Performance Equity Compensation Design and Use Matrix

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This matrix describes the 11 types of performance-based equity compensation and 9 key issues (primary use, primary plan sponsor, typical recipient, common KPI, key advantages and disadvantages, accounting, communication and administration issues).

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Performance Equity Compensation Design and Use Matrix

  1. 1. The Performance Equity Compensation Design and Use Matrix Issues  and Primary   Key   Key   Features Typical   Typical   Common  KPI Key   Key   Key Descrip(on Compensa(on   Communica(on   Administra(on   Plan  Sponsor Recipient and  Metrics Advantages Disadvantages Accoun(ng  IssuesEquity  Types Use Issues Issues Internal and soft goals, In down times awards may be Communicating a Public companies with limited including annual Communicates value of severely limited providing Liability accounting until award hypothetical future award Pre-award information not Performance   Award of restricted outstanding shares. ability to define long-term KPI performance reviews. equity awards prior to little in the way of retention. is made. Fixed accounting after can be difficult and kept in stock admin Award size based on meeting defined Motivate and Retain and metrics, but a need to Upper Management Project oriented goals award date. Fairly easy to Award creates immediate award is made. Generally no potentially dangerous. system. Accounting not fully Awarded  Shares goals. Vesting is typically based on time meet stock ownership including delivery dates and translate dollar value to dilution. Goals are usually need for valuation services Performance orientation is supported by any system guidelines approvals of new products award size based on a maximum term of general short-term by regulators one-year Internal and soft goals, Communicating a including annual Communicates value of In down times awards may be Simple Valuation. Complex hypothetical future award Pre-award information not Performance   Award of Restricted Stock Units. Award Public companies with limited Upper and Middle performance reviews. equity awards prior to severely limited providing accrual. Expense booked is can be difficult and kept in stock admin size based on meeting defined goals. Motivate and Retain ability to define long-term KPI Project oriented goals award date. Fairly easy to little in the way of retention. relative to probable payout. No Management potentially dangerous. system. Accounting not fully Awarded  Units Vesting is typically based on time and metrics including delivery dates and translate dollar value to Goals are usually based on a expense reversal if goals are Performance orientation is supported by any system approvals of new products award size maximum term of one-year market based general short-term by regulators Corporate or market under- Sales staff, market Stock admin systems do performance may result in Simple Valuation. Complex Plans can be complex and Award of Restricted Stock Units. drivers, business-line Top performers are not support. Dividends are Performance   Spread at vest is typically multiplied or Public and private financial owners and others Sales Targets or rewarded in a meaningful top performers receiving less accrual. Expense booked is difficult to explain. Regular, difficult to track. Difficult to Motivate Performance against growth than intended. Leveraged relative to probable payout. No interim communications are divided by factors of between 1 and 5, firms. where direct financial way. Bottom performers correctly track proximity Leveraged  Units based on performance against goals results can be associated or revenue goals receive limited payout multiples must revisited expense reversal if goals are a must. Unlikely to be fully and remaining effort to to individuals regularly and monitored market based understood by shareholders reach goals closely Can set thresholds to Complex combinations of Regular communication Stock admin systems do Award of Restricted Stock Units. Simple Valuation. Complex Performance   Shares at payout are determined as a Established public companies Revenue, Relative TSR, EPS, ensure payout even if metrics and goal levels accrual. Expense booked is required to drive not support. Dividends are Upper and Middle performance is below require intensive analysis. performance. Must provide difficult to track. Difficult to Earned  Units percentage of shares awarded, as Attract and Motivate with history to support long- Management Recruitment, Cost-cutting, expectations Excellent Improper design or poor relative to probable payout. No proximity to goal and what correctly track proximity related to threshold, target or term goal definition EBITDA expense reversal if goals are communication tool for performance can result in still needs to be done to and remaining effort to maximum goals high performance staff loss to competitors market based attain goals reach goals Misaligned goals may Simple Valuation. Basic accrual if Communication may be Stock admin systems accelerate awards too early, Public or private companies Upper and Middle goals are not probable. Expense easier than other partially support these. Performance   Award of Restricted Stock Units. Award Attract, Motivate and with goals that are best Management. Broad- Revenue, Relative TSR, EPS, Provides motivating factor providing little or no long- acceleration if it is probable that performance awards. Must Participant reports are vesting is time-based, but can be moved Recruitment, Cost-cutting, on top of standard term incentive or retention. Retain attained in shortened periods based in certain goals will be met. No expense provide resource for limited and vesting Accelerated  Units forward if goals are met of time industries EBITDA Restricted Stock Units Time-based element reduced reversal if goals are market explaining potential acceleration is largely optics of performance based