2015 equity trends report - university of pennsylvania · 2015 equity trends report | 2. contents...

2015 Equity Trends ReportFeaturing Commentary from

Founded in 2000, Equilar provides unbiased research services and exclusive corporate governance tools. Our award-winning products—Insight, BoardEdge, Engage, and Atlas—translate complex, unstructured data sets into valuable information to help executives, board members, and investors make the best decisions possible. Using unrivaled data systems and a cloud-based platform, we deliver the highest-quality services and information with accuracy and integrity.

Equilar’s client base of more than 1,000 companies—which includes 70% of the Fortune 500, public and private companies, compensation consultants, investors, attorneys, and major proxy advisory firms—relies on our unparalleled access to the boardroom and wider corporate ecosystem. All of our business services empower, engage and enable executives throughout the world.

Our flagship product, Equilar Insight, has been the gold standard for accurate and trusted benchmarking data on executive pay and pay for performance alignment. Featuring Equilar TrueView (ETV), Insight is the only platform that seamlessly integrates both public (proxy) and private data (sourced from Equilar’s proprietary Top 25 Executive Compensation Survey) to provide more complete benchmarking for executive positions beyond CEO and CFO. Equilar Insight’s best-in-class Governance Center also provides a comprehensive set of tools including the Institutional Shareholder Services (ISS) Simulator, the proprietary Glass Lewis P4P Modeler & Proxy Papers, Equilar Market Peers and Equilar Pay for Performance Profile.

Over the years, Equilar has built on our core strengths and added to our product portfolio. Our newest offering, BoardEdge, provides directors, executives, investors, and governance professionals the ability to objectively evaluate and compare the composition of a board along multiple dimensions, such as diversity, board tenure and industry experience. Each of our solutions leverages the power of network connections and commonalities among board members and executives at the world’s most influential companies.

About Equilar

Featured In

2015 Equity Trends Report | 2

Contents


Introduction 4Executive Summary 4

Methodology/Key Findings 5

Equity Grant Practices 6Prevalence of Equity Packages Among S&P 1500 Companies 7

Restricted Stock 8

E*TRADE Commentary 8

Options 10

Restricted Stock and Options Comparison 12


Performance Equity 13Percentage of S&P 1500 Companies Granting Performance Equity Vs. Options 14


Prevalence of Companies Granting Performance Equity by Sector 15

Performance Equity by Vehicle and Plan Type 16


Most Prevalent Metrics Determining Performance Equity by Sector 17


Time-Based Equity Vesting 18Equity Vesting Schedules 19

Equity Vesting Schedules by Sector 20


Dilution 21Total Overhang Among S&P 1500 Companies 22


Option and Stock Overhang Among S&P 1500 Companies 23

Run Rate Among S&P 1500 Companies 24

Prevalence of Evergreen Provisions Among S&P 1500 Companies 24


Statistical Appendix 25

Executive Summary

With options continuing to disappear from incentive plans and the recent focus on pay for performance from shareholders, performance equity has been on an upswing. Indeed, the percentage of companies in the S&P 1500 that granted performance equity has increased 17.7% since 2010.

Relative total shareholder return (TSR) is far and away the most prevalent metric to which companies prefer to tie performance equity, with nearly half of the S&P 1500 using it in at least one of their performance awards. Notably, it is also the most popular equity vehicle among every industry sector. Metrics such as earnings per share and revenue commonly follow as the next most prevalent.

In just the past year, the number of options granted has fallen 32.5% among companies in the S&P 1500. And across a 5-year period from 2010 to 2014, the number of options granted dropped 67.6%. Whether or not options are effectively linking pay to performance is still under debate, so the decrease in options awards could partially be due to the fact that investors tend to view options as a time-based and not a performance equity vehicle.

As companies continue to remove options from their equity packages, restricted stock continues its rise as a sole equity vehicle. Since 2010, the number of companies that granted only restricted stock in equity packages increased more than 15 percentage points. Accordingly, the number of companies that granted no equity, only options or a mix of options and restricted stock decreased.

Median equity overhang has decreased as well, going from 4.3% to 3.8% in 2014. However, overhang from stock has remained constant in the past year, attributing the overarching decrease almost solely to the large reduction in option overhang.

20%

30%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014

OptionsPerformance Equity

∙ ∙ ∙ 69.3%

∙ ∙ ∙ 60.7%

Percentage of S&P 1500 Companies Granting Performance Equity Vs. Options


Introduction

The Dodd-Frank Act is still in the spotlight upon its 5-year anniversary, and scrutiny toward executive compensation and pay-for-performance remains a hot topic. As such, equity, the cornerstone of executive compensation, continues to play an essential role in governance matters for proxy advisors, shareholders and companies alike. Although 2014 changes to equity trends have been less drastic relative to previous years, the overarching trajectory has remained the same. Shareholders’ push for companies to tie equity and performance has resulted in companies continuing to increase their usage of performance equity, trending toward using restricted stock as the premier equity vehicle. Consequently, options awards have continued falling in all indices and industries in the S&P 1500.

