Barbara Baksa, Executive Director of the National Association of Stock Plan Professionals (NASPP) identifies six trends in the usage of performance awards, from the 2016 Domestic Stock Plan Design Survey, co-sponsored by the NASPP and Deloitte Consulting.
Trend #1: Performance awards are on the rise for executives.
Over the past four survey cycles, we’ve seen a more than 100% increase in the use of performance awards at the NEO and senior executive levels. For NEOs, usage has risen from 37% of respondents in 2007 to 80% in 2016. For senior execs, usage has risen from 32% of respondents in 2007 to 69% in 2016. Very few companies grant performance awards below the ranks of senior execs.
Trend #2: Performance-based options are not popular.
The vast majority of respondents (95%) issue full-value performance awards paid out in stock. Only 19% issue awards paid out in cash and only 8% issue performance-based options. I suspect this because when performance options are underwater, they don’t provide much of an incentive.
Trend #3: TSR is hot right now.
Usage of TSR (Total Shareholder Return) as a performance metric has increased 80% since our 2010 survey, up from 29% to 52% of respondents. There is a lot of variation in practice when it comes to choosing performance metrics; this is the first time in the history of the survey that any performance metric is utilized by more than half of our respondents.
Trend #4: Three is the magic number when it comes to performance periods.
The majority of respondents (78%) measure performance over a three-year period. I suspect this is because ISS (and possibly other proxy advisors/investors) encourage use of a three-year performance period.
Trend #5: Multiple metrics are common.
Just over 60% of respondents report that their performance awards are subject to more than one metric: two metrics is most common but 19% use three or more.
Trend #6: Performance is typically measured at the corporate level.
Just under 90% of companies report that they measure performance at the corporate level only, rather than incorporating departmental, team, or individual goals. At 62% of respondents, the metrics for performance awards are different than those used for the company’s annual incentive plan (another 20% use a combination of annual incentive plan metrics and other metrics).