Recently, Fidelity Stock Plan Services and ClearBridge Compensation Group assessed the alignment between Performance Awards and a company’s performance. Accessing data and researching deep into company grant practices and Performance Award payouts, they specifically looked for factors which impacted the pay‑for‑performance relationship to help determine whether or not an ideal mix of equity vehicles exists.
For this study, ClearBridge analyzed Performance Award Data collected from Fidelity Stock Plan Services for two hundred Fidelity clients with share-based Performance Awards that had performance periods of one plus years. Though the total number of participants in these plans ranged from 1 to 5,692, the average was 168.
To analyze the pay-and-performance relationship, they analyzed Fidelity Stock Plans Performance Award data for 594 Performance Award payouts between 2008 and 2015. This data was then compared to the company’s performance measure relative to the performance of the S&P 500® Index. ClearBridge then used company grant mix data provided by Fidelity Stock Plan Services for 304 clients with five years’ worth of grant practices. Using this information allowed them to look at how these companies’ mixes changed over time.
What did they discover? Three truths, and a lie.
#1: Payouts and company performance are directionally aligned, but still imperfect. The data showed that Performance Awards continue to align with company performance, but only to a certain extent. Approximately two-thirds of awards were in line with performance, measured as either “Total Shareholder Return” (68% alignment) or “Earnings per Share” growth (62% alignment.) The findings showed that higher-performing companies’ payouts were more aligned with performance that low-performing companies.
#2. Metrics DO matter. Total Shareholder Return performance demonstrated the strongest relationship between payouts and performance (68%), while revenue performance shows the weakest relationship (51%).
#3. LTI vehicle mix may be related to company performance results. High-performing companies tended to include Performance Awards and/or Stock Options in their long-term incentive (LTI) mix more often than low-performing companies (92% vs. 81%). 73% of companies that grant Performance Awards do so in combination with one or more other LTI vehicles.
Stock Options are not a “performance” vehicle. Despite predictions of their eventual demise after and opinions from institutional shareholders that Stock Options are not performance-based, Stock Options continue to be an enduring choice with 52% of companies using them. Providing direct alignment with shareholder value creation, they may be worth reconsidering.
While Performance Awards appear to achieve the pay-and-performance alignment companies strive for, in themselves they are not a magic solution; instead, a combination of Long-Term Incentives, including restricted stock and stock options, is most effective.
Read the full study with supporting graphs and charts here: Performance Awards: 3 Truths...and a Lie?.