity: The Equity Compensation Blog
Executive and
Equity Compensation
Consulting
2
Our Topic Today
Reasons for Performance Plans
Types of Performance Plans
Prevalence in the US: Large vs. midcap/smallcap firms
The Problem with Prevalence
Key Issues for Boards of Directors The Governance Ups and Downs of Performance Plans Understanding Valuation
The Continuing Debate: Incentive or Pay Delivery
3
Reasons for Performance P lans
Flat equity markets
Growth companies grew up
Accounting rule changes “leveled the playing field”
Volatility was not making stock options “more valuable”
RSUs emerged as stock options were moved into the “bad” column
Pay without performance continued
Global changes in governance mandated change
Line of sight was lacking with stock price
Investor and proxy advisor solution: performance based on stock price
4
Types of Performance P lans: Key Design Parameters
Performance plans vs. performance shares
Measurement and settlement
Performance features
Applied to full-value shares or options
Impact of performance on vesting
Contingency or acceleration
Denomination
Shares or dollars
Settlement
Shares or cash
Determination of settlement
Formula or discretion or participant choice
2^5*3 = 96 plan designs
5
Types of Performance P lans: Vesting
6
Average Time to vest:
Example for 4 years
• (12+24+36+48)/4
• Average = 30 months
ExamplesA3/SA3 = Annual or Semi-Annual 3 yearsA4 =Annual 4 yearsA1M3 = Annual for 1st year/monthly for 3 yearsA1Q3 = Annual for 1st year/qrtly for 3 yearsC3 = Cliff vesting after 3 yearsP3 = performance vesting at end of year 3P1A3 = Performance vest at 1 year/3 year annual
Vesting Frequency in 2010
A =Annual / SA = Semi-Annual
M =Monthly
Q = Quarterly
C = Cliff
P = Performance # = Years
Schedule Avg Time to V Schedule Avg Time to V Schedule Avg Time to V
US CELLULAR CORP USM A3, C6 C3 36.0JUNIPER NETWORKS INC JNPR A1M3 25.9 P3 36.0METROPCS COMMUNICATIONS INC PCS A1M3 25.9 A1Q3 29.6ADOBE SYSTEMS INC ADBE M4 24.5 0-50-25-25, A3 33.0 P1A2 30.0WINDSTREAM CORP WIN A3, C3 P1 12.0LEAP WIRELESS INTL INC LEAP 0-25-25-50 39.0 P20-20-20-40 33.6AOL INC AOL A1M3 25.9 0-50-25-25 33.0ECHOSTAR CORP SATS A5 36.0BROCADE COMMUNICATIONS SYS BRCD A3 24.0 P2A1 36.0BMC SOFTWARE INC BMC M4 24.5 A3 24.0 P2, P3 30.0CROWN CASTLE INTL CORP CCI A3 24.0 P3 36.0TELLABS INC TLAB A3 24.0 A3 24.0 P1A3 36.0IAC/INTERACTIVECORP IACI 0-50-25-25 33.0 0-50-25-25 33.0COMVERSE TECHNOLOGY INC CMVT A1 12.0SYNOPSYS INC SNPS Q4 25.5 P1A3 36.0CINCINNATI BELL INC CBB A1M3 25.9 P3 36.0TW TELECOM INC TWTC A4 30.0 A4 30.0EQUINIX INC EQIX P1-50-25-25 33.0LORAL SPACE & COMMUNICATIONS LORLNUANCE COMMUNICATIONS INC NUAN C2 24.0 C2 24.0 P2 24.0ARRIS GROUP INC ARRS A4 30.0 P3 36.0AKAMAI TECHNOLOGIES INC AKAM A1Q3 29.6 A3 24.0 P3 36.0VIASAT INC VSAT A4 30.0 A4 30.0SBA COMMUNICATIONS CORP SBAC A4 30.0 A4 30.0EARTHLINK INC ELNK X1 14.2FAIR ISAAC CORP FICO A4 30.0 P1, P2 30.0COMTECH TELECOMMUN CMTL A5 36.0ROVI CORP ROVI A1M3 25.9PROGRESS SOFTWARE CORP PRGS M5 30.5 SA3 21.0
Prevalence of LTI Vehicle 69% 69% 52%
Vesting Schedule Avg Time to Vest Mode 25.9 24.0 36.0(months) 75th 30.0 31.5 31.5
Average 28.3 27.1 32.0Median 25.9 29.6 29.625th 25.7 24.0 24.0
Performance PlansCompany Ticker
SO/SAR RS/RSU
And then add vesting alternatives…
Prevalence in the US
7
Survey-driven headlines indicate performance award prevalence is booming
A “Top 250” analysis indicates performance share prevalence has grown from 63% in 2009 to 75% in 2012 for “executives” (NEOs)
An analysis of the S&P 1500 companies indicates performance share prevalence for CEOs increased from 47% in 2009 to 58% in 2011
Technology sector survey of 422 companies – “any use of performance shares” = 30%
Directly correlated to revenue size
Revenue Range
Performance Award
Prevalence
<$50mm 3%$50mm-$200mm 16%$200mm-$500mm 25%$500mm-$1B 33%$1B-$3B 42%>$3B 55%ALL 30%
The Problems w ith “Prevalence”
Depth into organization
CEO
NEOs
Officers
Range of # of participants in a company in the US: 1 to 15,000 (4.3%)
Mix of performance awards vs. stock options and RSUs
Ranges from 5% to 100% performance awards
“Rigor” of performance goals
Cases of 3x no payout and 3x max payout
Year-to-year changes in design
Piñata plan design
8
Key Issues for Boards of Directors
What Problem are we Trying to Solve?
