Wednesday, October 23, 2019

How competitive are your equity plans?  Find out as we examine the results of the NASPP and Deloitte 2019 Domestic Stock Plan Design Survey.  Published since 1996, this is the industry’s most comprehensive survey on stock plan design, covering restricted stock and units, performance awards and stock options.  The panel will highlight the survey results and compare the latest results to past surveys to illustrate growing trends.

Featured panelists:

• Barbara Baksa, Executive Director, NASPP
• Dan Ferretti, Manager, Compensation Operations, Campbell Soup Company
• Rose Hoffman, Directors, Global Stock Plan Services, Paypal Inc.
• Joseph Rapanotti, Senior Manager, Deloitte Consulting LLP

 
Index
Survey Overview
Plan Design
Time-Based Full Value Awards
Performance Awards
Stock Options
 
 Kathleen Cleary, Education Director, NASPP:  Good afternoon, everyone.  Welcome to today’s webcast, “Top Trends in Equity Plan Design,” highlighting the results of our 2019 Domestic Stock Plan Design Survey.  Our panel today will discuss the 2019 survey results and trends, and do some comparisons to our previous Domestic Stock Plan Design survey in 2016.
 
First, introductions.  My name is Kathleen Cleary, and I’m the Education Director for the NASPP.  I’m really excited to welcome an esteemed panel of industry experts today, Barbara Baksa, the Executive Director for the NASPP; Dan Ferretti, Manager, Compensation Operations for Campbell Soup Company; Rose Hoffman, Director, Global Stock Plan Services for PayPal; and Joseph Rapanotti, Senior Manager with Deloitte Consulting.
 
The slide presentation for the webcast is posted on Naspp.com and you can download or print the slides if you’d like and refer to them in the future.
 
Let’s go ahead and dive into the webcast.  Slide 2 lists our speakers for today.  And I will turn it over to you, Barb, to get us started.
 
Barbara Baksa, Executive Director, NASPP:  Thanks, Kathleen.  Before we get too far, I’m going to let my panelists introduce themselves.  I think everyone knows me, I’m Barb Baksa, Executive Director for the NASPP.  Joseph, do you want to give a short introduction for yourself?
 
Joseph Rapanotti, Senior Manager, Deloitte Consulting:  Good afternoon, everyone.  Welcome to today’s session.  Joseph Rapanotti here from Deloitte Consulting.  I’m a leader in our human capital consulting practice.  My focus is on rewards design and transformation, helping clients across many industries reimagine and re-operationalize their rewards program to attract the right workforce and retain talent.  Thank you for joining us today.
 
Baksa:  Thanks.  Dan, do you want to give an introduction for yourself?
 
Dan Ferretti, Manager, Compensation Operations, Campbell Soup Company:    Sure, I’m Dan Ferretti, the manager of Compensation Operations for Campbell Soup Company on our HR services team.  I manage our executive compensation programs, as well as our year-end compensation process and our workforce technology as it relates to compensation.
 
Baksa:  Thank you, and Rose?
 
Rose Hoffman, Director, Global Stock Plan Services, Paypal Inc.:  Hi, I’m Rose Hoffman and I am the director of Global Stock Plan Services for PayPal Holdings.  We are headquartered in San Jose, California and have a little over 22,000 employees.  My team and I handle the equity programs for all of PayPal.

Survey Overview

 
Baksa:  Thank you, Rose.  Here’s our agenda for today.  I’m going to start with a quick overview of the survey, and then Joseph and I are going to be trading off.  We’ll cover each of the four major sections from the survey with Rose and Dan providing color commentary as we go.  We do have a lot to cover today, so we’re just going to get right to it.
 
Slide 5 provides a quick overview of the survey.  This survey is co-sponsored by the NASPP and Deloitte Consulting and today we’re going to be presenting some key findings.  One thing to be aware of is that the results we are presenting today are preliminary.  We are reasonably confident of the data points that we’re sharing, or we wouldn’t be sharing them, but we are just finishing up our final vetting process, so it’s possible that some data could change.  This is something you want to keep in mind as you are making decisions based on any of the data we present today.  We expect that we will have the final results available next month.
 
Slide 6 provides a little bit more information about the survey.  The NASPP has been conducting this survey since 1996 and we’ve been collaborating on it with Deloitte since 2004.  The survey is divided into three editions; the domestic design, domestic administration, and then the international edition.  Today, we are presenting results from the domestic design edition.  This survey covers the design of restricted stock and unit awards, performance awards and stock option programs.  We last conducted this survey in 2016.
 
This is by far the industry’s most comprehensive survey on stock plan design administration.  We are covering data that is not publicly disclosed in proxy statements and I’m not aware of any other survey that goes into the amount of depth that we go through in our survey. The survey itself consisted of over 170 questions; anyone who completed the survey knows that the data that we’re presenting today is a mere fraction, probably less than 10 percent of the full results.
 
We had 425 companies participate in the survey.  This survey is the most comprehensive in terms of the response rate that we get; it’s actually quite unusual to get that many respondents to a survey in the equity compensation field.  This makes the survey a great resource for our members, well worth the cost of membership.
 
Virtually all of the respondents to the survey are public companies—also something to keep in mind.  Last year, we did a survey of private companies and that data is very different than what we’re going to be presenting today.
 
In addition, a little over one-third of the respondents are in the high-tech industry.  Respondents are headquartered throughout all regions of the United States and a very small percentage are headquartered overseas.  Companies of all sizes participate in the survey—a little over two-thirds have over 5,000 employees globally.
 
Before we get into the data, I’d like to just pause for a minute and have Rose and Dan give you a little bit of background on their companies, a quick overview of their equity programs, as they’re going to be providing some color commentary on all this data.  I think it will be helpful for you to have a little background on what their equity programs are.  Rose, we’ll start with you.
 
Hoffman:  Thanks, Barb.  Here at PayPal, we actually stopped granting stock options in 2015.  We grant restricted stock unit awards and performance RSUs as well.  Currently, it is at a certain grade level and above that we grant to; I want to say it’s more of an individual contributor that we grant to.  It is pretty broad-based, for the most part. 
 
Baksa:  Dan?
 
Ferretti:  Sure, Campbell Soup Company is based in Camden, New Jersey.  If you’ve seen us in the news recently, we’ve had a number of divestitures and acquisitions lately.  Once the dust all settles on that, we’ll have about 16,000 employees in the U.S. with some in Canada and Mexico as well.
 
We grant annually to about 800 of those employees.  Our annual grant cycle actually just finished.  We grant the beginning of October and just went through our fiscal year-end process and grant cycle recently.
 
Our current plan is a mix of time lapse RSU and performance RSUs with relative TSR.  We grant to senior management and above, and that compromises those 800 people I mentioned, which makes up about 5 percent of our population.
 
Baksa:  Okay, great.  We asked Rose and Dan to be on this panel because we felt like they were a nice contrast.  We’ve got Rose who’s high tech with a more broad-based program and then Dan who’s East Coast, not high tech and less broad-based.  We thought they would provide the gamut of color commentary.  With that, I’m going to turn it over to Joseph to take us through plan design.
 
Return to Index

Plan Design

 
Rapanotti:  Welcome, everyone, we’re excited to be here today and as Barbara has mentioned, this section will cover general plan design.  These are topics that are common across all award types, so let’s go ahead and get started.
 
First up, looking at the prevalence of equity awards, equity vehicles do vary by employee level across the organization.  This is predominantly led by proxy advisory firms and shareholders who want to see a majority of the top leaders tied to one or more long-term incentive vehicles.
 
But what kind of vehicles do you offer?  An organizational culture tied to pay-for-performance or leadership objectives that are tied to long-term performance are better suited for performance-based awards; whereas an LTI program focused on retention would likely have more restricted stocks or stock option-based grants.  Let’s look at the data though.
 
For 2019, we see at least 50 percent of companies offering all three major categories to some level of the organization, with senior leadership receiving the most awards.  If we focus on leadership though, there is a healthy balance of granting across all three plan types with higher weighting towards performance awards than restricted stock awards.  This is because leadership is more likely to have a long-term performance target and their LTI should reflect the long-term performance focus.  Inversely, more junior level roles select performance-based awards with higher emphasis towards restricted stock because restricted stock awards are easier to understand and make a more meaningful connection between the organization’s long-term performance than individual contributor performance.
 
It’s important for employees to understand the awards they are granted and RSUs are a little bit more straightforward to understand.  Overall, this trend is aligned with what we’ve seen in prior surveys and there are only slight changes in the data from 2019 to 2016.
 
