Performance-Based Long-Term Incentive Plans: Are They Effective? How to Improve Shareholder Alignment
The form and amount of equity-based compensation awarded to public company executives is a highly publicized and controversial topic. A clear decline in stock option grants has occurred in favor of performance-based long-term incentive plans (“LTIPs”). This can be attributed to a number of factors, including mandatory expensing of stock options, increased pressure by shareholder advisory groups to grant performance-based awards, and the perception that stock options may induce unnecessary risk taking. Designing an effective and aligned performance-based LTIP is a complex and time-consuming undertaking, and raises a number of governance issues and risks for companies and Boards.
The panel will discuss the following issues:
Institutional shareholders and the leading proxy advisory services view of long-term incentive plans.
The changing role of Compensation Committees in developing performance-based long-term incentive plans
New litigation risks related to executive compensation, say-on-pay, and stock-incentive plans
- Insights from Grant Thornton’s examination of over 300 plans implemented by about 100 S&P 500 companies from 2007 to 2012, including how did the LTIPs pay out as compared to shareholder return? How did this compare to compensation realizable from time-vested restricted stock or stock option? Which plans worked best: for example, financial-based plans vs. plans based on a relative return (“RTSR”) metric?
How to consider capital markets characteristics in determining the right mix of long-term incentives.
Donald Nemerov, Managing Director, Compensation and Benefits Consulting,
Grant Thornton LLP
The form and amount of equity-based compensation awarded to public company executives is a highly publicized and controversial topic. A clear decline in stock option grants has occurred in favor of performance-based long-term incentive plans (“LTIPs”). This can be attributed to a number of factors, including mandatory expensing of stock options, increased pressure by shareholder advisory groups to grant performance-based awards, and the perception that stock options may induce unnecessary risk taking. Grant Thornton examined over 300 plans implemented by about 100 S&P 500 companies from 2007 to 2012 to understand their alignment with the total shareholder return (TSR) realized by each company and offer insights for their improvement. We will cover:
- How did the LTIPs pay out as compared to shareholder return? How did this compare to compensation realizable from time-vested restricted stock or stock option?
- Which plans worked best: for example, financial-based plans vs. plans based on a relative return (“RTSR”) metric?
- Success factors to consider for the “next wave” of such plans.
- How to consider capital markets characteristics in determining the right mix of long-term incentives; and how to use this information in discussions with shareholders and proxy advisory firms.
Larry W. Miller, Managing Director,
Innisfree M&A Incorporated
Institutional shareholders and the leading proxy advisory services prefer that companies
base their long-term incentive plans on performance-based awards, at least in part, rather
than wholly on time-based awards.
- ISS – Compensation policy begins with a statement that “shareholders … want
assurance that top management’s compensation is primarily performance-based”
First three factors to be considered as part of qualitative review are:
- The ratio of performance- to time-based equity awards;
- The ratio of performance-based compensation to overall
- The completeness of disclosure and rigor of performance goals
- GL – “[A]n integral part of a well-structured compensation package is a
successful link between pay and performance”
- Shareholder policies
But adopting a performance-based plan does not guarantee a favorable recommendation nor favorable votes from shareholders
- Both ISS and GL, at least as a first step, start with quantitative measures mapping CEO compensation against TSR, on a company-specific basis and as compared with a peer group
- A company without a performance-based LTIP may pass the quantitative screen and generally expect a positive recommendation, while a company with a performance-based LTIP may find itself with an elevated concern and subjected to a qualitative review of its compensation program
In the qualitative review, the devil is in the details – each aspect of a performance-based plan is a potential minefield:
- Target and maximum payout opportunity as a percentage of base salary
- Too high?
- Increasing in the face of poor stock performance?
- Too easy?
- Duplicative of metrics for annual incentive plan?
- Absolute vs. relative?
- Length of performance period
- Too short/long?
- Re-testing permitted?
- Discretion (or absence of)
- Adjustability of targets?
- Subjective factors?
Matthew G. Isakson, Lead Senior Consultant,
Meridian Compensation Partners, LLC
- Compensation Committees want to see a greater proportion of “performance-based” LTI. Correspondingly, the use of restricted stock in the annual LTI program is being increasingly scrutinized.
- Contrary to some outside observers’ perspectives, most management teams, directors and frequently institutional shareholders include both multi-year performance plans and conventional stock options as “performance-based” LTI. Stock options are included because notwithstanding their time-based vesting, in order to realize value, the underlying stock price must increase and this generally means improving company performance.