Check-box plan design?
Specific shareholder/adviser concerns?
Key challenges
Interpreting survey and proxy data
Mix and weighting of equity vehicles
Understanding valuation
Extreme variations in accounting value based on design features
Performance measures
Performance period(s)
Interaction with other market trends
Ownership guidelines and holding requirements
Clawbacks
9
Governance Ups and Downs: Emerging Problems
Goals
1. Low ball goals
2. Timing of adoption of relative TSR plans
3. Relative TSR payouts with negative absolute TSR
4. Financial measures that don’t support value creation
5. Interim milestone-based goals
6. Non-GAAP measures
7. Vague subjective goals
8. Remco discretion
9. Mid-cycle modifications
10. After-the-fact overrides
10
Plan Structure
11. Valuation-based compensation numbers
12. Annual incentive plans hiding in an “LTI”
13. Part of the “LTI portfolio”
14. Liberal termination provisions
15. Liberal change in control provisions
16. Unnecessary complexity
17. Total cost of plan operation
18. Administration on spreadsheets
19. Participant skepticism and lack of perceived value
Understanding Valuation
From: “Value and Valuation: Making Sense of Long-Term Incentive Data” with Terry Adamson of Aon Hewitt, presented at:
WorldatWork Annual Conference 2012
National Association of Stock Plan Professionals (NASPP) Conference 2012
NASPP Boston Chapter meeting November 2012
WorldatWork White Paper to be published in early 2013
11
The Continuing Debate: Incentive or Pay Delivery
Shareholders and advisers want pay delivery tied to results…as they define results and increasingly defined as TSR
TSR-based measures are creating a lottery environment
Over time, few companies will be able to sustain favorable relative TSR
Pattern of TSR adoption and abandonment is correlated with both share price cycles and payout experience of programs
TSR is mistakenly assumed to be a measure of shareholder value
“Share price reflects expectations about future cash flows. So what TSR really measures is a shift in shareholder expectations about future cash flows…It is possible for shareholder value to be destroyed while TSR is indicating otherwise.”*
TSR-based performance awards are enforcing a collar on payouts to executives based on the experience of relatively short-term shareholders
12
* From ”Total Shareholder Return and Management Performance: A Performance Metric Appropriately Used, or Mostly Abused?” – Rotman International Journal of Pension Management, Fall 2012, R. Burgman and M. Van Clieaf
The Continuing Debate: Incentive or Pay Delivery
Market trading dynamics and global economic concerns are muting executive impact on share price
Average investors’ holding period in US: 3.5 years 3.5 months
70% of US market trading volume is high-frequency trading: 3.5 hours?
Euro crisis
China currency valuation issue
Climate change
Late breaking news in the US (week of 03 December 2012)
Spread of “special dividend” in December to optimize tax impact given “fiscal cliff” situation
SEC focus on “window dressing” by mutual funds that causes share price spikes on the last day (in the last half-second) of a fiscal period, and a significant drop the next trading day
13
The Continuing Debate: Incentive or Pay Delivery
Shareholder-driven plan design is exacerbating single-stakeholder view of performance, but what about…
Employee ownership?
Seen as “dilution” through proxy advisers’ static models
ESG?
Dismissed as “nonquantitative, non-objective measures”
Conscious Capitalism©?
14