Methodology

This report sheds light on how the country’s largest public companies motivate and reward their leadership through compensation. For information regarding 2014, this analysis included all named executive officers (NEOs) in S&P 1500 companies with at least one year of publicly disclosed equity grant practices available at the time of writing (n=1,460). For data regarding 2010 to 2013, the dataset reflected S&P 1500 companies with four years of publicly disclosed equity grant practices (n=1,345). This reflects a change in methodology moving forward, in order to represent trends in the S&P 1500 as an index instead of the S&P 1500 as a specific set of companies. Throughout the report, restricted stock and restricted stock units are referred to as restricted stock. Options and stock appreciation rights (SARs) are summed in graphs and calculations unless otherwise stated, which also applies to restricted stock and restricted stock units. Additional data can be found in the appendix at the conclusion of the report.

KEY FINDINGS

• The share of S&P 1500 companies granting performance equity awards increased to 69.3% in 2014, up from 68.9% in 2013 and 51.7% in 2010. Long-term stock units remained as the most popular performance equity vehicle, accounting for 49.9% of all performance equity.

• Option use has continued its decline, with 60.7% of companies granting options in 2014, compared to 63.9% in 2013 and 75.6% in 2010.

• 37.9% of companies granted exclusively restricted shares, up from 34.7% in 2013 and 22.3% in 2010.

• Graded vesting remains the preferred vesting schedule, with 78.8% of equity granted in 2014 vesting in multiple installments instead of just one lump sum.

• Median overhang among companies fell to 3.8% in 2014 from 4.3% in 2013.

2

3

4

5

1


Equity Grant Practices

Equity grant practices have evolved considerably over the past five years. A majority of companies in the S&P 1500 continue to offer a mix of both

restricted stock and options; however, that figure is diminishing, falling from 67.5% in 2010 to 57.4% in 2014. Meanwhile, companies that offer restricted stock exclusively as an equity benefit have become an increasing subset of the S&P 1500, increasing to nearly 38% of companies in 2014. Overall, the trends point to a decrease in options awards, and the percentage of companies providing options exclusively as a method of equity grants has diminished significantly over the past five years as well.

DATA POINTS

• From 2010 to 2014, S&P 1500 companies that only grant restricted stock has grown more than 15 percentage points, increasing from 22.3% to 37.9% in that time frame (Fig. 1)

• Companies that award only options/SAR as an equity package now account for only 3.3% of companies in the S&P 1500, down from 8.1% in 2010 (Fig. 1)

• The percentage of companies that use neither stock nor options has steadily declined since 2010, falling from 2.1% to 1.4% in 2014 (Fig. 1)

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014

RS / RSUs Only Both NeitherOptions / SARs Only

8.1% 6.8%5.1%

65.5%67.5% 62.3% 59.6%

34.7%30.7%26%22.3% 37.9%

57.4%

4.3% 3.3%

Prevalence of Equity Packages Among S&P 1500 Companies1

Equity Grant Practices


DATA POINTS

• The amount of stock granted among S&P 1500 companies in the 75th percentile was flat from 2012 and 2014, totaling 1.1 million. However, that figure is up from 950,000 in 2010 (Fig. 2)

• Outstanding stock among companies in the 75th percentile remained at 2.6 million from 2013 to 2014, but increased from 2.1 million in 2010 (Fig. 3)

0

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014

25th Percentile 75th Percentile50th Percentile

∙ ∙ ∙ 1.1MM

∙ ∙ ∙ 450

∙ ∙ ∙ 168

0

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014


∙ ∙ ∙ 2.6MM

∙ ∙ ∙ 1.0MM

∙ ∙ ∙ 410

Year-Over-Year Restricted Stock Granted in the S&P 15002

Year-Over-Year Restricted Stock Outstanding in the S&P 1500 3

THO

USA

ND

STH

OU

SAN

DS

Equity Grant Practices (continued)

E*TRADE Corporate Services Commentary

As seen in the chart above, the popularity of issuing RS or RSUs as the only form of an equity grant has steadily increased since 2010. While companies that issue options and Stock Appreciation Rights (SARs) by themselves or along with RS/RSUs are still a significant percentage (60.7%) of the population researched, the rise of RS/RSU grants as the primary means of equity compensation is undeniable. This shift seems to correlate with three key catalysts:

• The adoption of FAS 123(R) by the Financial Accounting Standards Board, which required a fair value to be calculated and expensed for options, effectively eliminating one of the benefits of options.

• The financial crisis of 2008/2009, which put many employees’ options or SARs “underwater,” reducing the value perceived by employees who received this form of equity.

• Lastly, the growing concerns over corporate governance and dilution, which disadvantages options since one needs to issue more options to achieve the same “monetary value” of a grant.

Restricted Stock

While recent years have seen an upsurge in exclusive use of restricted stock among companies as an equity grant practice, 2014 marks a year of little change in terms of amount of stock granted or outstanding. Medians for both restricted stock granted and outstanding saw a marginal increase compared to 2013.

Over time, however, those figures had grown significantly before flattening in recent years. Since 2010, the median number of restricted stock and restricted stock units (RS/RSUs) granted across the S&P 1500 increased 20.8%, reaching 450,198 in 2014. Meanwhile, the median number of RS/RSUs outstanding among companies in the S&P 1500 in 2014 was 1.0 million, a 21.4% increase since 2010.


Stock grants across industry sectors varied greatly in 2014. S&P 1500 companies in the technology sector granted the most stock in 2014, offering a median 798,000, significantly higher than the other sectors. In fact, the median value for restricted stock grants in the technology sector was 77.3% above the overall median, and the 75th percentile was nearly twice that of the next highest sector, basic materials. The industrial sector granted the least amount of restricted stock overall, with the median value at 240,332, 53.4% below the S&P 1500 median.

