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Category Archives: Performance Awards

July 25, 2017

Ways to Count Performance Awards

Counting the shares underlying time-based awards is usually straightforward: one share granted equals one share issued. Performance awards, on the other hand, usually provide for a spectrum of possible payouts: one share granted might mean two shares issued, or .5 shares issued, or no shares issued. Given the many possible payout levels, how many shares should be considered granted for the various administrative and reporting purposes that are relevant to performance awards?

The last two issues of The Corporate Executive (January-February and May-June) took a look at this question and came up with 16 different purposes for which shares under performance awards are counted. In almost all cases the shares are counted differently. I thought it would be interesting to take a look a few of these purposes in the NASPP Blog. Now, 16 purposes is far too many to go through in one blog entry, so I’ll start with just one purpose and I’ll look at more in future entries.  For today’s entry, we’ll look at counting the number of shares available in the plan.

Counting Performance Awards Against the Shares Available for Future Grants

There are no legal requirements that govern how performance awards must be counted against a plan’s reserve (other than those contained within the plan itself). Thus, for purposes of reducing the number of shares available in the plan as a result of performance awards, companies can make a policy decision as to whether to count the threshold, target, or maximum shares against the reserve.

Survey Says …

According to the NASPP’s Domestic Stock Plan Design Survey (cosponsored by Deloitte Consulting), practices in this area are split:

  • 48% of respondents tracking awards against the plan reserve at the maximum payout
  • 43% tracking them at the target payout
  • 7% track awards at the expected payout
  • 1% use some other approach

Best Practice (IMHO)

I feel pretty strongly that the best practice is to count performance awards against the plan reserve at the maximum possible payout. Where awards are counted at the target payout (or, worse, at the threshold payout), there is a risk that the company will not be able to meet its obligations should a higher level of performance be achieved. Once the performance period has closed, failing to have sufficient shares in the plan to cover the payout is problematic. At a minimum, allocating additional shares to the plan would require shareholder approval, which is not accomplished at the drop of a hat. There are likely to be accounting and securities law implications, as well.


But this approach has its drawbacks. As evidenced by the NASPP survey, many companies are reluctant to earmark shares for a payout that isn’t expected (in some cases, not even remotely) to be achieved. In the current environment, where share usage by public companies is heavily scrutinized and restricted by proxy advisors and institutional investors, reducing the plan reserve by the maximum possible payout could prevent the company from making subsequent grants at the desired level or force the company to request shareholder approval for additional allocations to the plan earlier than would otherwise be necessary.

– Barbara

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June 29, 2017

Six Trends in Performance Awards

Earlier this year, I presented five trends in restricted stock and unit awards. For today’s blog, I present a second installment in what I can now officially call a “series”: six trends in performance awards from the 2016 Domestic Stock Plan Design Survey cosponsored 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 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).

– Barbara

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June 8, 2017

EPS Targets and ASU 2016-09

Under ASU 2016-09, all windfall and shortfall tax effects of stock compensation will run through earnings in the P&L. When vesting in performance awards is tied to earnings per share, this could make it harder to set the targets in the future because it will be harder to forecast earnings. And, for awards that have already been granted, it might make the current targets easier to achieve (or harder to achieve if the company is experiencing tax shortfalls).

Adjusting EPS Targets

Companies might be tempted to adjust EPS targets for existing performance awards, to reflect the company’s new expectations in light of ASU 2016-09. But, unless the terms of the award already address what happens when there is a change in GAAP prior to the end of the performance period, this could be hard to do. Modifications of targets could cause the awards to no longer be exempt from Section 162(m) and could have other implications.

If the targets aren’t modified, companies will likely have to adjust their forfeiture estimate for the awards.


Many companies use a non-GAAP calculation of EPS for purposes of their performance awards.  Where the EPS calculation already excludes expense from stock compensation, it should also exclude any tax effects attributable to stock awards. And where this is the case, ASU 2016-09 won’t impact the likelihood of the targets being achieved.

Survey Says

In our May quick survey, we asked what companies plan to about their performance awards in which vesting is tied to EPS. Here’s what they said:

  • 16% use a non-GAAP measure of EPS that already excludes stock compensation expense
  • 2% are planning to adjust their EPS targets
  • 35% are not planning to adjust their EPS targets
  • 48% don’t know what they are going to do about their EPS targets

– Barbara

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January 24, 2017

ISS, Burn Rates, and Performance Awards

ISS 2017 Equity Compensation Plan FAQ notes that where companies want ISS to include performance awards in their burn rate when the awards are earned, ISS now requires specific disclosures with respect to the performance awards.

