Equity compensation in an executive compensation program

by on June 30, 2009 · 0 Comment POSTED IN: HR Info Center

Equity comp is both part of the compensation program and retention scheme

Most organizations use equity compensation both as a form of retention and as a piece of the compensation program. When you look at what’s gone on in the marketplace with the declining stock market especially in the public company setting and even privately held setting with all the regulation around 409(a) and the deferred comp regulations, everybody’s looking at equity.

Should equity be part of the compensation program going forward

HR and salary experts are in a kind of in this quandary. Do we grant more shares, more options because the value of those has diminished and we’ve got a market rate that we need to give out? As we do that, we bump up against some of the other thresholds that are out there as far as burn rate and overhang rate and all those.

Those metrics have been monitored by the institutional shareholder-investor standards for a long time. They’ve provided data out there on what is reasonable, given the industry and all that. As we have to double down on stock allocations to get the right value to the person, then that causes us capital structure concerns in increasing those amounts. So that’s a quandary.

Some companies are moving away from equity in a compensation program to more of a phantom stock-restricted stock units. Because we have to deal with 162(m) and deduction limits and other things, if we use stock or stock units, we need to tie that to performance on the front end. Obviously, that’s a good governance standard. You know, the governance index is becoming more prominent now. And is the board doing the right thing in managing executive compensation program

Equity is a dwindling part of an employee compensation program
A survey said only about 2% of the company’s overall public and private now actually have an all employee stock plan which could include options where as in the past, historically, Wal-Mart had all employees in their plan. A lot of the tech companies have that. All that’s changed.

Kodak basically looked at all these issues and said, “We need to do something different.” Mostly accounting driven here but also a way to take some of these down through the organization a little bit further because as you get squeezed by your capital structure, your burn rate and overhang, you start bumping up against those limits, you have less options or restricted stock or other things to allocate to the group.

So as you have less, they tend to knock people off the bottom of that allocation. And that’s what’s happened in a lot of organization. In fact, what we see now is the equity as part of the compensation program cut off at the director level. Some companies do it at the director level. And some companies don’t. But that tends to be the line in the sand somewhere at that level.

What they wanted to do is not only manage the accounting issues a little bit better. They also wanted to extend some other down in the organization a little further and not have their overhang issues so they use more performance stock units and restrictive stock units which are more akin to deferred comp.

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

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