The third year of mandated say on pay has seen a continued increase in emphasis on performance-based equity plans, with a focus on TSR, according to Frederic W. Cook & Co’s 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives. The report, which is published annually in the fall, analyzes long-term incentive plan practices for executives at the 250 largest companies in the S&P 500 Index. This year’s key findings include:
- Performance shares continued to increase in prevalence for the third year in a row and are now used by 81% of the top 250 companies (up from 75% in 2012). Interestingly, although both performance shares and restricted stock have increased in prevalence, the decline in usage of stock options has leveled off in 2013, a finding the report attributes to large investors beginning to “exert their authority” and express “disagreement with [proxy] advisory firms defining stock options as non-performance-based equity.”
- Companies using three or more forms of long-term incentive grants (i.e., stock options, performance shares/unitsand restricted stock) increased from 34% to 39%, while the share of companies using two forms dropped to 46% from 49%, indicating a “portfolio strategy” that balances various types of objectives within a long-term incentive plan. This approach was particularly prevalent in the energy and financial industries.
- TSR is now the most prevalent performance metric (50%) among the top 250, edging out profit-based measures such as EPS or net income, and is most frequently used on a relative basis (88%) vs. an absolute basis (4%). Profit-based measures remain very common (49%) followed by capital measures (39%) such as return on equity or return on capital.
- Similar to last year, nearly half of companies (46%) use a single performance measure category in long-term incentive plans while just over a third (34%) use two measures.
A link to the FW Cook Top 250 Report is below.