Can equity awards be optimized for insulation against market declines? If 2020 is teaching us anything, it’s that companies may need to get creative in figuring out how to restore broken incentives. Restoring is one thing, optimizing is another. Both are possible – even in a volatile market.
Furthering our exploration into this question, the latest episode of our Equity Expert podcast series takes a deeper look at how companies can optimize their equity awards in a down market.
In the episode Optimizing Equity Awards in a Down Market, I chat with Nathan O’Connor of Equity Methods about the unexpected – and the opportunities to think beyond typical practices in restoring value to equity awards.
O’Connor effectively sums up 2020 as the year that equity compensation became much more relevant. Whereas in the past it may have been one slice of a large compensation pie, the link to market conditions has left many equity awards in a turmoil status and employee morale in the tank. O’Connor emphasizes that restoring these broken incentives is a key aspect of keeping leadership teams focused on the future.
The path to fusing a gap between incentives and perceived value requires a balancing act between keeping leadership focused, while withstanding corporate governance pressure from shareholders and proxy advisory firms. After all, shareholders don’t get a do-over with their holdings and are likely to want management to share in their pain.
What is the path to successfully balancing incentives with shareholder perceptions in a down market? O’Connor suggests that restoring incentives without jeopardizing the messaging about such actions in the proxy statement is the ticket. To accomplish this, there are a few options available.
Look at historical equity awards and make modifications
Apply discretion to payouts on existing awards
Make a supplemental (special) grant
There are multiple flavors, along with pros and cons to consider in analyzing these choices. Of critical importance in evaluating any of them is the objective of minimizing incremental accounting expense. Modeling of different scenarios and variables will provide insight into which options present the best opportunity for success.
If your company is looking for a way to restore incentives and plan future awards to be better insulated against market shockwaves, you’ll want to digest this episode. Click here to listen now!
Key discussion points include:
Trends and observations of an unprecedented 2020
How equity compensation has grown in relevance this year
Key considerations companies face in restoring broken incentives
The mechanics of restoring incentives and 3 choices available
What is "discretion" and how is it different from modifying an award?
Exploring different flavors and varieties of award modifications
Thoughts on relative performance equity and it's place in executive compensation
Predicting the future of the equity compensation landscape
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