- Broadly, we are seeing greater Committee participation in performance metric selection and in the stress testing of annual and/or multi-year performance goals.
- Relative total shareholder return (TSR) has become the most prevalent long-term performance measure with approximately 50% of long-term performance plans including this metric to some degree; at the same time there is close evaluation of when the metric is a “good fit” or not and the potential tradeoffs of strong alignment but potentially weaker incentive qualities
Robert McCormick, Chief Policy Officer,
Glass, Lewis & Co.
- Shareholders are increasingly closely examining how all forms of compensation are granted including long term equity incentives. They particularly want to know what, if any, performance metrics are tied to either or both the granting of equity awards and the earning of the awards. Shareholders are interested in knowing how the granting and vesting of awards under long term incentive plans are linked to the overall compensation strategy of the company. They further want to understand how long term awards incentivize executives to achieve the strategic goals of the company. Therefore, shareholders closely review the choice of award (e.g. options, restricted stock, performance shares, etc.), the performance criteria, the challenging nature of the performance metric(s) and the how the long term incentives work in conjunction with other forms of compensation, with a preference for having the largest portion of compensation tied to long term performance.
Mark R.S. Foster, Partner,
Morrison & Foerster LLP
- Overview of new litigation risk relating to executive compensation, say-on-pay, and stock-incentive plans
- Proxy statements: a target rich environment for disclosure claims
- Fuel for the fire: benchmarking reports, simulations, and projections
- Containment strategy: how to minimize litigation risk, and sanitize documents for litigation
Who Should Attend:
- HR/compensation professionals & consultants
- Corporate governance/proxy advisory professionals
- Corporate Tax Professionals & Finance Executives
- C-level executives and Board/Compensation Committee members
Don has over 25 years of experience designing executive compensation and pay-for-performance programs, and advising management and Boards of public, private and tax exempt companies.
Don has worked with companies across virtually every industry and size. These engagements include total compensation benchmarking, annual and long-term incentive plan design, equity incentives, phantom stock arrangements and non-qualified deferred compensation plans. Don has also worked with numerous clients on regulatory matters, including ASC 718, Section 409A, SEC proxy disclosure, and Intermediate Sanctions. Don is a frequent speaker and has published numerous thought leadership articles on topics related to executive compensation and pay-for-performance.
Mr. Nemerov is affiliated with World @ Work and National Association of Stock Plan Professionals.
Mr. Nemerov received his Bachelor of Science in Economics from Wharton School, University of Pennsylvania and his Masters degree in Industrial Relations from the University of Minnesota.
Don has over 25 years of experience designing executive compensation and pay-for-performance programs, and advising management and Boards of public, …
Larry W. Miller is a Managing Director of Innisfree M&A Incorporated. Mr. Miller focuses on providing strategic advice in M&A transactions, proxy contests, and annual and special shareholder meetings. In addition, he counsels clients on corporate governance and compensation issues, specializing in assisting issuers in obtaining favorable results on say-on-pay and equity plan proposals.
Prior to joining Innisfree, Mr. Miller was a litigation attorney associated with Cravath, Swaine & Moore representing both issuers and dissidents in proxy contests and M&A transactions. After Cravath, Mr. Miller served as a Justice of the Supreme Court of the Republic of Palau.
Mr. Miller earned a B.A. from Amherst College, and a J.D. from the New York University of School of Law.
Larry W. Miller is a Managing Director of Innisfree M&A Incorporated. Mr. Miller focuses on providing strategic advice in M&A …
Matthew Isakson is a Lead Senior Consultant located in Meridian’s Lake Forest office with over a decade of executive compensation experience. He consults with compensation committees and senior management on a broad range of executive compensation matters including compensation strategies and pay philosophies, long-term incentive plan design, short-term incentive plan design, executive and director compensation benchmarking, severance and change-in-control benefits, proxy disclosure and Say on Pay.
Matthew works with a broad range of industries, including: energy, retail, technology, transportation, and utilities.
Prior to joining Meridian, Matthew was an executive compensation consultant and manager at Hewitt Associates, now Aon Hewitt.
Matthew holds a B.B.A in Finance from the University of Iowa and is a Certified Executive Compensation Professional (CECP) as designated by WorldatWork.