A Quick Primer on ISS, Burn Rates, and Performance Awards

ISS includes performance awards in a company’s burn rate when the awards are earned, if the company includes this information in the disclosures related to its stock plan. If this information isn’t disclosed, ISS includes the performance awards in the burn rate calculation when they are granted.

The problem with including the performance awards when they are granted is that ISS doesn’t reduce the burn rate for subsequent forfeitures (due to either termination of employment or failure to meet the performance goals). Consequently, it is generally preferable to have performance awards included in the burn rate when they are earned.  This will result in a more accurate (and possibly lower) burn rate, because only the shares that are actually earned and paid out will be included in the calculation.

What’s Changed?

In the past, ISS simply required companies to clearly and consistently disclose how many shares were granted and earned under performance awards, without defining what the disclosure should have looked like. In its 2017 Equity Compensation Plans FAQ, however, ISS has stipulated the following requirements for the disclosure:

  • Table format
  • Separate from the disclosure for time-based awards
  • Aggregate of all performance awards granted to all employees (providing the disclosure only for awards held by NEOs is insufficient)
  • Covering three years
  • Included every year going forward, even if the plan will not be acted on in a particular year
  • Included even if no performance awards were granted or earned in a particular year

ISS has also said that they generally won’t calculate the number of shares earned under performance awards, even if it would be possible for them to do this from information presented in narrative format.

The FAQs include a sample disclosure that looks remarkably like the old roll-forward tables companies used to include for all of their stock compensation under the original FAS 123.

Is This Legally Required?

The disclosure isn’t legally required or required under ASC 718. But if you want ISS to include your performance awards in your burn rate when they are earned, rather than when they are granted, the disclosure is necessary.

– Barbara

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December 20, 2016

Top Ten Trends in Stock Plan Design

The full results from the 2016 Domestic Stock Plan Design Survey, which the NASPP co-sponsors with Deloitte Consulting LLP, are now available.  Companies that participated in the survey (and service providers who weren’t eligible to participate) have access to the full results. And all NASPP members can hear highlights from the survey results by listening to the archive of the webcast “Top Trends in Equity Plan Design,” which we presented in early November.

For today’s blog entry, I highlight ten data points from the survey results that I think are worth noting:

  1. Full Value Awards Still Rising. This survey saw yet another increase in the usage of full value awards at all employee levels. Overall, companies granting time-based restricted stock or units increased to 89% of respondents in 2016 (up from 81% in 2013). Most full value awards are now in the form of units; use of restricted stock has been declining over the past several survey cycles.
  2. Performance Awards Are for Execs. We are continuing to see a lot of growth in the usage of performance awards for high-ranking employees. Companies granting performance awards to CEOs and NEOs increased to 80% in 2016 (up from 70% in 2013) and companies granting to other senior management increased to 69% (from 58% in 2013). But for middle management and below, use of performance award largely stagnated.
  3. Stock Options Are Still in Decline. Usage of stock options dropped slightly at all employee levels and overall to 51% of respondents (down from 54% in 2013).
  4. TSR Is Hot. As a performance metric, TSR has been on an upwards trajectory for the last several survey cycles. In 2016, 52% of respondents report using this metric (up from 43% in 2013). This is first time in the history of the NASPP’s survey that a single performance metric has been used by more than half of the respondents.
  5. The Typical TSR Award. Most companies that grant TSR awards, use relative performance (92% of respondents that grant TSR awards), pay out the awards even when TSR is negative if the company outperformed its peers (81%), and cap the payout (69%).
  6. Clawbacks on the Rise.  Not surprisingly, implementation of clawback provisions is also increasing, with 68% of respondents indicating that their grants are subject to one (up from 60% in 2013). Enforcement of clawbacks remains spotty, however: 5% of respondents haven’t enforced their clawback for any violations, 8% have enforced it for only some violations, and only 3% of respondents have enforced their clawback for all violations (84% of respondents haven’t had a violation occur).
  7. Dividend Trends. Payment of dividend equivalents in RSUs is increasing: 78% of respondents in 2016, up from 71% in 2013, 64% in 2010, and 61% in 2007.  Payment of dividends on restricted stock increased slightly (75% of respondents, up from 73% in 2013) but the overall trend over the past four surveys (going back to 2007) appears to be a slight decline. For both restricted stock and RSUs, companies are moving away from paying dividends/equivalents on a current basis and are instead paying them out with the underlying award.
  8. Payouts to Retirees Are Common. Around two-thirds of companies provide some type of automated accelerated or continued vesting upon retirement (60% of respondents for stock grants/awards; 68% for performance awards, and 60% for stock options). This is up slightly in all cases from 2013.
  9. Post-Vesting Holding Periods are Still Catching On.  This was the first year that we asked about post-vesting holding periods: usage is relatively low, with only 18% of companies implementing them for stock grants/awards and only 13% for performance awards.
  10. ISOs, Your Days May be Numbered.  Of the respondents that grant stock options, only 18% grant ISOs. This works out to about 10% of the total survey respondents, down from 62% back in 2000.  In fact, to further demonstrate the amount by which option usage has declined, let me point out that the percentage of respondents granting stock options in 2016 (51%) is less than the percentage of respondents granting ISOs in 2000 (and 100% of respondents granted options in 2000—an achievement no other award has accomplished).