How about we get some thoughts from our panelists?  Rose and Dan, how have your company’s granting practices changed over the last two years?  Is this data aligned and are there any changes you’re thinking about for the future?  Dan, any thoughts on comparing to Campbell?
 
Ferretti:  For Campbell, we did actually make some changes for this year’s grant.  In previous years, we had stock options in the mix for our executives and we also had a second type of performance award that was based on an internal free cash flow metric.
 
For this year’s grant we’ve eliminated both of those and the grant we just made is just a mix of time lapse RSU and performance RSUs with a relative TSR metric.  When we were looking at the plan design, we considered, what award types are most valuable to our participants, what do they feel the most comfortable with, what do they feel has the most intrinsic value?  Then we wanted to balance the alignment to shareholders, thus making sure that there are still performance metrics in there and tied to TSR.
 
We also looked to simplify it a little bit.  The free cash flow performance award was a little bit hard to understand for participants and also presented some accounting challenges based on the way it was designed, so we decided that to simplify it to just the mix of two different types of awards, which seemed to be the best way to go.
 
Rapanotti:  Right, that’s great.  Then thinking through that, the intrinsic value to the employee is what’s easy to understand and making sure that those award vehicles are tied to the right population based on whatever the expectations are of them, so they can receive meaningful value.  That’s very good, thank you.  Rose, anything you’d add just thinking about the changes over the years, how this data aligns with what you’re doing and changes you’ve been thinking about or recently made at PayPal?
 
Hoffman:  One change, as I said earlier, is that we stopped granting stock options in 2015.  One other thing we did a couple of years ago is that we kicked in what we called an annual incentive program.  The way the program works is that 50 percent of our bonus is now considered equity, but it’s based on the company’s performance and how the company does.  Based on that, it can pay up anywhere from 0 percent to 200 percent, which is nice if it’s above 100 percent, and we’ve been lucky in the last two years that what we actually received was above 100 percent.
 
We’ve also been looking at our overall equity vehicles for next year and trying to decide what makes the most sense for our employees to have financial wellness.  That is something that our comp committee is looking at and trying to figure out what we can do to help employees to be in a better financial situation, whether it means granting RSUs or more of this annual incentive program because currently, we grant over 14,000 employees in the annual incentive program.  Only about 8,000 employees are not receiving it.  It’s one of those things they are starting to look at to see what makes the most sense.
 
Rapanotti:   That’s great, and I love to hear too that your future state design is focused on overall wellbeing of the employee.  Wellbeing is an important  topic in the rewards space right now and companies are trying to grapple with how to balance the rewards offerings around employee wellbeing and optimizing cost for those programs as well.
 
I think in this case you’re leading the market, to some extent, really focusing on how to make sure that these awards fit in to the overall wellbeing of employees.  Kudos to PayPal for being forward thinking in that!
 
Hoffman:  Thank you.
 
Rapanotti:  Thank you both.  Let’s move on to our next slide.  We have our first polling question.  Similar to past webinars, we will run polling questions throughout the session to get feedback from all of you and help you engage in our dialogue today.
 
Our first polling question is, “Which of the following has your company changed significantly in the past three years: the types of awards we grant, the levels of employees who receive grants, both of the above, neither of these or not applicable at all?  We’ll give everyone just a minute to review and provide a response.
 
Baksa:  Starting with slide 8, which Joseph just covered, I feel like a lot of the theme of this year’s survey is that nothing’s changed.
 
If you look at slide 8, there is very little movement over the last three years for any employee level or any vehicle.  There are a couple percentage points that changed, but that’s often just noise and can be due to the fact that companies who participate in the survey change from year to year—companies get acquired, other companies go public or spin off—each survey has a different population of respondents. That is sometimes where you see those one percentage point differences from one survey to the next.  I included this polling question because I thought it would be interesting to see if our audience has made any changes.
 
We can see from the polling results that there have been some changes among our audience members.  Twenty-one percent changed the types of awards they grant, 16 percent changed the level of employees who receive grants and 12 percent changed both of the above.  There’s still 40 percent that didn’t change anything and 12 percent for whom the question was not applicable.
 
Rapanotti:   About 50 percent changed something, 40 percent that haven’t done anything yet, and then 12 percent not applicable for our listening audience. 
 
All right, let’s move on.  Our next trend is looking at sourcing and use of shares from a fungible pool.  A fungible pool is a balance of shares approved under the LTIP plans that may be used for granting multiple equity vehicle types, for example, a fungible pool that grants stock options, restricted stocks and performance awards.
 
Fungible pools have been around for a while now since ISS came up with a performance scorecard approach providing guidance on whether shareholders should vote yes or no on a long-term incentive plan.
 
In 2016, 31 percent of companies reported having a fungible pool.  This year, we see slightly fewer companies reporting the use of a fungible pool at 29 percent.  Since the ISS has changed their approach to balanced scorecards, where many more factors are included in the scoring process, I expect that fungible plans may continue to decrease in prevalence over time due to administration demands, tracking the share pool shares and knowing that ISS has changed their point of view on it.  It’s just a slight downtick in the number, but we’re interested to see how this pans out over time.
 
One of the challenges is forecasting share reserves and burn ratios; full value awards and performance awards not typically deducted from a share plan as one share per awarded share.  In 2019, the full value award counted as 2.36 shares against the plan and performance awards, 2.49 against the plan.  This is 10 percent and 50 percent higher, respectively, than what was reported in 2016 and may likely show the overall upward trend in the market performance for publicly traded companies over the last several years.
 
Let’s go back to our panelists on this topic.  Rose, I’m interested to hear how PayPal is handling the fungible plan approach, whether or not this working for you and why?
 
Hoffman:  We do have a fungible plan and we did actually just change it in May of 2018 to make the ratio higher for stock options.  All our full value rewards reduce the share reserve on a one-for-one basis, it’s only the stock options that have a higher ratio.  Considering that we have stopped granting stock options, it’s just one of those things where we still have some outstanding in the plan because they have a four-year vest.  When participants exercise their options or terminate from the plan, we aren’t granting any more options.
 
The reason we implemented a fungible pool is because we believe that it was a good compensation and governance practice that we needed to make sure we accounted for.  Again, like you said, Joseph, ISS was definitely all in favor of the fungible plan, so we went ahead and put it in place.  We feel that it did what we needed it to do and is still doing what we need it to do at this point, so that we can keep within our limits.
 
Rapanotti:  Thank you for that great case example of implementing a recently new fungible plan and helping use that as a way to govern your current share balances and managing through your burn rate.
 
Let’s move on next to overhang.  Overhang is thinking about the number of shares outstanding plus the shares available, divided by common shares outstanding.  It helps us understand the dilution potential of the stock plan if shares were to hit the market.
 
Overall, 90 percent of companies are maintaining less than 15 percent overhang of shares outstanding with nearly 70 percent at less than 7.5 percent for overhang.  But what’s the organizational correlation with these numbers, if we think about who’s at the lower end and who’s at the higher end?
 
Typically, we see signs that the company, for example, number of employees and market capital revenue as a driver of overhang, where large companies have a lower percentage and smaller companies have a higher percentage.
 
Let’s test it.  In the 2019 data this year, companies with 25 billion in revenue or higher had an average of 4.5 percent overhang based on the data we see here.  Companies under $1 billion revenue had an average of 15 percent overhang or higher.  That’s a really wide spread.  In the end, large companies have more shares that have been issued over time, increasing common shares outstanding and typically are monitoring dilution rates more closely due to market pressures.  We often see large clients monitoring overhang around the 2.5 percent to 3 percent, so that’s aligned with the data that we’re seeing from the 2019 survey this year.
 
Let’s jump to slide 12 and talk about burn rate really quick and then we’ll go back to our panelists.  Building on the overhang topic, burn rate helps companies understand how quickly shares in a pool are being used before needing to request new shares for issuance.
 
For 2019, 80 percent of companies maintain less than 2.5 percent burn rate.  Similar to what we did for overhang, let’s look at how these numbers play out when comparing the size of the company.  Companies under $1 billion in revenue on average had 6.7 percent burn rate, while companies over $20 billion in revenue are closer to 1 percent burn rate.  Burn rate and overhang both have the same inverse relationship between companies (size and rate) and this is likely because of the scrutiny and focus on monitoring these rates as the company grows larger over time.
 