DATA POINTS

• The 75th percentile in the industrial goods sector showed restricted stock granted at just 533,000. The next lowest sector at the 75th percentile, Utilities, totaled 722,000 in 2014 (Fig. 4)


0 500 1,000 1,500 2,000 2,500


BasicMaterials

ConsumerGoods

Financial

Healthcare

Industrial Goods

Services

Technology

Utilities ∙ ∙ ∙ 722

∙ ∙ ∙ 2.2MM

∙ ∙ ∙ 964

∙ ∙ ∙ 533

∙ ∙ ∙ 1.2MM

∙ ∙ ∙ 952

∙ ∙ ∙ 915

∙ ∙ ∙ 1.3MM

Restricted Stock Granted by Companies in the S&P 15004


The factors discussed on the previous page have likely contributed to the rise in RS/RSU popularity. However, this is not the end of the story. It is hard to reject the relative simplicity of RS/RSU grants compared to other forms of equity compensation. E*TRADE Corporate Services’ research and participant commentary indicate employees tend to understand this form of equity more easily1. If a goal of granting equity is to attract and retain top talent, there is a definite benefit if employees have an easier time understanding and valuing the grant. Furthermore, there is a benefit to employees not having to take any further action once the grant is vested, unlike options which can expire if an employee does not exercise his or her vested grant, which may create unnecessary complexity for the issuing company.

THOUSANDS


Options

Options prevalence has continued to fall in recent years. In 2010, median options granted for the S&P 1500 stood at nearly 400,000, and dropped to 122,428 in 2014. In the span of just the past year, the median number of options granted fell 32.4%. Notably, the 25th percentile of the S&P 1500 granted zero options, a consistent trend throughout the past several years.

The median number of options outstanding among the S&P 1500 has also decreased in the past five years, now half of what it was in 2010. In 2014, median options outstanding for the index totaled 1.6 million, down from 3.5 million five years ago.

DATA POINTS

• In 2010, the 25th percentile for the S&P 1500 granted 3,000 options, but that figure quickly declined to zero in 2011, where it has since remained (Fig. 5)

• With nearly 10 million options outstanding in 2010, the 75th percentile among S&P 1500 companies dropped to 4.9 million in 2014 (Fig. 6)

0

300

600

900

1,200

1,500

2010 2011 2012 2013 2014


∙ ∙ ∙ 600

∙ ∙ ∙ 122 ∙ ∙ ∙ 0

0

2,000

4,000

6,000

8,000

10,000

2010 2011 2012 2013 2014


∙ ∙ ∙ 4.9MM

∙ ∙ ∙ 1.6MM

∙ ∙ ∙ 371

Year-Over-Year Options Granted in the S&P 1500 5

Year-Over-Year Options Outstanding in the S&P 1500 6

Equity Grant Practices (continued) TH

OU

SAN

DS

THO

USA

ND

S



At an industry sector level, median options granted for every sector decreased from 2013. Uniquely, S&P 1500 companies in the utilities sector granted zero options in 2014, and financial companies also had a zero level at the median. Meanwhile, healthcare has continued to grant significantly more options than all other sectors, and the industry saw a median 565,308 options granted in 2014.

DATA POINTS

• After healthcare – an outlier at 1.7 million options granted in the 75th percentile – technology was the next largest sector with 700,000 options granted at that deviation (Fig. 7)

0 500 1,000 1,500 2,000


BasicMaterials

ConsumerGoods

Financial

Healthcare

Industrial Goods

Services

Technology

Utilities ∙ ∙ ∙ 0

∙ ∙ ∙ 700

∙ ∙ ∙ 690

∙ ∙ ∙ 549

∙ ∙ ∙ 249

∙ ∙ ∙ 684

∙ ∙ ∙ 504

∙ ∙ ∙ 1.7MM

Equity Mix Among Companies in the S&P 1500 by Sector7

THOUSANDS


Restricted Stock and Options Comparison

Among S&P 1500 companies that granted a non-zero value for a given type of equity, the average number of RS/RSUs granted was 1.6 million in 2014, and the average number of options/SARs granted was 1.5 million. This represents a flip-flop from 2010, when the average number of options granted totaled 2.0 million, vs. 1.9 million shares of restricted stock.

Of the companies that granted a non-zero amount of equity, the actual grant amounts have dropped for both restricted shares and options relative to 2013. Comparatively, option

grant values dipped 12% from last year while stock fell just 4.9%. Since 2010, actual option grant values have decreased by 23.3% and stock has decreased by 14.0%. This data, in conjunction with the overall equity granted mentioned in the two previous sections, shows that option use is significantly decreasing from a combination of less use of options as an equity vehicle as well as drop in total grant values. On the other hand, more companies are using stock as a vehicle, though they have been granting less volume in recent years.


500

1,000

1,500

2,000

2,500

3,000

1.5MM

1.6MM

2010 2011 2012 2013 2014

Restricted Shares Options

...

...