Next year, we will conduct the Domestic Stock Plan Administration Survey, which covers administration and communication of stock plans, ESPPs, insider trading compliance, stock ownership guidelines, and outside director plans. Look for the survey announcement in March and make sure you participate to have access to the full results!

– Barbara

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March 25, 2016

Pay for Pulse No More?

We’ve seen quite a bit of evolution in the mix of equity incentive compensation vehicles and terms over the last decade. The use of stock awards has surpassed that of stock options. Performance based compensation continues on its upward rise towards total prevalence. Another change that has slowly gained traction in the wake of Dodd-Frank, Say-on-Pay, and other measures is what I’m terming a slow death for the time based vesting of options and awards, or, as some call it, “pay for pulse.”

In a recent Equilar blog titled “Companies Just Say No to “Pay for Pulse,” the author cites a recent study of Equilar 100 companies that found 70% of the executive pay mix was “at risk.” In another report (Equilar’s 2015 Equity Trends Report), “nearly 70% of S&P 1500 companies used performance awards in 2014, up from about 50% in 2010.” This is consistent with the trends that we’ve observed as well.

Equilar also suggested that a closer look at LTIPs revealed that performance awards (in the form of units, stock, and options) comprised almost 80% of individual incentive plans. Equity awards that vest over time—or time-based awards—made up the remainder. Additionally, “slightly more than 10% of the Fortune 500—or 51 companies—used performance equity exclusively. The list varied by industry, but notably included multiple energy, retail and media companies.”

We really didn’t need more evidence to know that performance awards appear to have found a long term home in the equity compensation mix. What remains not entirely clear at this point is the fate of time based vesting for options and awards. There is an argument that while performance based incentives work well for executives – those with the most control over corporate decisions and strategy – there may still be benefit to offering time based vesting awards to those farther down in the ranks of the organization where some job functions may be more task oriented and less strategic in nature.

Time will tell whether time-based vesting is on its way out the door, or will stand the test of time (no pun intended) and remain a smaller, but still present, component of company stock plans. Is there still a home for “pay for pulse” in the equity compensation vesting mix?

We have a great webcast planned on the very relevant topic of performance awards and their evolution. On April 7th, Performance Awards: An Ever Changing Landscape will include Jillian Forusz from Adobe Systems Inc., Belen Gomez from Equilar, Dan Kapinos from Aon Hewitt and Robert Purser from E*TRADE. We’ve also got a podcast interview with Belen Gomez from Equilar going up on our website on Monday, March 28th. If you subscribe to the podcast now, you’ll get an email notification when Belen’s interview is up.


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November 24, 2015

ISS Scorecard: What’s New for 2016

Last Friday, ISS issued an updated FAQ for its Equity Plan Scorecard.  For most companies, the overall scorecard structure remains unchanged: a max of 100 points and 53 points is a passing grade.  For companies disclosing three years of equity data, the points available under each pillar also remain the same, but the scores for each test within the pillars may have been adjusted (ISS doesn’t disclose the number of points each test is worth).

Here’s what ISS is changing for 2016 (effective for shareholder meetings on or after February 1, 2016):

New Company Category

The IPO/Bankruptcy category has been renamed “Special Cases” and includes any companies that have less than three years of disclosed equity grant data. This is still largely newly public companies and companies emerging from bankruptcy, but it could include other companies. For example, if a public company implemented a new stock compensation program in 2016 and had not previously granted any equity awards, they would presumably be in this category (because they wouldn’t have any equity grant data to disclose for prior years).