Overall, the numerical trends compared to prior surveys, if we think back to 2016 and earlier, are really consistent with what we’ve seen overall from survey to survey, including this year.  But let’s check with our panelists, and we’ll go to Dan to talk about Campbell.  Dan, I’ve heard that Campbell made some changes around managing, understanding and monitoring overhang and burn rate, what are some of the drivers of that?
 
Ferretti:  By the nature of our plan, it actually isn’t a huge issue for us.  Our current overhang is less than 5 percent and I think our current burn rate is actually less than 1 percent.  It’s just the combination of full value awards and the relevantly small population that we grant to that makes it pretty much a non-issue for us.  If there’s a big drop in the stock price, we could potentially run into some burn rate issues, but for the most part, we haven’t had any concerns in recent years.
 
Rapanotti:  Yes, great example, just thinking about the different size component that can help influence where the burn rate tends to be and thinking that although the size of the organization may be large, the number of participants receiving the awards may be small and that allows you to have more flexibility in where your burn rate and overhang may need to be.  Thank you for that, Dan.
 
Next up, let’s look at make whole and buy out awards.  This is new data point for 2019, make whole and buyout awards for new hires.  We added this question for 2019 to get a better understanding of new hire practices related to equity granting.  What we found is that one-third of companies do not offer any options to make whole or buy out equity for new hires, while two-thirds do offer some sort of program.
 
Only a very small number of companies have a program that allows for buyout or make whole awards on a broad basis as a policy.  We saw that high-tech companies are nearly twice as likely not to offer a make whole or buyout grant compared to general industry companies.
 
The key takeaway for new hire grants is first, to ensure that your plan allows for the new hire granting; next, that you have the procedure and the protocols in place to allow for the approval of those new hire awards in time for the grant process; and then, that employees really understand how these awards would benefit to a broader long-term incentive as eligibility for your company’s total award value proposition.
 
Sometimes the make whole or buyout grant can start looking a little bit like the old west, and just making sure that everything is in place to govern and monitor those appropriately.  Rose and Dan, how are you both managing make whole and buyout grants for new hires?  Rose, is PayPal offering any sort of policy on this?
 
Hoffman:  Actually, we’ve only done it on certain occasions, for instance, when we spun off from eBay.  When an employee was going from eBay and coming over to PayPal after we had spun off within that first year, we wanted to make sure that we made those employees whole, so we basically granted them an equity award that then kept their same vesting schedule they had with eBay, and that way, they weren’t technically losing anything.
 
That was about the only time that we have ever done anything like this.  Outside of that, it is not a normal policy or a normal practice for us.
 
Rapanotti:  Got it, great example, an exception-based only criteria for make whole and buyout.  Dan, how about Campbell, any make whole or buyout granting?
 
Ferretti:  We generally will do maybe one or two of these a month and it’s generally for forfeiture repair for a new hire.  We’re only doing them for people who we’re hiring to a level that’s eligible for our plan, so they’re hired into a director level or similar, where they would normally be eligible for an LTI plan.  Then we’re willing to do a buyout grant, again, assuming it’s appropriate based on what they have with the current company, what’s going to vest over the next few years, et cetera.
 
Rapanotti:  Great, that’s a great example too.  Just above a certain a level, employees who are eligible for that program under normal circumstances, making sure that they aren’t leaving too much on the table and that’s giving you a vehicle to attract and acquire new senior talent in the marketplace, and not have that be a hindrance to bringing in that leadership from an LTI perspective, so thank you for that.
 
All right, we have our second polling question and we’re going to go back to the audience again.  This question looks at new hire granting practices and we want to know specifically, what grants is your company buying out from a vested or unvested perspective?
 
If you issue buyout grants in any circumstance, it doesn’t matter if it’s targeted to certain populations or to everyone, what are they for?  Both unvested and vested shares, unvested shares only, only a portion of the unvested shares, it depends on the circumstances and buyout grants are crazy talk.
 
Baksa:  The webcast today is a session that we presented at the NASPP Conference. After we presented the session, someone asked me if companies buy out everything or only buy out the most recent grants or just a portion of the unvested shares?  I didn’t really have an answer and it’s not something we ask in the survey, so, I thought what better time to collect data than when I have some of my closest friends on the webcast to answer the question for me. 
 
Rapanotti:  Yes, Barb, to your earlier point, I like how Dan phrased it.  It’s just a forfeiture repair.  In and of itself right there, we know the company is really focusing on what’s being forfeited.  I think that’s impractical in most senses to be able to manage a buyout plan or make whole plan.
 
Baksa:  Yes, my thought is—and we talked about this when we were live at the Conference—it probably depends on what people ask for.  People who ask for buyout grants are going to be more likely to get them and people who ask for all of their vested grants to be replaced are probably more likely to get that.
 
Our poll shows that 32 percent of those listening say it depends on the circumstances.  I’m going to guess that those circumstances are who asked for what and how much the company wants to hire that person.
 
Ferretti:  I also think we look at the likelihood that you’re going to receive shares in the future.  If you say, “I have a thousand shares,” but they’re all performance shares and your performance plan historically paid out at zero, then we may not be as inclined to do forfeiture repair if it’s something that you’re likely to receive in the future had you stayed with that company.
 
Baksa:  Yes, that makes sense.  Just a note for everyone on the call, the next time you’re looking for a new job, ask about buyout grants.
 
Ferretti:  It can’t hurt to ask.
 
Rapanotti:  All right, let’s move on.  Thank you, everyone, for your responses to the polling question.  Let’s look at the next trend on plan design, clawback provisions.  As you know, we are still waiting for the SEC to finalize the rules on clawbacks after Dodd-Frank.
 
What we see in place today is because companies really want to have a strong governance practice around recouping awards.  For example, companies want to have a mechanism to recoup an award after the business or leader misses a business metric or goal, or if a company settles an award based on hitting a bonus target and that target was incorrect or misdated, how do you get the shares back?
 
Clawback provisions create mechanisms for this to happen with broad sweeping definitions.  What are companies doing?  Seventy-two percent of companies overall include a clawback provision of some kind for any employee, compared to 68 percent in 2016.  Most companies are implementing clawbacks for top leaders in the company with fairly standard triggers addressing financial restatement, termination or violation of code of conduct.  This is all very consistent with the 2016 report with only slightly higher numbers than we saw last time.
 
The reality, though, is we may see many of these data points jump to 100 percent if rules are published stating minimum standards for a clawback.  So, we’re interested to hear and see what happens with that.
 
Rose, how are clawbacks established over at PayPal?  What employees are covered and what triggers are you using as part of the clawback?
 
Hoffman:  For us, it is essentially all VPs—any and all VPs have clawback provisions in their grant agreements.  Basically, what triggers the clawback is any kind of actual omission that becomes a material violation of our code of conduct.  That’s what it’s based on and pretty much where we are with our clawbacks at this point.
 
Rapanotti:  Great example, thank you.  It’s interesting that it’s right at the top level, that VPs and above are being covered by your clawback provisions, given that they have influence on business overall.
 
Baksa:  On slide 15, the people who are subject to clawbacks feels about right to me.  I would expect them to apply to the most senior people.  But on the right side, we really haven’t seen the events that trigger a clawback change much.  When you look at those four events that are the top four, they are fairly narrowly defined.
 
When you think about some of the significant scandals we’ve seen in the past few years, from data breaches to Me Too stuff to outright fraud in the case of some companies, I’m surprised that we’re not seeing more companies expand their clawback triggers and doing something more like a material breach of the company’s code of conduct, like what PayPal is doing.
 
Rapanotti:  Right, and good point.  There’s a longer list in the survey of the other areas, but it’s a combination of heavy financial or some soft triggers or terms that are being covered by the clawback.  It’s an interesting point, we’ll see when we will start to see a spike in these other areas impacting business performance—to your example, data breaches.
 
Next is change-in-control and double triggers.  A little bit of background first, companies have a choice between implementing a single trigger or a double trigger provision in the event the company has a change of control.
 
A single trigger simply means that, when a company experiences a sale or a merger, equity holders would receive an accelerated value of all or a portion of their equity outstanding.  This is generally unpopular with investors and some proxy advisory firms believe single trigger could count against plan designs during the scoring process.  To respond, companies have added a second trigger to a company that sale or merger of company, termination without cause, for example.  This means two triggers must be met before any acceleration of awards will be allowed.
 
Double triggers help entice executives to continue employment after a change of control rather than walk away and take the payout.  It makes acquiring companies able to retain leadership more effectively and it helps make buyouts more effective or M&A activity more attractive as well.
 