Average RS/RSUs and Options/SARs Granted Conditional on Non-zero Grants8


Many companies have moved toward value-based grants for their equity compensation programs, rather than defining grants by a number of shares. As the economy improves and the stock market strengthens, by using these types of awards, the granted value may stay steady year over year. However, the number of shares granted decreases because the “per share” value has increased. This certainly helps with dilution over time, which for some companies is a consideration, but there is also a benefit for Human Resources and Compensation professionals to consider. Granting a value is easy to explain to an employee, and fits well into a total rewards view of compensation strategies. This is becoming a real factor in how to compensate employees, with some companies even allowing employees to select the percentage of pay they would like directed to cash versus equity.

THO

USA

ND

S


Performance Equity

Performance Equity

As companies work to meet shareholders’ expectations regarding overall pay and performance alignment, performance equity awards—which have payout values dependent on predefined metrics—have become the vehicle

of choice for incentivizing leaders at many companies. Since 2010, the percentage of companies in the S&P 1500 granting performance equity has risen significantly, reaching 69.3% of that group in 2014, up from 51.7% in 2010. That percentage, however, has begun to flatten, and year-over-year growth in the percentage of companies granting performance equity increased just 0.3% from 2013 to 2014.

20%

30%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014

OptionsPerformance Equity

∙ ∙ ∙ 69.3%

∙ ∙ ∙ 60.7%

Percentage of S&P 1500 Companies Granting Performance Equity Vs. Options9


Institutional investor advisory companies appear to be playing a significant role in issuers’ decisions to add performance equity grants to their compensation strategies, especially in the more senior ranks of the company. This pay for performance push is having an impact on public companies that now regularly include performance awards in the compensation mix granted to employees, sometimes making performance equity the only non-cash long-term incentive for executives within those firms.


Performance Equity (continued)

DATA POINTS

• The industrial goods sector saw the largest percentage gain in companies offering performance equity in 2014, reaching 73.6%, up from 69.5% in 2013 (Fig. 10)

• The technology sector showed the lowest percentage of companies offering performance equity at 61.4% in 2014, though that figure was up from 42.6% in 2010 (Fig. 10)

• The financial sector saw the biggest gain during the study period, with the percentage of companies granting performance equity awards increasing from 41.2% in 2010 to 68.6% in 2014 (Fig. 10)

0% 20% 40% 60% 80% 100%

2010 2012 2013 20142011

Basic Materials

Consumer Goods

Financial

Healthcare

Industrial Goods

Services

Technology

Utilities

S&P 1500

∙ ∙ ∙ 69.3%

∙ ∙ ∙ 78.9%

∙ ∙ ∙ 69.2%

∙ ∙ ∙ 68.6%

∙ ∙ ∙ 63.0%

∙ ∙ ∙ 73.6%

∙ ∙ ∙ 68.0%

∙ ∙ ∙ 61.4%

∙ ∙ ∙ 93.3%

Prevalence of Companies Granting Performance Equity by Sector10 Across industry sectors the prevalence of performance equity grants has steadily increased over the past five years, but has plateaued. For example, utility companies have historically granted the most performance equity, and by far continue to lead the pack with 93.3% of utilities companies in the S&P 1500 granting such awards in 2014. That figure, however, dipped slightly from 95.2% in 2013. The largest drop in prevalence occurred in the healthcare sector, where the percentage of S&P 1500 healthcare companies granting performance equity decreased from 69.4% last year to 63.0% in 2014.



The overall rise in performance equity has introduced a variety of equity plan structures, composed of stock, units and options, and divided into long-term incentive plans (with performance periods of multiple years) and short-term incentive plans (with performance periods of one year or less). Long-term performance awards comprised the vast majority of performance awards granted to named executive officers (NEOs) among S&P 1500 companies in 2014, totaling 79.2% of all performance equity plans.

DATA POINTS

• For both long-term and short-term incentive plans, the most common vehicle was units, comprising of 63.8% of all performance-related grants (Fig. 11)

• Long-term incentive plans awarded in units were by far the most common individual plan type, comprising 49.9% of all plans (Fig. 11)

• Consistent with the overall decrease in options awards, long-term option performance equity plans totaled just 1.1% of all plan types, and short-term option plans only 0.6% (Fig. 11)

STIP Stock STIP OptionsSTIP Units

LTIP Stock LTIP OptionsLTIP Units

50%

28%

1%

1%

6%

14%

Performance Equity by Vehicle and Plan Type 11


Comparing the data below by equity vehicle, we see that RS/RSUs comprise 98% of the performance equity granted while options only comprise 2%. This correlates with the general trends discussed regarding the increase in RS/RSUs granted.

Other factors may also come into play when looking at the mix of RS/RSU grants used for performance equity plans versus options. Time-based options have an intrinsic market-driven performance factor directly tied to an increasing stock price. Because a time-based option’s intrinsic value is tied to the appreciation of the underlying security, it may be redundant to add performance conditions upon its vesting.


Given the increased popularity of performance-based equity grants, companies are left with the task of determining how they will choose to measure the performance of their executives. The most prevalent performance metric among companies in the S&P 1500 was relative total shareholder return (TSR), with 47.8% of companies utilizing this metric in 2014. Relative TSR was also the most prevalent metric within each individual sector. Overall, earnings per share (EPS) and company revenue were the next most popular metrics at an index level, showing 25.3% and 22.1% prevalence, respectively, across the S&P 1500 as a whole.