Matthew Isakson is a Lead Senior Consultant located in Meridian’s Lake Forest office with over a decade of executive compensation …
Bob oversees the policy development of Glass Lewis’ proxy voting guidelines and the analysis of 20,000 Proxy Paper research reports. Bob formerly managed the proxy voting for Fidelity Investments. He serves on the board of the Northern California Chapter of the NACD and the ICGN Shareholder Rights committee. Bob serves on the Advisory Board of the University of Delaware’s Weinberg Center on Corporate Governance. Bob frequently speaks at industry conferences and has appeared on NPR, CNBC, Fox Business News, Business News Network, BBC, Board Member’s This Week in the Boardroom, and Bloomberg television. Bob was named one of the 100 most influential people on corporate governance by Directorship magazine from 2008 through 2012.
Bob oversees the policy development of Glass Lewis’ proxy voting guidelines and the analysis of 20,000 Proxy Paper research reports. …
Mark Foster is a partner in Morrison & Foerster’s San Francisco office. He focuses on representing public companies, and their directors and officers in securities fraud class actions, shareholder derivative lawsuits, and special investigations. Mr. Foster routinely defends clients against investor lawsuits that allege violations of federal and state securities laws, breach of fiduciary duty, and insider trading. Mr. Foster has extensive experience with litigation under the Securities Act of 1933, the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act, the Securities Litigation Uniform Standards Act, the California Corporations Code, and Delaware corporate law. Mr. Foster has won dispositive pre-trial motions, prevailed on the merits at trial, and preserved victories on appeal.
Mr. Foster’s recent experience includes the successful defense of directors and public companies against challenges to their proxy statements in lawsuits that targeted the adequacy of disclosures about executive compensation in connection with say-on-pay votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as votes on amendments to stock incentive plans.
Mark Foster is a partner in Morrison & Foerster’s San Francisco office. He focuses on representing public companies, and their …
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About Grant Thornton LLP
Founded in Chicago in 1924, Grant Thornton LLP (Grant Thornton) is the U.S. member firm of Grant Thornton International Ltd, one of the world’s leading organizations of independent audit, tax and advisory firms. The firm operates 54 offices across the United States with more than 500 partners and 6,000 employees.
Through in-depth understanding of the complex accounting and tax rules governing compensation and benefit plans, executive compensation and more, our Compensation and Benefits Consulting professionals help you manage costs, improve your business effectiveness and meet regulatory compliance requirements.
About Innisfree M&A Incorporated
Innisfree is a full service proxy solicitation/investor relations firm providing clients with sound tactical and strategic advice and results-oriented implementation in proxy and consent solicitations (whether friendly or contested), tender and exchange offers, mergers, rights offerings, strategic restructurings and other domestic and cross-border transactions requiring action by public security-holders. Innisfree provides expert consulting services on a wide range of matters, including executive compensation proposals, corporate governance issues and investor relations.
About Meridian Compensation Partners, LLC
Meridian Compensation Partners is an independent executive compensation firm providing trusted counsel to hundreds of large companies. We consult exclusively on executive and Board compensation matters, including their design, value and related corporate governance practices.
Our consultants throughout the U.S. and in Canada have decades of experience in pay solutions that are responsive to shareholders, reflect good governance principles and align pay with performance. Our partners average almost 25 years of executive compensation experience and collectively serve over nearly 500 clients, with 9 offices across North America.
About Glass, Lewis & Co.
Glass Lewis is the leading, independent, governance analysis and proxy voting firm, serving institutional investors globally that collectively manage more than $15 trillion in assets. With research focused on the long-term financial impact of investment and proxy vote decisions, Glass Lewis empowers institutional investors to make sound decisions by uncovering and assessing governance, business, legal, political and accounting risks at more than 23,000 companies in 100+ countries.
About Morrison & Foerster LLP
Morrison & Foerster is a global firm of exceptional credentials. With more than 1,000 lawyers in 16 offices in key technology and financial centers in the United States, Europe and Asia, the firm’s clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life science companies. Morrison & Foerster has been included on The American Lawyer’s A-List for 10 straight years, Chambers Global named MoFo its 2013 USA Law Firm of the Year, and Chambers USA named the firm both its 2013 Intellectual Property and Bankruptcy Firm of the Year. In addition, BTI named MoFo among its 2013 Brand Elite. The firm’s lawyers are committed to achieving innovative and business-minded results for its clients.