Reviewing the data for 2019, 66 percent of companies are implementing a double trigger for stock vehicles.  This has been increasing over time, as I mentioned, and we saw that again this year.
Going back to the panel, I’m curious to know for Campbell whether or not there’s a double trigger in place.  Dan, what and where were these implemented and any challenges in making the decision to move to that direction with double triggers?
 
Ferretti:  Yes, we have double trigger and we’ve had it as far back as I can recall.  What was interesting recently is with all the divestitures we’ve done, we’ve had to redefine or “remind” our population what a change of control is, meaning it’s a change in control of ownership of the entire company, not just a subsidiary of it.  I think that was more the communication of what a change of control really is.  The double trigger though, again, that’s really been around as long as I can remember in our plans.
 
Rapanotti:  Yes, it has definitely been something that’s been around for a while and is trending upwards.  I think at some point, this number may go from two-thirds to even higher, but it’s not going away.
 
Great example too, if you’re expecting a lot of activity in divestiture or the M&A space, it’s probably worthwhile to get ahead of reinforcing the provisions of the plan based on double triggers—going into the process, so you’re not doing as much damage control in the back end.  Rose, anything for PayPal that you’d add to this discussion around change-in-control?
 
Hoffman:  We have double trigger as well and it has been like that basically since we spun off from eBay.  We look at all of it as it relates to a change in control anytime we do updates to the plan.  At this point, like Dan said, it is what it is, and you can only make it better.
 
That’s how we look at it and figure that we do take a look at it to make sure we’re still all in agreement as to what it should be doing.  That way, everybody is covered.
 
Rapanotti:  Thank you for that example from PayPal on change-in-control.  Let’s jump quickly to slide 17, builds on the change in control data a little bit more.  It’s a quick look at handling performance awards that do accelerate as a result of change-in-control.  What are companies doing with the actual awards?
 
It’s most common for companies to convert performance awards to a time-vested RSU.  This is based on target or actual performance.  Dan, thinking about change-in-control over at Campbell, is this something you’re coming across very often?  How are performance awards being handled given all the activity that’s going on there?
 
Ferretti:  Well, thankfully, we’re not coming across it.  We do have it in the plan that, in the event of a change of control, the performance RSUs will be converted to time-vested RSUs.  We have a formula that says the greater of 50 percent of the award or the amount of time that has lapsed since the grant.  If we’re two years into a three-year grant, they would end up with two-thirds.  If we’re less than halfway, they would end up with 50 percent.
 
Rapanotti:  Thank you for that, Dan.  Let’s go ahead and wrap up the plan design section and move right along into time-based full value awards and I’m going to hand it over to Barb to walk us though that section.  Barb?
 
Return to Index
 

Time-Based Full Value Awards

 
Baksa:  Thanks, Joseph.  We’re now going to turn our attention to time-based full value awards.  These include restricted stocks and unit awards as well as stock bonus awards.
 
Slide 19 illustrates the types of full value awards that companies are currently granting.  By far, RSUs are the most common type of full-value awards granted, with 84 percent of respondents granting them.  Restricted stock comes at in a distant second with only 26 percent of respondents granting that type of award.
 
The rest of the awards here, including stock bonus awards, which  we refer to as unrestricted stock, are coming in at less than 2 percent of companies.
 
I think it makes sense that, when companies are granting full-value awards, they’re granting either restricted stock or RSUs.  When you’re giving away stock for free, it’s not surprising that companies will want to attach some vesting conditions to the awards.
 
In keeping with our “Nothing’s Changed” theme, the data on slide 19 is very similar to what we saw in the 2016 survey.  There’s been perhaps a slight decline in the usage of restricted stock, but otherwise, we just haven’t seen practices change here.  Now, I’m going to turn to our commentators, and I’ll start with you, Rose.  What types of full-value awards are you granting and at what levels are you granting them?
 
Hoffman:  We are granting restricted stock and restricted stock units.  We are actually granting to individual contributors at this point.  The way that we grant them, of course, is that there is a dollar value provided to us and then we take a 30-day average to be able to calculate the number of shares.  Based on the 30-day average of the stock price is how we grant them.  But those are the two that we’re using the most.
 
Baksa:  Dan, what are you doing at Campbell?
 
Ferretti:  We are using only RSUs, and again, we are granting to senior management level and above.  The determination of award type is pretty similar, we’re targeting value to grant to those folks and then we use an average share price over time to determine how many actual RSUs they get for that award.
 
Baksa:  At least you’re in line with my survey results here.  Rose, would you say that you use RSUs more than restricted stock or are you using them on an equal basis?
 
Hoffman:  We’re using RSUs a lot more than we’re using the restricted stock.
 
Baksa:  I’m going to check you both off as in alignment with the survey.  Next up, we have another polling question. When we presented this data at the Conference, someone asked why companies prefer RSUs over restricted stock.  I think there are a lot of good reasons for that; more than five I had room for in the GoToWebinar poll.  So I combined three reasons into the first choice in the poll: with RSUs you don’t want to deal with employees having voting rights, you don’t want to pay dividends on the award, or you don’t want to deal with employees filing an 83(b) election.  If any one of those is a reason for you, I’m going to have you select that first choice even if some of the three aren’t a reason for you.
 
We’re going to talk about retirees a little bit later in today’s webcast; RSUs  provide better taxation for employees who are going to receive a payout upon retirement, they offer some tax deferral opportunities. If you are issuing awards globally, often RSUs will have a better tax result. 
 
There could be other reasons that I don’t have in poll or maybe you just never really thought about it.  You grant RSUs because that’s what you’ve always granted.
 
Again, I thought it would be a great opportunity to find out why 200 of my closest friends don’t grant restricted stock.  We can see that my first choice there is the top reason with 61 percent of respondents not wanting to deal with either voting rights or even an 83(b) election.  That’s a very valid reason, in my opinion.  And then, the second choice is the global considerations.
 
Just to be clear, by asking this question, that does not mean that I prefer restricted stock over RSUs.  My preference is definitely RSUs.  I think they’re the most flexible vehicle and there are a lot of good reasons to be granting them.
 
Next up, we’re going to look at approval procedures for stock awards.  I have two slides on this. Slide 21 looks at who is approving annual grants and we’re really focused on non-Section 16 officers here.
 
For companies granting to Section 16 officers, those grants are almost always approved by the compensation committee.  It’s really necessary to do that for Section 16 purposes so there’s nothing interesting to talk about with respect to grants to Section 16 officers.  But for non-Section 16 officers, companies can delegate approval authority to an officer, even an officer who’s not a member of the board.  You can see here only about a fourth of our respondents are taking advantage of this for their annual grants.
 
My expectation is maybe if we had asked about off-cycle grants that might have gone up a little bit.  But we are still seeing that the majority of respondents are submitting their annual grants to the full committee for approval.  I’m going to ask my color commentators to weigh in here.  Dan, we’ll start with you.  Who is approving your full-value awards?
 
Ferretti:  The annual grants do go to the board, so we’re in line here.  For the off-cycle grants though, we do have a delegation to our VP of total rewards actually.  For most of those grants we talked about earlier, the make whole grants, the VP of total rewards can approve those other than those that we might grant to someone like a new CFO or somebody that has to be approved by the board.
 
Baksa:  Rose, what’s PayPal doing?
 
Hoffman:  Actually, everything goes through our CEO and he approves the focal grants, the new hires.  Anything we’re granting to overall employees does get approved by the CEO.
 
Baksa:  That definitely gives you some extra flexibility, allowing you to be really responsive.  I think that’s the advantage of delegating authority to an officer, you don’t have to wait for a board or a comp committee meeting to have your grants approved.
 
On slide 22 we look at the timing of grants.  One emerging practice that we’ve seen for full-value awards is the consolidation of grant dates  for off-cycle grants. In the survey, we asked about this practice for new hire grants.  We’ve seen this practice emerge because the vest date is a taxable event for full-value awards.  If you’re granting awards willy-nilly every time someone is hired, you’re going to end up with a lot of different taxable events throughout the year.  You could end up with potentially a taxable event every single day.  This ends up being very burdensome in terms of managing your full-value award program.
 
Consolidating the grant dates helps mitigate this burden. For example, for everyone hired during the same month, you might grant all awards at the end of the month or halfway through the next month.  Or maybe for everyone hired during a quarter, you grant all their awards on a specified date following the end of the quarter.
 