DATA POINTS

• Utilities companies showed the greatest predilection as a sector for relative TSR, with 93.0% of companies in that industry granting performance equity packages based on that metric (Fig. 12)

• Nearly 44% of technology companies offered performance equity plans based on revenue in 2014, a higher percentage than any other sector (Fig. 12)

• Healthcare companies led all sectors in terms of performance equity plans based on EPS, with 37.3% of companies in that industry doing so (Fig. 12)


Most Prevalent Metrics Determining Performance Equity by Sector12

Sector Metric Prevalence

S&P1500 Relative TSR 47.8%

EPS 25.3%

Revenue 22.1%

Basic Materials Relative TSR 68.1%

ROC / ROIC 33.6%

Cash Flow 10.6%

EBITDA 10.6%

Consumer Goods Relative TSR 38.0%

EPS 32.4%

Revenue 31.5%

Financial Relative TSR 50.0%

ROE 28.4%

EPS 25.3%

Healthcare Relative TSR 48.0%

EPS 37.3%

Revenue 30.7%

Industrial Goods Relative TSR 45.3%

ROC / ROIC 27.4%

EPS 25.5%

Services Relative TSR 30.5%

EPS 28.6%

Operating Income / Margin 27.7%

Technology Relative TSR 45.9%

Revenue 43.9%

Operating Income / Margin 27.7%

Utilities Relative TSR 93.0%

EPS 33.3%

Net Income 14.0%

ROE 14.0%


The inclusion of secondary metrics into the performance metric calculation seems to be more closely tied to the desire to fairly compensate executives for the broad influence they have over the company. Beyond total shareholder return, companies are looking at other areas that are key to mid- and long-term value creation. These areas can be easily measured, the influence executives have on the measurement is clear, and over time they are a reasonable measure of the impact an executive has had on the company’s value.

Ultimately these plans, just like broad-based equity plans, are designed to attract and retain top talent. Creating a performance metric that can be driven by the employee and also tie to the goals and values of the company is more likely to motivate and attract talent than simply tying the performance equity to TSR.


Time-Based Equity Vesting

Time-Based Equity Vesting

As an alternative to performance-based equity, companies also offer time-based equity vesting as

a means of retention and compensation. A majority of time-based equity vesting schedules among S&P 1500 companies were offered in the form of stock in 2014, totaling 58.9%, vs. 41.1% for options-based vesting schedules. Graded vesting schedules comprised the majority of all equity vesting schedules chosen in 2014 – including 92.1% of all options schedules – which is tied to the concept that a segmented structure encourages executives to stay at the company instead of leaving money on the table if they choose to pursue other opportunities.

Among equity vesting periods offered by S&P 1500 companies in 2014, the lion’s share of equity rewards were scheduled to vest in a 3- to 4-year window, regardless of the vesting schedule, and there is a high occurrence of cliff-vesting awards to be completed within a 3-year period. Preference for 3- or 4-year vesting periods for graded options and stock appreciation rights was also equally split among S&P 1500 companies for the most recent year.

Overall, stock with graded vesting schedules has increased in popularity among S&P 1500 companies, increasing 26.4% from last year. As such, graded stock vesting schedules were the most prevalent, with 40.7% of schedules among S&P 1500 companies being offered in that form.

Stock Awards58.9%

Option Awards41.1%

Cliff30.9%

Graded69.1%

Cliff7.9%

Graded92.1%

...

Equity Vesting Schedules 13


On a sector-by-sector basis, however, vesting schedules varied significantly. For example, S&P 1500 companies in the financial and technology sectors exhibited the highest proportion of graded stock awards in 2014. Just over 55% of all equity vesting schedules among financial companies came via graded stock awards in 2014, and 54.0% of all such schedules in the technology sector were based on graded stock. Indeed, these were the highest proportions of any vesting schedule across all sectors, and the only ones to command a majority.

DATA POINTS

• Utilities companies by far showed the greatest instances of cliff stock vesting schedules based on units, with 49.6% of schedules in that sector falling into that category. Conversely, only 8.3% of vesting schedules in the technology sector occurred in this form (Fig. 14)

• Healthcare companies had the highest percentage of graded option/SARs as part of vesting schedules at 49.2% in contrast to the utilities sector, which had the lowest percentage at 17.3% (Fig. 14)

• Overall, cliff option/SARs schedules were the least prevalent among nearly every sector individually, with the highest coming from the consumer goods sector at 8.3% (Fig. 14)

0% 20% 40% 60% 80% 100%

Basic Materials

Consumer Goods

Financial

Healthcare

Industrial Goods

Services

Technology

Utilities

S&P 1500

Graded Cliff / Units Cliff Options / SARs Graded Options / SARsGraded Stock / Units

25.3% 35.4% 35.3% ···4.1%

26% 27.6% ···8.3%38.2%

14.4% 55.1% 28.7% ···1.8%

13.4% 35% 49.2% ···2.3%

24.5% 29.1% 43.3% ···3%

16.5% 39.1% ···3.5%40.9%

8.3% 54% ···1.2%36.5%

49.6% 31.2% ···1.9%49.6%

18.2% 40.7% ···3.2%37.9%

Equity Vesting Schedules by Sector14

Time-Based Equity Vesting (continued)


Technology and Financial sector companies have seen a shift in the age and motivation of the talent they are trying to attract and retain. Younger employees value “belonging to an organization that is doing good” but have a desire for more immediate rewards1. E*TRADE Corporate Services’ participant research has indicated that many of the employees in this new generation don’t have long-term plans and as a result tend to value more frequent vesting periods and vesting periods that are shorter in overall duration.