acceleration manual metrics Complicated to explain and No systematic support. Performance   Variable-priced units. Award price is set Companies with volatile stock Provides moderate payout Can be seen as demotivating Complex valuation. Complex manage. Participants must Reporting must be custom according to performance against Motivate prices where over or under Executives (C-Suite) Revenue, Relative TSR vehicle for unpredictable when price becomes too high be "in the loop" to truly be accrual.. created and managed Priced  Units defined goals or index of companies payout is a concern companies or markets. in relation to expectations motivated by these types of manually plans Stock admin systems offer Difficult to communicate Motivate and Attract. Public companies where Peer Group Performance, Participants view these are little or no support for Shareholder friendly and the value relative to Variable-priced Stock Options. Exercise Useful for attraction when performance against peers has Performance against specific understood. Ensures that limiting. Over-performance Valuation can be complex. competitor awards if they variable-priced options. Indexed  Op(ons price linked to performance to a company is seen as been strong. Companies Executives (C-Suite) industry index, Performance payout is relative to market may result in less than desired Accrual is generally simple if are not also indexed. Can Typically all admin is present index or group of peers outperforming where over-payout has been against general market payout. Peer groups can be goals are clearly understood. performed on spreadsheets performance as a whole provide competitor competitors in future suspected index difficult to define recruiting tool between grant and vest dates Internal and soft goals, Communicating a including annual Complex formula needed to Pre-grant information not Companies with limited ability Communicates value of Liability accounting until award hypothetical future award Performance   Grant of Stock Options. Grant size to define long-term KPI and performance reviews. equity awards prior to grant convert performance goal is made. Fixed accounting after can be difficult and kept in stock admin based on meeting pre-set goals. Vesting Motivate Upper Management Project oriented goals into a combination of shares system. Accounting not metrics, where options are date. Improves optics of award is made. Generally no potentially dangerous. Granted  Op(ons is typically based on time more highly valued than units including delivery dates and grant size to participants and exercise price. Not need for valuation services Performance orientation is supported well by any approvals of new products based on a long-term goal generally short-term system by regulators Stock admin systems Reduces impact of May require complex valuation. Communication is easier Performance   Grant of Stock Options. Grant vesting is Public or private companies Upper and Middle Revenue, Relative TSR, EPS, Ensures vesting regardless performance on grant since Expense may be less due to than other performance partially support these. Attract, Motivate and with goals that are best Management. Broad- Recruitment, Cost-cutting, of performance. Easily Participant reports are Accelerated   time-based, but can be moved forward Retain attained in shortened periods based in certain EBITDA, Stock Price over understood by participants shares will vest if participant potentially shortened life. awards. Must provide limited and vesting if goals are met remains eligible. Double Expense may be more due to resource for explaining of time. "Tech friendly" design industries given period of time with little downside acceleration is largely Op(ons hurdle for participants potentially fewer forfeitures potential acceleration manual Communication is easy at Companies emphasizing Valuation requires additional Supported fairly well by Grant of Stock Options. Exercise price Shareholder friendly and Creates double hurdle for grant. Difficult as time Premium  Priced   is set to a price higher than current superior returns, or when Upper and Middle understood. Easy to participants. Very low analysis. Potentially longer life progresses, unless most stock admin systems. Motivate current stock price has been Stock Price growth increase value. Spread at time of Optics showing growth and FMV. Typical plans set price at a Management administer. May have perceived value until options performance meets goals. Op(ons 10%-15% premium reduced significantly by market reduced expense impact are in the money. grant reduces value. Accrual is Can provide basis for movement to being in-the- pressures basic competitor recruitment money is limited Ensures that options only Cost of plan difficult to predict Regular communication Grant of Stock Options. Options Double hurdle for Stock admin systems do Revenue, Relative TSR, EPS, vest if performance is until all variables are known. required to drive Performance   available to be exercised are Established public companies Executives (C-Suite) Recruitment, Cost-cutting, attained. Shareholder participants. Difficult to set Goal type drives whether performance. Must provide not support. Difficult to determined as a percentage of total Motivate with history to support long- (complex goals). Broad- effective goals.Valuation is correctly track proximity EBITDA, Stock Price over friendly. Payout in good expense can reversed if missed. proximity to goal and what Earned  Op(ons granted, as related to threshold, target term goal definition based (simple goals) given period of time situations can be higher complex. Difficult to track Generally requires complex still needs to be done to and remaining effort to or maximum goals than standard options approved pools of shares valuation attain goal reach goals©2012  -­‐  Performensa0on  Consul0ng Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406 email:  info@performensa0on.com web:  www.performensa0on.com

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