In addition, the Special Cases category is now divided into S&P 500/Russell 3000 companies and non-Russell 3000 companies.  The S&P 500/Russell 3000 companies can earn 15 points for the Grant Practices pillar; to provide these points, their max score for the Plan Cost pillar is reduced by ten points to 50 and their max score for the Plan Features pillar is reduced by five points to 35.  Scoring for the non-Russell 3000 companies in this category is the same it was for IPO/Bankruptcy companies last year: 60 points for plan cost, 40 points for plan features, and no points for grant practices.

CIC Provisions

The “CIC Single Trigger” category under Plan Features is renamed “CIC Equity Vesting” and is a little more complicated (last year it was pass/fail).

For time-based awards:

  • Full points for 1) no acceleration, or 2) acceleration only if awards aren’t assumed/substituted
  • No points for automatic acceleration of vesting
  • Half points for anything else (does this mean half points for a double trigger?)

For performance-based awards:

  • Full points for 1) forfeiture/termination, or 2) payout based on target as of CIC, or 3) pro-rata payout
  • No points for payout above target (ISS doesn’t say if this applies if performance as of the CIC is above target)
  • Half points for anything else

Post-Vest Holding Periods

The period of time required to earn full points for post-vest holding periods increased from 12 months to 36 months (or termination of employment).  12 months (or until ownership guidelines are met) is still worth half credit.

Happy Thanksgiving!

– Barbara

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May 19, 2015

How Many Grant Dates Can One Option Have?

How many grant dates can one option have? The answer, as it turns out, is more than you might think.  I was recently contacted by a reporter who was looking at the proxy disclosures for a public company and was convinced that the company was doing something dodgy with respect to a performance option granted to the CEO.  The option was not reported in the SCT for the year in which it was granted, even though the company discussed the award in some detail in the CD&A, had reported the grant on a Form 4, and the option price was equal to the FMV on the date the board approved the grant.  The reporter was convinced this was some clever new backdating scheme, or some way of getting around some sort of limit on the number of shares that could be granted (either the per-person limit in the plan for 162(m) purposes or the aggregate shares allocated to the plan).

Bifurcated Grant Dates

When I read through the proxy disclosures, I could see why the reporter was confused.  The problem was that the option had several future performance periods and the compensation committee wasn’t planning to set the performance goals until the start of each period. The first performance period didn’t start until the following year.

Under ASC 718 the key terms of an award have to be mutually understood by both parties (company and award recipient) for the grant date to occur. I’m not sure why the standard requires this.  I reviewed the “Basis for Conclusions” in FAS 123(R) and the FASB essentially said “because that’s the way we’ve always done it.” I’m paraphrasing—they didn’t actually say that, but that was the gist of it.  Read it for yourself: paragraph B49 (in the original standard, the “Basis for Conclusions” wasn’t ported over to the Codification system).

The performance goals are most certainly a key metric. So even though the option was granted for purposes of Section 409A and any other tax purposes (the general standard to establish a grant date under the tax code is merely that the corporate action necessary to effect the grant, i.e., board approval, be completed), the option did not yet have a grant date for accounting purposes.

And the SCT looks to ASC 718 for purposes of determining the value of the option that should be reported therein. Without a grant date yet for ASC 718 purposes, the option also isn’t considered granted for purposes of the SCT. Thus, the company was right to discuss the grant in the CD&A but not report it in the SCT. (The company did explain why the grant wasn’t reported in the SCT and the explanation made perfect sense to me, but I spend an excessive amount of time thinking about accounting for stock compensation. To a layperson, who presumably has other things to do with his/her time, I could see how it was confusing and suspicious).

Trifurcated Grant Dates?

The option vested based on goals other than stock price targets, so it is interesting that the company chose to report the option on a Form 4 at the time the grant was approved by the compensation committee. Where a performance award (option or RSU) is subject to performance conditions other than a stock price target, the grant date for Section 16 purposes doesn’t occur until the performance goals are met. So the company could have waited until the options vested to file the Form 4.

If you are keeping score, that’s three different grant dates for one option:

Purpose  Grant Date
 1. Tax  Approval date
 2. Accounting / SCT  Date goals are determined
 3. Form 4  Date goals are met

If the FASB is looking for other areas to simplify ASC 718, the determination of grant date is just about at the top of my list. While they are at it, it might nice if the SEC would take another look at the Form 4 reporting requirements, because I’m pretty sure just about everyone (other than Peter Romeo and Alan Dye, of course) is confused about them (I had to look them up).

– Barbara

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