That way you only have a few grant dates per year, no more than 12, if you’re grant once a month.  That limits the number of taxable events you’re going to have to deal with on an annual basis and helps with administration of your full-value awards.
 
We can see on slide 22 that 30 percent of respondents issue their new hire grants only once a quarter and 24 percent issue them once a month.  Quarterly or monthly feels like a pretty good interval to me.
 
Nine percent of our respondents issue their new hire grants only once a year.  On the plus side, you only have one vesting date a year on which you have to worry about collecting taxes on your full-value awards.  One concern with this practice is that, in some cases, there’s a big gap between when someone’s hired and when they finally get their new hire grant and that may be problematic from an employee motivation issue.
 
Another concern is that the company could be acquired during that gap—I’ve seen this happen—then the individuals who were hired and hadn’t gotten to their grant yet might be out of luck. Become they don’t have a grant at the time the company is acquired, they might not get one.  This concern is much less likely to be a problem if you have a quarterly grant date or a monthly grant date.
 
Another thing we focus on in this survey question is whether companies are limiting their full-value grants to only open window periods or granting them only after earnings have been released.  This is more of a corporate governance matter than an administrative issue and more an optics consideration.  You can see that only a very small percentage of our respondents are concerned about this issue.
 
Rose, when is PayPal issuing full-value awards?  What are you doing for your new-hire grants?
 
Hoffman:  We only grant on the 15th of the month following the month of hire.  If an employee came on board in September, they would get a grant on October 15.  That is how we are handling our new hires.
 
Baksa:  Dan, what do you do?
 
Ferretti:  We are similar.  We grant the first of every month, if you’re hired from September 1-30, you get an October 1 grant.  I actually like Rose’s method for one particular reason—it avoids the dreaded January 1 vesting date.  For those of you who are plan admins, you understand what I’m talking about.
 
The once a month cadence has been really helpful and we don’t have anybody complain that they are waiting for their grant for a couple of weeks.  It’s been good for us.
 
Baksa:  We have a Top Ten List in the November-December 2016 issue of The NASPP Advisor on why you should avoid December 31 and January 1 for any of your transactions.  I agree with Dan, I would prefer the 15th of the month over the 1st of the month.
 
Ferretti:  Or just don’t grant in January.
 
Baksa:  Yes, that’s another solution.  We have one question that came in about the accounting impact of using a 30-day average.  That was something that you talked about, Rose, where you’re using a 30-day average to calculate the number of shares employees will get.
 
In terms of an accounting impact, using the 30-day average just impacts the number of shares employees get.  For accounting purposes, you’re still going to use the actual fair market value on the date of grant to determine expense for the award.  That means that there’s going to be a discrepancy between the value of the award that you might communicate to the employee and the amount of expense that you’re recognizing for the award. The value you would communicate to the employee would probably be based on that 30-day average since that’s what you used to calculate the number of shares.  But for accounting purposes, your expense will be based on the close or the average on the date of grant.
 
Hoffman:  Yes, our accounting is based on the value on the date of grant, so for expense, that is what we are using.  The 30-day average to calculate the number of shares is to increase a gap based on the value that was in the offer letter.  However, for expense, it really is the closing price on the date of grant that we use.
 
Baksa:  Next we’re going to look at how companies vest their full-value awards.  Overwhelmingly, companies use graded vesting for their full-value award.  Seventy-three percent use graded vesting versus only 27 percent that use cliff vesting. Where companies are use graded vesting, most of them vest annually.  Just over half use a three-year vesting period and another almost 40 percent vest over a four-year time period.
 
In the 2016 survey, we interestingly saw a very small shift to quarterly vesting with a one-year cliff, comprised almost entirely of high-tech companies.  We didn’t see any further shift in that direction in this year’s survey, however.  The percentage of companies using that vesting schedule remained flat and I’m going to guess that it’s still high-tech companies.  Rose, what are you doing for your vesting schedule?
 
Hoffman:  We vest annually over three years.
 
Baksa:  Dan?
 
Ferretti:  Yes, same for ours as well.
 
Baksa:  Next up we will look at post-vesting holding periods.  The concept of imposing a post-vest holding period on awards is something we saw emerge, I would say, maybe five years ago. This is a requirement that prohibits the award holder from selling the shares acquired under the award for a period of time after vesting. That restriction can reduce the fair value of the award for accounting purposes, which reduces the amount of expense the company will have to recognize for the award. Because it reduces the fair value, you could grant more shares to the employee who is subject to that restriction, which could be compensation to them for having to be subject to the restriction, and your expense would stay the same.
 
In most cases where we see these restrictions imposed—and you can see on slide 24 that we do not see them imposed very often—but where we do see them imposed, they only apply to executives.  The idea is that executives oftentimes are subject to stock ownership guidelines and retention policies, and because of this, they can’t sell their stock anyway.  So, the company might as well attach this holding period on their grants, either reducing the amount of expense recognized for the awards or granting them a few more shares.
 
Despite that nice advantage, we really have not seen widespread adoption of post vesting holding periods.  Only 13 percent of our respondents have them, which is actually five percentage points less than what we saw in 2016, so it possible that usage of post-vest holding periods had declined a bit.
 
Rose, PayPal considered post vesting holding periods, but you decided against them.  Do you want to talk a little bit about that?
 
Hoffman:  We decided against it for, let’s just say, all the VPs.  What we decided to do—for the same reason that you talked about—is to have ownership guidelines for all of our Section 16 insiders, where basically any of our senior VPs or executives that report to our CEO, all have ownership guidelines.  So, we decided to go ahead and take advantage of doing the post holding vesting periods for their awards.  Like you said, they can’t sell anyway because they have to meet the limit, and if they don’t meet it they have a certain time period to achieve it.  By us doing this for them or the executives, it just made a lot more sense.  And again, we didn’t take it across the board.  It’s only executives reporting to the CEO who have awards with a post-vest holding period.
 
Baksa:  Great, that brings us to our next polling question, “What is your company’s position on post vesting holding periods?”  Have you implemented them?  Are you thinking about implementing them?  Are you in Rose’s position where you thought about them but decided they weren’t for you?  Or you’ve never thought about them, or never heard of them? 
 
We have a question about the rationale for why a company might choose graded vesting versus cliff vesting for RSUs.  I think that’s really a balance between wanting to have shares vesting frequently enough that employees can see their next vesting event and be motivated by it but not having awards vest so frequently that employees don’t feel like they need to stay for the next vesting event because it’s just a small number of shares vesting on each date.
 
The challenge with a cliff vesting period—and where companies do have cliff vesting for full-value awards, most of them use a three-year vesting period—is that it’s just a long way out into the future.  If it’s early on in the life of that grant and an employee gets another job offer, they may just feel like, “Three years is just too long.  I’m never going to make it anyway.  Might as well just leave” versus with the annual vesting employees might think, “I’m going to be vesting in a few months anyway.  I should stick around.”
 
I saw some data from Schwab recently, in a survey they did of stock plan participants, that employees do consider the next vesting date when they’re considering whether or not to leave.  Rose and Dan, do you have any comments to offer about why your companies chose annual versus cliff vesting?  Not to put you on the spot, but I’m going to do it anyway.
 
Hoffman:  Our stock options were basically cliff vesting, one-year cliff and monthly thereafter.  Mainly because with stock options, it’s up to the employee when they exercise them.  It had nothing to do with what we do now with the restricted stock awards or restricted stock units, where you actually have a release at each vesting event.  It just made things easier if we vested our restricted stock and units on an annual basis, and on the 15th of every month.
 
It was just a way to be able to phase out options to retain employees because, like you said, if they’re thinking about leaving the company, they usually do look to see when their shares are going to vest next and decide whether or not it’s really worth it.  Of course, it’s always based on the stock price.
 
If the stock price isn’t doing well, they don’t really care.  If it is doing well, then they usually will stick it out, so there is a way of retention there.  That is the main reason why we’ve done it.
 
Baksa:  Dan, anything?
 
Ferretti:  We kind of have a mix, too.  We’ll get to performance awards shortly, but our performance awards are a three-year cliff, because of the performance period.  But the time lapse has always been one-third per year over three years and it does keeps people interested in the plan.  I would probably say it keeps their awards top of mind, “Hey, I have stock vesting.  It’s coming every year.”
 
I can’t say anecdotally that people definitely take it into account because when you look at the resignation statistics, you can see it spike after a vesting event.  So, good or bad, they’re definitely staying for that period of time and paying attention to it.  It’s always been that way, and it does keep people engaged in the program and thinking about the fact that they’ve got stock and some ownership in the company they may want to hold on to.
 
