One of the hottest topics in the equity compensation industry today is performance award plans. According to the 2013 Domestic Stock Plan Administration Survey published by Deloitte and the NASPP, 87% of the responding companies have plans that can offer performance awards, a 22% increase from the prior survey. These structures traditionally seek to encourage employee loyalty and the achievement of specific business goals.
Today, individual and institutional investors demand increased accountability from company executives to align shareholder and employee interests, as well as a long-term focus. But beware of some important pitfalls when establishing and administering these plans.
Overly complex metrics: Make sure the goals established for performance plans are not so confusing that neither shareholders nor executives understand them. In addition, many systems will not be able to properly track or account for them. This leaves the tracking of the awards to the mercy of a spreadsheet, adding risk to an already complex product.
Metrics not aligned with employee duties: A line employee receiving an award based on increases in corporate EBIDTA, which the employee cannot control, will not create an incentive for higher performance. A better metric is one that is consistent with areas over which there is real responsibility, such as on-time processing, or accident-free work days. On the other hand, a proliferation of personally tailored awards can make managing these awards much more difficult.
Disregarding cost-benefit of dividend equivalents: Paying or accruing “dividend equivalents” or even “performance-based dividend equivalents” on unvested restricted stock units is a way for employees to be actively engaged and aware of their awards. However, the cost of maintaining and paying out these small amounts can be a heavy burden. In addition, reinvesting dividend equivalents may create complications with compounding “dividends on dividends.” Make sure the systems, reconciliation, and personnel costs are worth what is usually a nominal disbursement.
Ignoring retirement implications: Consider whether deliveries of shares should continue after retirement according to the regular vesting schedule, or whether retired employees should benefit from or be denied shares due to events after their departure.
Unclear standards: When evaluating performance metrics, think about whether to use internal standards, such as revenue or net profit, or external standards, like the recently popular “total shareholder return.” Market-based criteria are easy for employees to track, but may result in irreversible compensation expense if the market-based goals are not reached. Evaluate the reaction by outside shareholders as well as the employees you are challenging to meet particular goals.
Not backing up your metrics: Backing up the results of the metrics with real data is important for corporate transparency. Provide employees with an analysis of the inputs and calculations to arrive at metrics such as “Total Shareholder Return,” so they are both engaged and knowledgeable about the company’s performance.
Poor communication: Make sure your employees understand the terms of the grant and monitor ongoing progress towards the goal, by updating the interim value of the potential payout along the way. The longer the vesting period, the more important it is to keep employees motivated and working to achieve the goals.
Computershare’s relationship managers can help you avoid these traps—as well as many others encountered in the administration of performance plans.
- As of July 26, 2014, clients will have the ability to apply an interim performance measurement for restricted stock awards/restricted stock units grants with performance vesting schedules. The same measurement percentage will be available for price modeling and display on the participant interface and in our SMART reporting tool.
- The actual measurement percentage will be displayed on the participant interface, the Adjustments & Corrections Tool (ACT) and in system exports.
- The platform will provide the means to link the participant’s grant with an outside source of data related to the measurement criteria. This can link can be to a vendor web site, or your own internal site.
- Rounding rules that can be applied to performance grants will be expanded to include options for standard rounding, always round down, always round up or banker's rounding.
- Cash Dividend accrual will now be supported for restricted stock awards, with or without performance vesting criteria.
Computershare clients can get complete details of the latest Employee Ownership System release from their relationship manager.