Companies trying to attract and retain these employees have shortened vesting periods even if it means making more frequent and smaller grants to align the company’s compensation and retention strategies. As the talent market continues to shift, it is reasonable to expect this trend to continue.

As with every trend, this will likely ebb and flow until the right equilibrium is found.

• If issuers elongate the vesting periods, make the grant too small, or extend the final vest date out too far, then the grant may lose its appeal.

• If, however, issuers make the vesting period too short or stack too much value in a short vesting window, then the result could be the employee taking enough of the value to feel rewarded and then moving on to the next employer.


Dilution

Dilution


Depending on the company and situation, several actions are available to help minimize dilution and are appealing in different ways. Offering a consistent value to your employees while minimizing the amount of shares that are granted is a balance. As noted above, this can be accomplished by granting fewer options and shifting to a more RS/RSU-based equity strategy. This allows grants of the same dollar value to be granted with fewer shares comprising the award.

Other methods, which admittedly have other potentially negative impacts to consider, include:

• reducing the number of people who receive grants• reducing the amount of shares in each grant• leveraging share withholding to collect funds due by the participant upon transaction• shifting to cash settled instruments

Dilution directly impacts shareholder wealth, and therefore receives a great deal of scrutiny from the

investor community. The final section of this report looks at dilution measured in terms of overhang, run rate and evergreen provisions in the past five years among companies in the S&P 1500.

Total overhang, a measure of potential dilution defined as the ratio of equity grant shares outstanding to total common shares outstanding, has continued to decrease among S&P 1500 companies over the past five years. In 2014, median

overhang among sample companies fell to 3.8% from 4.3% in 2013, and was down from 5.9% in 2010. (Fig. 15) The decline in total overhang over the past five years parallels the decline in option overhang, while overhang from stock is up marginally as grants of full-value shares continue to rise. In 2014, median overhang from options among companies in the S&P 1500 was 2.1%, down from 2.8% in 2013 and from 4.5% in 2010. (Fig. 17, on following page) Meanwhile, median overhang from stock has remained flat at 1.1% since 2011 when rounded, increasing by hundredths of percentage points each year. (Fig. 16 on following page)

0%

2%

4%

6%

8%

10%

2010 2011 2012 2013 2014


∙ ∙ ∙ 6.0%

∙ ∙ ∙ 3.8%

∙ ∙ ∙ 2.0%

Total Overhang Among S&P 1500 Companies15


0%

1%

2%

3%

4%

5%

6%

7%

8%

2010 2011 2012 2013 2014


∙ ∙ ∙ 4.3%

∙ ∙ ∙ 2.1%

∙ ∙ ∙ 0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2010 2011 2012 2013 2014


∙ ∙ ∙ 2.2%

∙ ∙ ∙ 1.1%

∙ ∙ ∙ 0.6%

Option Overhang Among S&P 1500 Companies16

Stock Overhang Among S&P 1500 Companies 17


Run rate is an important calculation in the measurement and evaluation of equity plan dilution, defined as the sum of options assumed and new equity shares granted divided by the total number of common shares outstanding. In the last five years, median run rate has remained stable despite equity mix changes, increasing from 1.4% in 2010 to 1.6% in 2014, but flat overall since 2012.

“Evergreen” provisions, so named because they provide for automatic replenishment of the number of shares available for issuance pursuant to equity compensation plans, have declined steadily over the last five years. Because automatic allotment of shares by nature does not require explicit shareholder approval, such provisions are often seen as a potential source of undesirable dilution. As a result, such provisions are often either replaced through amendments or left out of new plans. The share of companies utilizing equity compensation plans with evergreen provisions fell from 7.4% in 2010 to 4.6% in 2014.

Dilution (continued)

0.%0

0.5%

1.0%

1.5%

2.0%

2.5%

30%

2010 2011 2012 2013 2014


∙ ∙ ∙ 2.8%

∙ ∙ ∙ 1.6%

∙ ∙ ∙ 1.0%

0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2010 2011 2012 2013 2014

2010 2012 2013 20142011

.

.

.

.

5.8%....

6 4%7.4%

.

.

.

.

5.0%....

4.6%

Run Rate Among S&P 1500 Companies18

Prevalence of Evergreen Provisions Among S&P 1500 Companies19


Run rate is an important metric to consider when analyzing dilution. However, it is susceptible to other factors that cause it to remain flat or even increase at the same time dilution is decreasing. One important factor that may explain why run rates have remained flat in light of the equity mix changes to granting more RS/RSUs is due to the calculation. When calculating run rate, RS/RSUs may have a conversion premium based on the company’s volatility applied to them. This makes the numerator in the calculation larger than one might anticipate, even if fewer shares are being granted. Other factors outside of equity compensation grants can also affect this. For example, companies that are actively trying to reduce dilution may institute a share buyback program. This reduces the amount of common shares outstanding and makes the denominator in the calculation smaller, resulting in a higher run rate in an environment of lower dilution.

Evergreen provisions may continue to decline due to the prevalence of “say on pay” initiatives and the intense focus of institutional investors on all aspects of public company equity compensation programs.