Baksa:  I think that all makes sense.  We posted the results of our quick poll up here and we are seeing a little bit more incidence of post vesting holding periods among our audience members than in our survey.  Sixteen percent of our audience members responded that they have post-vest holding periods and then another 5 percent are thinking about them.  The majority are with you, Rose, they’ve thought about them, but it’s not for them.  There are 35 percent of you that haven’t really ever thought about them which means, I’m going to guess, maybe they aren’t for you either.
 
Next up we have data on what happens when employees terminate.  I get a lot of questions about how awards are treated in the event of termination of employment. Not so much for resignations, unvested awards are almost always forfeited when employees resign.  But for situations where companies maybe feel that the award holder is still entitled to at least a portion of their awards, there’s a lot of interest in knowing what other companies are doing.
 
In the survey, we collect data on the treatment of equity vehicles for seven different types of termination situations.  For today, we’re only going to look at the three that I find most interesting which are normal retirement, death and disability.
 
Slide 26 is color coded: blue means vesting is accelerated and red means vesting is continued upon that particular termination event.  The dark blue and dark red mean a full payout—full continued vesting or full accelerated vesting.  Light blue and light red mean a pro rata payout.  Light green means some other more complicated payout methodology . Grey means that the payout is at the discretion of the board; I’m going to count these companies as paying out their awards upon retirement, but actually that might go either way.
 
White on the very right that means the award is forfeited—the companies in the white area are not paying out their awards.  By comparing the color to white portions of the chart, you can see the overall percentage of companies paying out versus not paying out.  You can see that in all three cases it’s quite common for companies to pay out the awards. 
 
Two-thirds of companies are paying out the awards for their retirees, 80 percent are paying out their awards in the event of death and 76 percent are paying out for termination to a disability.  For death and disability, full acceleration is the most common approach.  That’s the darkest blue color you see on slide 26. 
 
For retirement, practices are actually pretty evenly split between accelerated and continued vesting, also between full and pro rata vesting. In the case of continued vesting, there’s a small preference for full payout versus pro rata, but otherwise, we’ve got a pretty even split between all of these practices.
 
Dan, let’s start with you.  What is Campbell Soup doing, in the event of these types of terminations?
 
Ferretti:  For normal retirement, we do full continued vesting.  We don’t accelerate vesting under any circumstances, it’s always continued.  Under normal retirement circumstances, though, it’s full continued vesting, on the originally scheduled dates.
 
For death and disability, we’re actually in the minority that do pro-rata continued vesting.  We do pro rate the award based on time of service, then the remaining units vest on the originally scheduled dates.  There’s just less of them.  If you happen to be retirement eligible at the time of death or disability, then the retirement rule applies, so you get the full continued vesting as opposed to the pro ration.
 
Baksa:  And Rose, what does PayPal do?
 
Hoffman:  For normal retirement, we go ahead and do a pro rata vesting up through the date of retirement, but for death and disability, we’re actually one of the companies that doesn’t do anything.  If they haven’t vested, they get forfeited.
 
Baksa:  Thank you.  I haven’t looked at the industry cuts on death and disability, but for retirement, we see a fairly stark contrast between what tech companies do and what non-tech companies do.  Tech companies are much more likely to payout awards upon retirement than non-tech companies.  Rose, you’re sort of in the minority among tech companies since you are providing some sort of payout for your retirees. 
 
I think to some extent these decisions have to do with the age of the employee population.  If you have a very young employee population, you probably haven’t really been forced to think about what you want to do when employees reach these life events versus if you have an older population—or if you’re granting to more of your senior employees in terms of rank like Campbell’s—you probably have had to think a little more closely about these life events and how you want to treat your awards.
 
Ferretti:  That’s right, and the retirement provision is especially difficult to end if you have it because you know it’s come up in different years, so should we treat retirement differently?  It’s one that’s really hard to change once it’s in effect.  There’s good reason to change it as far as retention purposes, but also the FICA taxation and those challenges that retirement eligibility can cause.  But again, it is a tough provision to get rid of once you have it in your program.
 
Baksa:  We have a question on how companies define disability.  We didn’t collect any data on this, I guess I’ve always assumed that people would define it based on how they define disability for other purposes.  Do you have any comments on how your company is defining disability, Dan?
 
Ferretti:  I believe it is based upon when somebody reaches the date at which they must be terminated due to disability—it basically follows the same rules as your disability would for other purposes.
 
Baksa:  Yes, it seems like it would be problematic to have a different definition for your equity plan versus other purposes.
 
Rapanotti:   I would agree with Barb and Dan, based on the work we’ve done with our clients.  It’s usually consistent between the other health and welfare programs and the retirement program—how you define disability in those plans carries over.
 
Baksa:  Thanks, Dan and Joseph.  Slide 27 covers the treatment of dividends or dividend equivalents, in the case of RSUs, for full-value awards. I want to be clear the data on this slide includes only those respondents who actually pay dividends on their common stock.  If you don’t pay dividends on your common stock, I don’t really care what you think you’re going to do for your dividends that you don’t have on your awards.
 
Where companies do pay dividends on their common stock, it is fairly common for them to pay dividends or at least a dividend equivalent on their full-value awards.  You can see that in my donut charts on the left, 78 percent of companies pay dividends equivalents on their RSU awards and 64 percent of companies are paying dividends on their restricted stock awards.
 
RSUs are aligned with the practices from the 2016 survey.  We saw almost no change there.  But for restricted stock, we saw a significant change—an 11-point drop in the companies paying dividends on their restricted stock which equates to a 15 percent decline.
 
This is possibly the only slide where I have a change to talk about. I’m going to guess that this change is due to ISS adding payment of dividends on unvested awards to their equity plan scorecard a couple of years ago, as well as that this practice has recently gotten some unfavorable attention in the media.
 
For a restricted stock, another 15 percent of respondents don’t address the question of dividends in their stock plan.  That’s similar to what we saw in 2016.  My guess is that a fair percentage of these respondents are paying dividends on their awards because, with restricted stock, employees receive the stock at grant, and that stock is entitled to dividend payments.  Unless you specifically address this in your plan  to stipulate that dividend are not paid on restricted stock, I think there’s a reasonable chance that you’re going to end up paying dividends on your restricted stock.
 
When I add that 15 percent to the 64 percent that pay dividends on their restricted stock, the companies paying dividends on the restricted stock is on par with companies paying dividends on their RSUs.  Still, the percentage of companies paying dividends on their restricted stock is still considerably lower than what we saw in 2016.
 
In terms of how the dividends are paid out for restricted stock, companies are largely split between paying dividends on a current basis, which means at the same time that they pay the dividend their shareholders receive, or waiting to pay the dividend out to award holders when the underlying award is paid out.  For RSUs, companies are much more likely to pay out the dividend with the underlying award by a ratio of almost three to one.
 
That brings me to the end of full-value awards, and I’m going to turn it over to Joseph to talk about performance awards.
 
Return to Index

Performance Awards

 
Rapanotti:  Thanks so much, Barb.  Let’s jump right in to performance awards.  We’ve mentioned Dodd-Frank a few times, and performance plans are another area that has especially been impacted with the implementation of Say-on-Pay and investors being able to influence the design of plans with their vote.
 
We’ve seen an increase in companies adopting performance-based programs to link company performance and achievement of performance targets to incentive compensation.  Shareholders like to see this.
 
There are a few key decisions that must be made when deciding how to implement a new performance award plan, the metrics used to calculate the performance and holding periods and how the award would end up paying out.  Let’s look at the last one first on slide 29, how the awards are paid out.  The most common—and no surprise—is stock-based performance awards for many reasons such as flexibility, taxation, the global flexibility and some other reasons that we’ve actually thrown out for stock-based awards over the course of this session.  But I want to put out to our panelists, Rose, can you walk us briefly through the types of performance awards PayPal is offering and whether those are stock, cash or option based?
 
Hoffman:  Sure, for VPs and above, we have a three-year performance period for our performance awards and they’re paid out in stock.  As I mentioned at the very beginning, we do an annual incentive program where half of the bonus is actually created and put into a performance award.  That has a one-year period that’s based on the company performance and is also paid out in stock.
 
Rapanotti:  Thanks.  It’s interesting to see how those designs have come together at the executive level based on the needs of the plan.  We’ll unpack some of the performance periods and so forth as we move to some of the design elements.  Thank you, Rose and let’s jump over to performance metrics.
 
