6 Trends in Performance-Based Equity Awards

As I noted back in June, the use of performance-based equity awards has risen steadily over the past quarter-century, paralleling the rise of service-based full-value awards. In the 2024 Equity Incentives Design Survey, cosponsored by the NASPP and Deloitte Tax, just over 90% of public companies now offer performance-based equity, up from 29% in 2000 and 87% in our prior 2021 survey.

In this blog, I examine other trends we observed in the use of performance-based equity in our 2024 survey.

Trend #1: Technology companies lag other sectors in the use of performance awards

Although usage in the tech and life sciences sectors is increasing, these companies still lag other industries, with only 84% currently granting performance awards (up from 79% in 2021), compared to 95% of non-tech/sciences companies (up from 91% in 2021). Use of performance awards is nearly universal in sectors such as manufacturing and financial services, where 98% of companies grant them.

The lag in the tech/life sciences sectors may be largely attributable to lower adoption rates in Silicon Valley, where only about two-thirds of companies offer these vehicles. In contrast, over 90% of companies in the Northeast grant performance awards, a prevalence that aligns with other sectors.

Trend #2: Performance awards are generally reserved for senior execs

Public companies that grant performance awards typically reserve them for senior-level executives. Fewer than 15% of companies offer performance equity to middle managers, and usage drops to just 5% and 1% for junior management and the general workforce, respectively.

It is also common for executives to receive a mix of service-based and performance-based equity. The most prevalent approach—used by over 60% of companies—is to offer a combination of a performance award and one type of service-based vehicle, typically RSUs. About 20% of companies offer executives a mix of performance-based equity and two types of service-based vehicles, typically RSUs and stock options.

Trend #3: Use of TSR awards continues to grow

The survey has tracked remarkable growth in the use of total shareholder return (TSR) as a performance metric. In 2007, only 30% of companies that granted performance awards tied vesting to TSR. This rose to over 60% in the 2021 survey and 64% in the most recent survey. No other performance metric is as widely used; the second most common, revenue, is used by only 31% of companies.

Don’t miss the NASPP webinar “Smart TSR Award Design: Trends and Best Practices” to learn more about why companies favor TSR awards, alternative award structures, and other key design considerations.

Trend #4: Use of ESG metrics is growing but still low

One area where we haven’t seen much growth is in tying award vesting to ESG metrics. Only 8% of respondents use ESG metrics—up from 4% in 2021—so perhaps we’ll see more growth in future surveys (or perhaps not, given the current political climate).

Trend #5: Vesting is typically conditioned on two or more metrics

A full 76% of companies use two or more metrics to measure performance. Most (41%) use two metrics, while 26% use three and 10% use four or more.

Across all industries, TSR is the most popular metric, and EPS is the third most popular. For tech and life sciences companies, revenue ranks second, but it drops to fourth among other sectors, where ROIC/RONA take the second spot.

Trend #6: Three years is the standard performance period

An overwhelming majority—83%—of companies use a three-year performance period for their awards. We see little variation across industries, though the few companies that use a different period are more likely to be in the tech and life sciences sectors.

About half of companies that measure performance over less than three years impose additional service conditions (i.e., a “service tail”) that extend beyond the performance period, typically by two years or less. Only 13% of companies with a three-year performance period impose a service tail.

About the Survey

The 2024 Equity Incentives Design Survey is part of a trio of surveys jointly conducted by the NASPP and Deloitte. These surveys provide an in-depth look at the design and administration of all forms of worldwide stock compensation. The 2024 edition focuses on the design of time-based full-value awards, stock options, and performance awards.

We conducted the survey in early 2024 and received over 360 responses. All respondents are public companies representing a wide range of industries and sizes—from newly public to well-established enterprises. About one-third of respondents are in the technology sector, and nearly all are multinational companies headquartered in the United States.

More Information

Intrigued? Check out our webinar highlighting the survey results, "Top Trends from the 2024 Equity Incentives Design Survey" or the full survey results.