Statistical Appendix

Year 2014

Year 2013

Average25th

Percentile50th

Percentile75th

PercentileAverage

25th Percentile

50th Percentile

75th Percentile

S&P 1500

1,538,553

168,132 450,198

1,105,157

1,598,523

168,000

440,000

1,139,000

Basic Materials

978,929

236,000

556,576

1,251,500

1,083,358

228,484

544,122

1,190,888

Technology

3,698,555

336,000 798,000

2,199,000

3,458,165

332,447

955,000

2,627,000

Consumer Goods

849,088

148,400

342,000

915,000

895,623

162,433

401,653

834,500

Financial

1,689,276

119,988 350,155

952,132

2,225,275

138,051

366,818

991,865

Healthcare

1,241,463

199,584 546,047

1,205,523

1,299,277

171,000

466,162

1,143,881

Industrial Goods

416,537

117,295

240,332

533,166

464,301

110,950

296,334

541,226

Services

1,072,584

180,198 451,741

964,000

977,393

168,735

423,000

1,000,000

Utilities

578,467

178,537 313,568

722,414

606,029

159,917

313,410

745,420

Year 2014

Year 2013

Average25th

Percentile50th

Percentile75th

PercentileAverage

25th Percentile

50th Percentile

75th Percentile

S&P 1500

3,527,685

409,588

1,047,865

2,553,408

3,594,446

386,250

1,026,671

2,622,000

Utilities

1,316,142

382,668 792,203

1,774,889

1,261,862

340,998

821,624

1,826,868

Technology

7,478,474

619,000

1,711,000

4,351,000

7,025,591

650,000

1,793,000

5,225,250

Services

2,497,620

458,981 954,000

2,399,500

2,248,790

399,662

1,041,189

2,464,000

Industrial Goods

1,190,295

241,941

674,215

1,327,916

1,221,470

250,342

687,000

1,365,000

Healthcare

3,148,592

437,625

1,123,292

2,616,500

3,078,347

427,000

974,330

2,351,000

Financial

4,436,374

332,525 846,462

2,567,565

5,375,346

308,640

826,000

2,707,340

Consumer Goods

2,037,242

330,823

909,855

2,091,412

2,305,416

352,208

873,000

2,134,874

Basic Materials

2,370,780

561,827

1,217,782

2,549,763

2,296,305

489,799

1,204,000

2,317,249

Restricted Stock and Restricted Stock Units Granted

Restricted Stock and Restricted Stock Units Outstanding



Year 2014

Year 2013

Average25th

Percentile50th

Percentile75th

PercentileAverage

25th Percentile

50th Percentile

75th Percentile

S&P 1500

928,368

- 122,428

600,000

1,109,928

-

181,000

800,000

Utilities

342,554

-

-

- 353,631

-

-

-

Technology

1,300,581

- 166,455

700,000

1,632,292

-

205,973

1,045,500

Services

726,879

- 127,000

690,155

848,988

-

180,000

800,000

Industrial Goods

1,109,017

-

201,000

548,726

1,078,306

-

247,790

700,000

Healthcare

1,895,165

138,599 565,308

1,738,457

1,910,079

164,000

518,000

1,798,231

Financial

302,074

-

- 249,303

567,239

-

5,000

435,022

Consumer Goods

1,393,784

-

200,000

684,000

1,562,276

-

322,500

1,041,365

Basic Materials

603,890

-

107,950

503,813

737,484

-

201,300

557,633

Year 2014

Year 2013

Average25th

Percentile50th

Percentile75th

PercentileAverage

25th Percentile

50th Percentile

75th Percentile

S&P 1500

6,402,721

371,125

1,644,497

4,882,979

7,827,381

576,248

2,092,500

6,239,000

Utilities

2,183,263

-

73,015 860,126

2,425,805

-

120,000

1,482,001

Technology

8,378,493

725,649

2,584,935

6,388,000

10,906,948 1,088,500

3,126,000

7,829,564

Services

4,335,186

449,477

1,566,000

4,220,074

5,331,828

691,000

1,949,000

5,227,000

Industrial Goods

7,085,449

505,431

1,633,904

4,664,998

7,192,931

594,315

1,901,677

4,603,000

Healthcare

10,927,160 1,383,100

3,176,495

7,981,500

12,517,167

1,695,380

3,917,000

9,228,000

Financial

4,399,234

55,347 905,000

3,011,267

6,372,696

189,080

1,293,000

4,809,726

Consumer Goods

9,701,435

453,331

1,864,707

7,292,000

10,896,650

797,000

2,421,000

7,676,383

Basic Materials

4,167,157

329,431

1,543,290

4,146,565

4,668,118

413,040

1,808,987

4,574,688

Options and SARs Granted

Options and SARs Outstanding



2014 2013

S&P 1500 68.92% 64.03%

Utilities 95.24% 95.24%

Technology 58.78% 54.73%

Services 65.33% 63.33%

Industrial Goods 69.49% 66.10%

Healthcare 69.35% 64.52%

Financial 68.92% 62.16%

Consumer Goods 71.30% 63.89%

Basic Materials 74.68% 64.56%

Long-Term Incentive Plan Annual Incentive Plan Stock Units Options Stock Units Options