One of the biggest challenges for a performance plan is setting long-term goals.  This is because the expectation of the shareholder community and the way their firms are evolving, setting a firm numerical target on any award may be subject to many external events impacting payout—things happen.  Restructuring M&A, market disruption and other natural volatility in the economy, this creates volatility and makes goal setting challenging.  Companies have learned over time how to tailor the metrics to suit their business needs and often are changing as needed to get the optimal mix of metrics.
 
If we look at the metrics reported for the 2019 survey, value metrics are most frequently used, at 66 percent across the board, which includes metrics like TSR and cash flow.  Revenue metrics like return on equity or capital are also common, but not quite as high as the value metrics, and specifically TSR.
 
The reason is that TSR helps solve for some the difficulty of measuring long-term performance, since you don’t have to set the goal.  The target can be tied to a stock report, which aligns to shareholders’ interest.
 
Let’s jump to slide 31 and unpack TSR a bit more as we think about different performance metrics.  Then, we’ll go back to some of the other metrics in a moment. Companies who use TSR measures have a choice between absolute or relative, absolute being the measure of change in a company’s own stock, whereas relative is measuring the performance of a company’s stock compared to its peers.  The peer comparison can be tied to an index or a list of peers.  Relative TSR is the most common approach used by companies, 90 percent of the survey respondents.  Why relative TSR though?  Many shareholders and advisors agree that doing better than your peer group is a better indication of performance than only measuring your own performance.
 
For example, an 8 percent increase in a company’s stock may not be material when looking only at the company and its business goals.  But if a peer group is used for relative TSR, and those all hit 2 percent on average, then four times the peer group is a fairly strong measure of performance in a comparable market. 
 
Let’s go to our panelists.  What sort of metrics or combination of metrics are being used to address the TSR question here?  Dan, do you want to jump into Campbell’s a bit?  I know we touched on some of these earlier with the performance plans and some of the earlier discussions.
 
Ferretti:  Sure, our plan uses relative TSR.  It’s the ranking of us versus our peers in the SMP food group, so it’s a relative measure based on peers.  We have previously granted performance awards with EPS measures, or again, the free cash flow one that I mentioned earlier.  But our current program is one that’s really been consistent, the relative TSR program.  We’ve actually been granting relative TSR awards since 2005.  I think we’re probably early adopters from that regard.
 
That’s been the primary metric we’ve used, and depending on where your performance is, you’ve seen it line up.  We’ve had years where we’ve paid out at zero and we’ve had years where we’ve paid out above 100.  It definitely follows the performance of the company versus the group.
 
Rapanotti:  Thank you for that.  Just for the sake of time, we’ll keep moving along here.  Looking at slide 32, building on TSR, if a company does use TSR and performance is negative, do awards still payout?  Companies can choose whether to pay out or not pay out based on when TSR is negative.  Eighty-four percent of companies do still pay out if TSR is negative and when their performance against a peer group is higher.
 
Proxy advisors scrutinize companies when the absolute TSR is negative and payouts are still triggered, but it doesn’t prohibit companies from proceeding with the payout.  Example, ISS and shareholders of these companies do add provision for a second metric to allow for payouts, along with payout caps.  Some other common metrics include earning per share, EBITDA and operating income.
 
Okay, this is the last item on TSR, and we’ll move on quickly.  Let’s look at payout caps.  Payout caps control payout during and after a windfall, but payout caps are very common to avoid overpayment and maintain reasonability, especially when they’re linked to TSR-based awards.
 
Okay, we have three minutes left.  I mentioned earlier that we were going to go back to our overall performance metrics.  Let’s go back there as part of the design element.  We dug into TSR a bit but stepping back to a higher level on metrics in general.
 
Companies will use multiple metrics to help manage opportunities for payout since there’s no payout is greater than 100 percent for strong performance.  Going with one metric is easier to communicate the rationale but it can also be seen an “all eggs in one basket” approach and having multiple metrics allows for more chances to really take a bite to the apple.
 
Overall, 68 percent of companies are using more than one metric in performance awards with about half of those using two, which is often plenty for multiple metrics plans.  More than three becomes challenging to communicate to executives who are empowered to attain those performance targets.  Typically, three is really the upper threshold.
 
Let’s jump on to slide 36.  Building on the metrics discussion, one way of identifying performance incentives metrics under the stock plan is to understand how they align to other incentive programs.  While two-thirds of the companies are identifying differentiated metrics in the regular annual incentive program, this is not by accident.  It’s a leading practice in the marketplace to use differentiated metrics and LTI to align executives to long-term strategic goals.  This is important, since incentive plans are typically shorter in nature.
 
The number of companies that indicated in this year’s survey that they do use the same metrics for LTI, and their incentive plans has dropped by 25 percent.  Barb, this is the only other material change to report so far.
 
But that 25 percent drop, those companies have moved to either a combination of the two or they’re using like an entirely different set of metrics.  I think we expect to see that continue.
 
Rapanotti:  Looking at performance period, we talked about this a little bit earlier.  Moving on to the other design element, the performance period.
 
Shareholder institutions push companies to tie long-term results to performance periods.  This can be multiple years to measure performance as opposed to one.  Most companies are utilizing a three-year performance period across the board and aligning with what we’ve seen in the past.
 
Looking to the future, we don’t see this changing based on current events and the three-year approach is really becoming standard to some extent.  Dan, we’ve talked about your performance awards a few times, but anything you would add specific to Campbell’s three-year cliff you mentioned earlier?
 
Ferretti:  Yes, we’re in line with that and I don’t see it changing.  That one’s been consistent now for going on 15 years—it’s a good measure.  It’s a good timeframe, not so long that people lose sight of the metric, but it’s also not too short where it’s not really performance over a long term.
 
Rapanotti:  Great example there.  Three years is a good balance between the two.  Rose, I know there’s a mix over at PayPal.  Any thoughts or details you’d like to share and some of the rationale between those performance periods?
 
Hoffman:  Yes, for the VPs and our executives, the LTI is three years, just like Campbell.  We felt it was a good timeframe and it’s been like that for us since we spun off from eBay.  It was something that our board wanted to make sure that we implemented, so we’ve been doing that now for the last five years and it’s been really good.
 
We do have the one year that is part of the annual incentive program for the rest of the employees.  Again, it is for 14,000 employees that we have this one-year period, and it’s based on the company performance, how they did overall for that year.
 
It can be sometimes be difficult to explain to employees the one-year annual incentive program.  This is our third year now; it definitely has been better.
 
Rapanotti:  Great examples.  Again, you saw the flexibility to use what you want in market trends.  If you’ve got to make a call on design, then you’re empowered to do that.  All right, thank you for that.
 
Let’s move on, terminations and forfeitures.  Slide 38 looks really similar to the backend of the section that Barb covered on the time-based awards.  It’s slightly different, so we’ll walk you through it.
 
A question we hear in the market often is how treatment of performance awards are defined in the event of retirement, disability or death.  As Barb mentioned a little bit ago, there are other termination events provided in the survey.  We wanted to focus on these three today.
 
In this chart, blue indicates treatment of awards, paid out at termination or separation of employment, so whatever is happening at the separation of employment.  Red indicates the treatment of awards applied and paid out at the end of the performance period.  The light green means there’s some other creative method used, grey is discretion and then the white is forfeiture altogether.
 
I don’t think it’s any real surprise that retirement separations are still being held as performance criteria in the plan.  In theory, retirees are still being paid out on other reward programs like deferred comp, all of which could have a link back to the performance of the company in some way.
 
There’s an element where the award is retired, and you shouldn’t be receiving a windfall of an award if something were to happen after leaving and no other participant in the plan is seeing a similar payout.  Companies are holding retirees to the end of that performance period commonly to ensure that it’s applied consistently across the board.
 
This is slightly different than what we saw for the restricted awards where about 30 percent of awards were accelerated at time of termination for payout.  Overall, there’s consistency at about 30 percent of companies who consider retiree grants forfeited at time of separation for both restricted and performance awards.
 
For death and disability, there’s more of an even split between the two.  This is similar to what we saw in the prior section.  I’d suspect that, personally, this is compassion for the families in the estate, but also the administrative burden of monitoring and tracking over many years how to get a hold of people when you pay out awards over time.

There are so few transactions, given the size of the plans that we’re trying to track down rather than just paying them, get them off the books.  Rose, any high points on these terms and topics related to PayPal on the performance awards?  Is it any different you’re your restricted?
 
