Performance-based Equity
Understanding to newest “new” thing in the Total Rewards Portfolio
PresentersBrit WittmanDirector, Exec Comp and Corporate Comp DesignIntel
Steve LensingSr. Manager, Equity and Executive CompensationeBay
Dan Walter, CEPPresident and CEO(917) [email protected]
What is meant by “performance-based equity”?
Award is given for meeting goals
Vesting is accelerated for meeting goals
Vesting occurs after a period of time AND goals are met
Vesting occurs ONLY when goals are met
Shares are earned, but not vested, when goals are met
Payout may be separate from earning and vesting
Why do companies implement performance-based equity? Performance was always the stated “reason” for offering
equity◦ “We want people to share in the success and growth of the company”
◦ NOTE: Very little mention of failure and demise of the company
External optics (Glass Lewis, RMG)
Practice at peer companies
Is performance simply stock price (total Shareholder Return)?
◦ When does stock price no longer provide a reasonable link to pay?
The Equity Compensation Dilemma
1988-1999 the “No Lose” zone (and the period of the greatest growth in the use and value of equity compensation plans)
What are the most common performance metrics?
TSR – Total Shareholder return
◦ Absolute
◦ Relative to peer group (s)
Financial Goals
◦ Revenue
◦ ROIC
◦ EBITDA
◦ Cost
Other◦ Risk
◦ Staff Retention
◦ Innovation / Product Development
HRIS◦ Performance Appraisal /
Human Capital Management score
About a million others
As a stand-alone goal it may not◦ Provide line of sight to staff below C-Suite
◦ Link corporate long-term success to plan
◦ Pay evenly. Peer groups can differ widely, skewing results
◦ Reflect risk or other factors in today’s payout
Companies are starting to combine it with other metrics◦ Create a balance using Financial, HRIS and Project goals –
Total Compensation Intelligence™
◦ Multiple Independent goals
◦ Co-dependent goals – Generally must meet TSR threshold to be eligible for other goals
Relative TSR is King for now, but…
Profits / Revenues – without a balance to costs and/or risk these can provide unsustainable performance and even allow gaming the system
Individual Goals – Can pay without corporate performance
Companies generally over-leverage the upside and minimize the downside. All carrot, no stick means staff can just go for homeruns, without trying to win the game
Single metric without a balancing component can result in unexpected results (and possible media headlines)
Are there any pitfalls for using specific types of performance metrics?
What do performance equity plan structures look like? Most common US structure is Performance Unit award with
a three-year measurement period
◦ Relative TSR against a peer group
◦ Minimum payout set at a level that shows effort
◦ Target payout set at a slight stretch goal
◦ Maximum Payout set at a significant stretch goal
Smaller companies often use shorter measurement periods
Some companies allow for “forgiveness” of missed goals (Frowned upon by RMG)
Outside the US there is more use of multiple layered goals
CEO and executive management
Scientists, key Individual Performers
Individuals with long-term project deliverables
Outside the US it is not uncommon for these to go below the mid-level of and organization
Who receives performance-based equity?
Between 35% and 60% of companies offer performance equity◦ These numbers have been very volatile
◦ Some sources show this percentage decreasing (PWC, FW Cook)
◦ Some sources show this number increasing (Equilar, Mercer)
Common in Finance and Life Science, growing use in Tech Many companies are pushing these plans down in the
organization◦ Microsoft – Top 1,200
◦ HP – Approx. 30,000?
Used at both large and small companies
Who awards performance-based equity?
Communication and engagement with goals and awards Best practices for communicating performance-based equity?
◦ “Communication is the key to a successful program” – Allison McBride, International Paper
◦ Educate participants on how the goals drive corporate success and why they apply to the individual
◦ Communicate often, consistently and with enough detail for individuals to understand how they are linked to the movement of the underlying metrics
Do employees like receiving performance-based equity? ◦ Results are mixed
When alignment and line-of sight are correctly positioned and the individuals can see their role plans seem to be positively received
When performance is low, the result can be similar to impact of underwater stock options
For lower level staff minimums may need to be structured to ensure some value even when performance is not great
What should my company consider before implementing performance-based stock? Looking at the payout curve, performance levels versus
payouts ◦ Alignment with the employee’s total compensation
Improperly designed programs can have the same over-leveraged results as stock options
Too little leverage provides no motivation to out-perform
Too steep a curve can create risk-adverse staff “A share in my hand is worth five potential shares that may be lost if I
miss my goal”
◦ Alignment of performance metrics to key company goals
One or multiple metrics
Payouts levels vs. company performance
◦ Alignment of payout with Shareholder return and market peers
Are you willing to “stick to your guns” if goals are missed?
What should my company consider before implementing performance-based stock?
Disclosure: CD&A must include metrics and reasons why they were used
Tax implications◦ Less predictable income planning BUT
◦ Better income deferral potential under 409A Administration
◦ Data Integration
◦ Financial Reporting
◦ Transaction Support Impact on CIC provisions and clawbacks Accounting impact is more complex than time-base equity
◦ Market-based awards have a fixed expense, but you cannot reverse it if goals are not met
◦ Performance-based goals (not based on stock price) require determining the probability of goals achievement and adjusting expense accordingly
Performance Based Equity at Intel Eligible: Management Committee Members (20 employees)
◦ Equity mix: 66% “OSUs” (performance RSUs) / 11% RSUs / 22% Options
3-year Performance Period; overlapping cycles
Performance Measures
◦ Relative TSR over performance period – median TSR of 15 direct competitors (the “Tech 15”) averaged with median TSR for the S&P 100
Payout Range
◦ Floor of 33%
◦ Maximum of 200%
◦ More highly leveraged above target than below (2 down; 3 up)
3-year Vest
◦ 100% vested and paid out at end of 3-year performance cycle
Eligible: SVPs and above (18 employees)
◦ Equity mix: 50% Options / 25% RSUs / 25% Performance RSUs
2-year Performance Period
◦ 2009-2010 and 2010-2011 periods were “decoupled” into two consecutive 12-month targets
Performance Measures
◦ FX-neutral revenue threshold
◦ Non-GAPP operating margin Both minimum FX-neutral revenue and non-GAAP operating margin thresholds must be met in
order of there to be any incentive payout
◦ Return on invested capital
2-year Vest
◦ 50% of the amount awarded is immediately vested upon grant and 50% will vest on the first anniversary of the grant
Performance Based Equity at eBay
Outside the US, performance is becoming the main foundation of share-based compensation
98% of FTSE 300 have performance share schemes
More than 90% of Australian companies have performance-based share remuneration
Say on Pay is the biggest driver of these plans
◦ Countries with some version of Say on Pay rules: UK, Australia, Sweden, Norway, Netherlands, Italy, Portugal, Spain, Austria, Germany, Ireland, Croatia, Hungary, Poland, Denmark, Finland, Estonia, Luxembourg, Switzerland, and Belgium
What is happening in the ROW?
What can we expect in the future? Say on Pay will become a reality
Use of performance-based equity will grow first in the C-suite and then push quickly down into upper and middle management
US plan designs will quickly catch up with ROW plan designs
PREDICTION – Silicon Valley will embrace these plans as a best-practice and innovate them just as they did stock options.
◦ Performance plans provide a similar upside and downside risk that is better structured for our current volatile market
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