S&P 1500 28.16% 49.94% 1.06% 6.10% 13.82% 0.64%

Utilities 55.04% 39.53% 0.00% 2.07% 3.36% 0.00%

Technology 14.01% 52.91% 1.12% 4.04% 25.78% 2.13%

Services 20.63% 50.51% 1.73% 8.94% 17.33% 0.16%

Industrial Goods 39.17% 43.82% 0.64% 4.33% 11.88% 0.16%

Healthcare 19.11% 54.33% 1.41% 4.23% 20.72% 0.20%

Financial 30.96% 49.50% 1.50% 8.02% 8.82% 1.20%

Consumer Goods 32.90% 54.01% 0.00% 5.40% 7.20% 0.49%

Basic Materials 33.33% 52.22% 0.79% 5.40% 7.14% 0.00%

Performance Equity

Performance Equity Vehicle Prevalence (In Percent of Awards)



Vesting Period 1 2 3 4 5 6+

Cliff Stock/Units 4.79% 2.69% 75.64% 8.29% 7.07% 1.52%

Graded Stock/Units 0.16% 3.32% 48.50% 34.64% 12.31% 1.07%

Cliff Options/SARs 5.92% 5.26% 79.28% 7.57% 1.97% 0.00%

Graded Options/SARs 0.06% 1.46% 43.87% 42.69% 11.34% 0.59%

Stock Awards (Inc. Units)

Option Awards (Inc. SARs)

Cliff Graded Cliff Graded

S&P 1500 18.2% 40.7% 3.2% 37.9%

Utilities 49.6% 31.2% 1.9% 17.3%

Technology 8.3% 54.0% 1.2% 36.5%

Services 16.5% 39.1% 3.5% 40.9%

Industrial Goods 24.5% 29.1% 3.0% 43.3%

Healthcare 13.4% 35.0% 2.3% 49.2%

Financial 14.4% 55.1% 1.8% 28.7%

Consumer Goods 26.0% 27.6% 8.3% 38.2%

Basic Materials 25.3% 35.4% 4.1% 35.3%

Equity Vesting Period Breakdown (In Percent of Awards)

Equity Vesting (In Percent of Awards)


About E*TRADE Corporate Services

E*TRADE Financial Corporate Services, Inc. is a premier provider of equity compensation management tools for many top companies, including over 20 percent of the S&P 5002. We offer flexible, easy-to-use and powerful solutions for complete equity compensation management, including support for most equity vehicles, and seamless access to stock plan participant services and education from E*TRADE Securities.

For four years running, E*TRADE’s proprietary Equity Edge Online® platform has been rated #1 in loyalty and overall satisfaction by Group Five, LLC3.

PLEASE READ THE IMPORTANT DISCLOSURES BELOW.

1. Results are from the 2015 Stock Plan Participant Survey conducted by E*TRADE Securities LLC in February 2015.

2. Data as of 2/23/15.

3. As of June 30, 2015, Equity Edge Online® was rated highest in Loyalty and Overall Satisfaction in the 2012, 2013, 2014 and 2015 Stock Plan Administration Benchmark Study and Financial Reporting Benchmark Study. Group Five, LLC is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial family of companies.

The data and analysis contained in this publication has been prepared by Equilar. The commentary, where noted, has been provided by E*TRADE Financial Corporate Services, Inc.

Equilar is not affiliated with E*TRADE Financial Corporate Services, Inc. or the E*TRADE Financial Family of companies.

Employee stock plan solutions are offered by E*TRADE Financial Corporate Services, Inc.

Securities products and services are offered by E*TRADE Securities LLC, Member FINRA / SIPC.

In connection with the stock plan solutions it offers, E*TRADE Financial Corporate Services, Inc. utilizes the services of E*TRADE Securities LLC to administer stock plan participant brokerage accounts.

E*TRADE Securities LLC and E*TRADE Financial Corporate Services, Inc. are separate but affiliated companies.

The laws, regulations and rulings addressed by the products, services, and publications offered by E*TRADE Financial Corporate Services, Inc. and its affiliates are subject to various interpretations and frequent change. E*TRADE Financial Corporate Services, Inc. and its affiliates do not warrant these products, services and publications against different interpretations or subsequent changes of laws, regulations and rulings. E*TRADE Financial Corporate Services, Inc. and its affiliates do not provide legal accounting or tax advice. Always consult your own legal, accounting and tax advisors.

Report Partner


©2015 Equilar, Inc. The material in this publication may not be reproduced or distributed in whole or in part without the written consent of Equilar, Inc. This report provides information of general interest in an abridged manner and is not intended as a substitute for accounting, tax, investment, legal or other professional advice or services. Readers should consult with the appropriate professional(s) before acting on information contained in this publication. All data and analysis provided in this publication is owned by Equilar. E*TRADE Financial Corporate Services, Inc. (E*TRADE) contributed commentary to this publication. E*TRADE is not affiliated with Equilar and all commentary is owned solely by E*TRADE. Any disclosure examples in this report are reformatted to fit this document, and certain sections of sample texts may be bolded to add emphasis. If you have questions or comments regarding this publication, please email [email protected].

For more information, please contact us at [email protected].

The contributing authors of this report were Erin Hansen, Jonathan Liu and Eric Wang, Research Analysts.

1100 Marshall Street Redwood City, CA 94063 Phone: (650) 241-6600 Fax: (650) 701-0993 E-mail: [email protected] www.equilar.com

2015 equity trends report - university of pennsylvania · 2015 equity trends report | 2. contents...

Documents