Hoffman:  For retirement, the one thing we do for performance awards is prorate them, so it’s based on a pro rata situation up through their retirement date.  However, awards will not get paid out until everything has been looked at.  We go ahead and prorate the number of shares that they would have received up through their termination date and then based on the actual performance, is how it will get paid out, at the time, everybody else gets paid out.  For death and disability, they get forfeited.
 
Rapanotti:  Good example.  It looks like PayPal aligns fairly well to the data that we have here.  Dan, anything you would add?
 
Ferretti:  We’re pretty much aligned with the majority.  We pro rate now at the end of the performance period, for the same reasons that you mentioned, we don’t want the people that are leaving to be any better or worse off than the people that are staying through the end of the performance period.  They get prorated for the time that they worked, but that then becomes their basis for whatever the payout is at the end.  It still could be zero or it still could be double what the prorated amount is.
 
Rapanotti:  Good point, maintaining that consistent performance across the board for anyone who had a choice whether to stick around or not.
 
For our next topic, we’re going to go into dividends again.  I’m going to pass it over to Barb to cover dividends and then carry us to the last section on stock options.  Barb?
 
Baksa:  Thanks, Joseph.  Like Joseph said, slide 39 reports on dividends paid on performance awards.  You can see that about two-thirds of companies pay dividends on performance awards paid in stock. This percentage drops to just under 40 percent for companies that pay out their performance awards in cash.  Where dividends are paid on performance awards, companies overwhelmingly pay out the dividend with the underlying award.
 
One challenge to paying dividends on performance awards is that you don’t know how many shares will be paid out, so you don’t really know how many shares you should be paying the dividend on.  Sixty-five percent of respondents calculate the dividend accrual using the target payout versus using the expected payout or some other method.  Twenty-nine percent use the expected payout.
 
The majority of companies wait until the award is paid out to pay out the dividends to employees.  At that time, 77 percent will adjust the accrued dividends upwards or downwards for performance. 
 
Return to Index

Stock Options

 
Baksa:  That finishes the performance awards section. We’re going to move right into the stock options section.  As we noted at the start of the webcast, just over half of respondents currently grant stock options or SARs.  We have  a question about why there’s been such a decline in the use of stock options.
 
I think for the most part it goes back to the adoption of ASC 718.  Since the adoption of this accounting standard, we’ve seen a pretty significant decline. In this year’s survey, it seems to have leveled out.  Through 2016, we were continuing to see the use of stock options decline.  I think that’s because once companies were forced to recognize an expense for stock options.
 
Once companies had to recognize an expense for stock options, they started looking at all the other vehicles that were available and started to wonder if stock options really were the right vehicle.   For a lot of companies, it turned out that options weren’t the right vehicle.  Many companies were only granting them because they didn’t cost any money under the prior accounting standard. 
 
Also, once companies have to recognize an expense for options, a problem with them is that the options can end up underwater and not paying out any benefit to employees.  A company could grant an option and within days, it could fall underwater, and it could be underwater for its entire 10-year life.  In this circumstance, the option doesn’t provide any benefit to the optionee and yet the company would still have to recognize an expense for it. This is unpalatable for a lot of companies and is another driver of the trend towards full-value awards.  Stock options are also more complicated to value than time-based full-value awards. All of this equates to a big shift from stock options to full-value awards.
 
I want to clarify that this shift is only among the public companies.  The overwhelming majority of the respondents to this survey were public companies.  In our private company survey that we did last year, we saw a much higher use of the stock options.  But for public companies, half of public companies have shifted away from options.  Among the half that still grant stock options, most of those are only granting options to their very senior executives.
 
When you look at the percentages on slide 41, keep in mind that these percentages are of those 54 percent of companies that still grant stock options.  When you see on the slide that 17 percent of respondents are granting ISOs, that actually works out to be only about 9 percent of the overall respondents.  We rarely see ISOs granted by public companies, but they are significantly more popular with private companies especially in Silicon Valley.
 
Among public companies, overwhelmingly, the public companies granting stock options are granting NQSOs.  Although after ASC 718 was adopted, there were a lot of predictions that SARs were going to become the vehicle of choice, that did not really happen,  We never really saw stock appreciation rights take off.
 
On slide 42, I have some data around how stock options vest.  The overwhelming majority of companies that grant stock options use graded vesting with respondents nearly evenly split between three years and four years for the length of vesting schedule.  Most companies vest options annually.  Eleven percent of respondents vest monthly after a one-year cliff.  My guess is that virtually all of that 11 percent are in Silicon Valley where that vesting schedule is absurdly popular.  The rest of the country uses annual vesting.
 
Let’s move into termination and forfeiture, on slide 43.  We’ve already seen variations of this slide for full value and performance awards.  This slide shows the percentage of companies that pay out stock options for our three interesting termination events. You can see that the percentages are a little lower than what we saw for the other types of awards.  Sixty-two percent pay out the stock options for retirement, 68 percent for termination due to disability and 70 percent for death. For disability and death, full accelerated vesting is the most common approach.  This is similar to what we saw with full value awards.  For retirement, we see full continued vesting.  It’s a little bit more popular than other approaches.
 
That brings us to slide 44.  When employees terminate while holding stock options, you have an additional question, which is how long stock options should remain exercisable.  I included all seven termination types on this slide because it’s an interesting question that I get asked about all seven termination types.  The key to this slide is that the lighter the blue, the longer the employee has to exercise until we get to white, which means that the option is exercisable all the way out until its original term.  The grey on the end is some other time period that’s not represented.  It could be shorter or longer than the time period represented here on my chart.
 
For cause, the most common approach is to immediately cancel the options.  In all other cases, employees are typically given at least a short period to exercise. For involuntary terminations other than cause and for resignation, three months is the norm.  When we get to death, disability and retirement, employees are typically granted a longer time period in which to exercise.
 
That brings us to the end of our survey, and we are out of time.  We have one more slide, to remind you that the 2020 Domestic Stock Plan Administration survey will be coming up early next year.  Hopefully, this presentation has demonstrated to you the incredible value of participating in our surveys. You can sign up now to participate in the 2020 survey.  The survey is not ready yet; we’ll have it ready early next year, probably in March.  But you can tell us now that you want to participate so that we can make sure you know about it when we launch the survey.
 
Next year’s survey will be on administration and communication.  It also covers employee stock purchase plans—the one vehicle that was missing from this year’s survey.  And it will cover board of director compensation, ownership guidelines and insider trading compliance.  All stuff that I’m sure you’re just dying to know what your peers are doing, so make sure you sign up to participate.
 
We did have a polling question on this, but we’re out of time.  As you can see, there’s only one right answer to the question “Is your company going to participate in the 2020 survey?”  I’ve got four choices here, but they all mean yes.  There’s only one right answer to this question. Hopefully now you’re charged up about next year’s survey, I sure am! 
 
This concludes our webcast for today.  A project like this involves a huge team effort, so I do have some thank-yous to go through before we close out.  The survey is not something that the NASPP has the resources to do on our own and we’re very grateful for all of Deloitte’s contributions to this project.  The survey is a fantastic resource for NASPP members, and we absolutely could not do it without Deloitte.  I especially want to thank Joseph Rapanotti and James Kwon from Deloitte for all their work on the survey.
 
Joseph, as you know, is my co-presenter today and his enthusiasm for this survey possibly surpasses my own, which is frankly a pretty high bar.  James has worked tirelessly behind the scenes and his efforts have really been key to making this survey happen.
 
Both James and Joseph are really the shepherds of this project and are involved in every phase of it, from developing the survey, promoting it and monitoring participation to analyzing the results and producing the final report.
 
I also want to thank Briana Krejci of Deloitte for providing additional behind-the-scenes assistance once we launched the survey and also helping us with analyzing the data.  I also owe a huge thank you to Tara Tays of Deloitte who has been our champion of the survey at Deloitte for at least a decade.  We absolutely could not do this survey without her support.
 
Lastly, I want to thank Joseph and the Deloitte staff for preparing today’s presentation.  They did all of the heavy lifting in terms of preparing the slide deck for today and they did a really great job calling out the data that would be of most interest to our members.  I really appreciate their efforts.
 
I want to thank Rose and Dan for presenting with us today.  Going through data like this can be pretty dry and having their color commentary really helped us bring it to life. 
 
Thank you to the audience for joining us today and I hope you enjoyed the presentation.
 
Return to Index
 
 
 
 
 
 
 
 
 
 
 
 
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