In exploring ideas and solutions, it’s important to understand the challenges that exist in offering equity compensation in today’s environment.
A company’s overall program or plan design may contain certain limitations that impede its ability to adapt when the unexpected happens. For example, a company that uses absolute metrics for their performance awards won’t be able to adjust to market fluctuations.
Similarly, when times are chaotic, employee understanding of the equity programs can take a nose dive. Perceived value of awards and ESPP participation often decline, in addition to other internal misalignments in messaging and connection.
Finally, valuation and administration are impacted when plan design omits protective features, such as an auto-cancel provision for underwater options. Lack of such a provision could leave worthless stock options outstanding for years – with no prospect of exercise. This leads to unnecessary overhang and a slightly higher valuation.
The above are just a few of the scenarios that can lead an equity program’s outcomes farther away from intended objectives.
So what’s a company to do? Devine, Stoudt and Tepper offer some ideas.
Common objectives in issuing full value awards include attracting and retaining employees, creating a culture of ownership, and aligning employees with shareholders. Those seem like great goals, but reality can be different. Timing of taxation on an RSU can make the award less attractive to an employee. Sometimes award programs foster entitlement rather than an attitude of ownership. When the stock market is down, employees and shareholders often aren’t aligned – full value awards held by employees have value even in a down market; shareholders may lose money in a down market.
How do companies avoid these (and other) undesired outcomes? The answers include creative plan design elements like post-vest holding periods, deferrals, and embracing a goal of minimizing tax impact to employees. Employee choice programs that allow the employee to select their equity mix also have potential to propel outcomes closer to objectives.
Ultimately, the objective for a performance award program is driving long-term company performance goals. The award is a vehicle used to focus and motivate employees to perform in a manner that achieves or exceeds the performance objective(s).
There are variables that comprise a performance award – a performance period (most commonly 3 years), metrics to achieve during the period, and measurement of whether the goal was met.
There are a myriad of potentially undesirable outcomes related to performance awards that create a mismatch with objectives. In some cases, employees may not have a good line of sight into the metrics (TSR, for example). Sometimes metrics can be too many or too complex, leading employees to focus on some, but not all, of the metrics. In addition, multi-year goal setting can lead to challenges in convincing employees that goals are achievable.
Plan design ideas to consider are longer (yes, that’s right – longer) performance periods, multi-year goal setting, and use of an integrated plan – which has a primary metric and a modifier. Spoiler: These solutions will be explored by Devine, Stoudt and Tepper at #NASPPVirtual next month.
Navigating through uncertain times is about planning and progress. Planning in advance for "what ifs" can lend more flexibility to the unknown, and mitigate many of the outcomes that create a rift between outcomes and intended objectives.
Progress is about making seemingly small shifts that can have big impact. When havoc appears, the volume of considerations can be paralyzing. My belief is that progress – in the form of learning, embracing new ideas, and taking action is particularly crucial during times of chaos. We have to keep moving foward, we have to bridge whatever gaps have surfaced.
Marrying planning and progress together when it comes to equity plans could well be the ticket to maintaining calm during the most challenging times.
All of these plan ideas, along with insights for ESPPs and Stock Options, will be explored in detail at the upcoming Virtual NASPP Conference (#NASPPVirtual) in the session “Equity Design Ideas to Better Align Outcomes with Objectives.” The presentation features Garry Devine of Horizon Therapeutics, Liz Stoudt of Infinite Equity, and Marsha Tepper of Morgan Stanley. To attend this session and more, visit our conference page.
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