Performance Based Equity svca - may 19 2010


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This presentation covers the realities of performance-0based equity in the Silicon Valley. Presenters includes professionals from Intel, eBay, Applied Materials and Performensation. Learn about the foundation and details of adding performance to equity compensation plans.

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Performance Based Equity svca - may 19 2010

  1. 1. Performance-based Equity<br />Understanding to newest “new” thing in the Total Rewards Portfolio<br />
  2. 2. Presenters<br />Brit Wittman<br />Director, Exec Comp and Corporate Comp Design<br />Intel<br />Steve Lensing<br />Sr. Manager, Equity and Executive Compensation<br />eBay<br />Dan Walter, CEP<br />President and CEO<br />(917) 734-4649<br /><br />
  3. 3. What is meant by “performance-based equity”?<br />Award is given for meeting goals<br />Vesting is accelerated for meeting goals<br />Vesting occurs after a period of time AND goals are met<br />Vesting occurs ONLY when goals are met<br />Shares are earned, but not vested, when goals are met<br />Payout may be separate from earning and vesting<br />
  4. 4. Why do companies implement performance-based equity? <br />Performance was always the stated “reason” for offering equity<br />“We want people to share in the success and growth of the company”<br />NOTE: Very little mention of failure and demise of the company<br />External optics (Glass Lewis, RMG)<br />Practice at peer companies<br />Is performance simply stock price (total Shareholder Return)?<br />When does stock price no longer provide a reasonable link to pay?<br />
  5. 5. The Equity Compensation Dilemma<br />1988-1999 the “No Lose” zone (and the period of the greatest growth in the use and value of equity compensation plans)<br />
  6. 6. What are the most common performance metrics? <br />TSR – Total Shareholder return<br />Absolute <br />Relative to peer group (s)<br />Financial Goals<br />Revenue<br />ROIC<br />EBITDA<br />Cost<br /><ul><li>Other
  7. 7. Risk
  8. 8. Staff Retention
  9. 9. Innovation / Product Development
  10. 10. HRIS
  11. 11. Performance Appraisal / Human Capital Management score
  12. 12. About a million others</li></li></ul><li><ul><li>As a stand-alone goal it may not
  13. 13. Provide line of sight to staff below C-Suite
  14. 14. Link corporate long-term success to plan
  15. 15. Pay evenly. Peer groups can differ widely, skewing results
  16. 16. Reflect risk or other factors in today’s payout
  17. 17. Companies are starting to combine it with other metrics
  18. 18. Create a balance using Financial, HRIS and Project goals – Total Compensation Intelligence™
  19. 19. Multiple Independent goals
  20. 20. Co-dependent goals – Generally must meet TSR threshold to be eligible for other goals</li></ul>Relative TSR is King for now, but…<br />
  21. 21. Profits / Revenues – without a balance to costs and/or risk these can provide unsustainable performance and even allow gaming the system<br />Individual Goals – Can pay without corporate performance<br />Companies generally over-leverage the upside and minimize the downside. All carrot, no stick means staff can just go for homeruns, without trying to win the game<br />Single metric without a balancing component can result in unexpected results (and possible media headlines)<br />Are there any pitfalls for using specific types of performance metrics?<br />
  22. 22. What do performance equity plan structures look like? <br />Most common US structure is Performance Unit award with a three-year measurement period<br />Relative TSR against a peer group<br />Minimum payout set at a level that shows effort<br />Target payout set at a slight stretch goal<br />Maximum Payout set at a significant stretch goal<br />Smaller companies often use shorter measurement periods<br />Some companies allow for “forgiveness” of missed goals (Frowned upon by RMG)<br />Outside the US there is more use of multiple layered goals<br />
  23. 23. CEO and executive management<br />Scientists, key Individual Performers<br />Individuals with long-term project deliverables<br />Outside the US it is not uncommon for these to go below the mid-level of and organization<br />Who receives performance-based equity? <br />
  24. 24. Between 35% and 60% of companies offer performance equity<br />These numbers have been very volatile<br />Some sources show this percentage decreasing (PWC, FW Cook)<br />Some sources show this number increasing (Equilar, Mercer)<br />Common in Finance and Life Science, growing use in Tech<br />Many companies are pushing these plans down in the organization<br />Microsoft – Top 1,200<br />HP – Approx. 30,000?<br />Used at both large and small companies<br />Who awards performance-based equity? <br />
  25. 25. Communication and engagement with goals and awards<br />Best practices for communicating performance-based equity? <br />“Communication is the key to a successful program” – Allison McBride, International Paper<br />Educate participants on how the goals drive corporate success and why they apply to the individual<br />Communicate often, consistently and with enough detail for individuals to understand how they are linked to the movement of the underlying metrics<br />Do employees like receiving performance-based equity? <br />Results are mixed<br />When alignment and line-of sight are correctly positioned and the individuals can see their role plans seem to be positively received<br />When performance is low, the result can be similar to impact of underwater stock options<br />For lower level staff minimums may need to be structured to ensure some value even when performance is not great<br />
  26. 26. What should my company consider before implementing performance-based stock? <br />Looking at the payout curve, performance levels versus payouts <br />Alignment with the employee’s total compensation<br />Improperly designed programs can have the same over-leveraged results as stock options<br />Too little leverage provides no motivation to out-perform<br />Too steep a curve can create risk-adverse staff <br />“A share in my hand is worth five potential shares that may be lost if I miss my goal”<br />Alignment of performance metrics to key company goals <br />One or multiple metrics <br />Payouts levels vs. company performance  <br />Alignment of payout with Shareholder return and market peers<br />Are you willing to “stick to your guns” if goals are missed?<br />
  27. 27. What should my company consider before implementing performance-based stock? <br />Disclosure: CD&A must include metrics and reasons why they were used<br />Tax implications<br />Less predictable income planning BUT<br />Better income deferral potential under 409A<br />Administration<br />Data Integration<br />Financial Reporting<br />Transaction Support<br />Impact on CIC provisions and clawbacks<br />Accounting impact is more complex than time-base equity<br />Market-based awards have a fixed expense, but you cannot reverse it if goals are not met<br />Performance-based goals (not based on stock price) require determining the probability of goals achievement and adjusting expense accordingly<br />
  28. 28. Performance Based Equity at Intel<br />Eligible: Management Committee Members (20 employees)<br />Equity mix: 66% “OSUs” (performance RSUs) / 11% RSUs / 22% Options<br />3-year Performance Period; overlapping cycles<br />Performance Measures<br />Relative TSR over performance period – median TSR of 15 direct competitors (the “Tech 15”) averaged with median TSR for the S&P 100<br />Payout Range<br />Floor of 33%<br />Maximum of 200%<br />More highly leveraged above target than below (2 down; 3 up)<br />3-year Vest<br />100% vested and paid out at end of 3-year performance cycle<br />
  29. 29. Eligible: SVPs and above (18 employees)<br />Equity mix: 50% Options / 25% RSUs / 25% Performance RSUs<br />2-year Performance Period<br />2009-2010 and 2010-2011 periods were “decoupled” into two consecutive 12-month targets<br />Performance Measures<br />FX-neutral revenue threshold<br />Non-GAPP operating margin<br />Both minimum FX-neutral revenue and non-GAAP operating margin thresholds must be met in order of there to be any incentive payout<br />Return on invested capital<br />2-year Vest<br />50% of the amount awarded is immediately vested upon grant and 50% will vest on the first anniversary of the grant<br />Performance Based Equity at eBay<br />
  30. 30. Outside the US, performance is becoming the main foundation of share-based compensation<br />98% of FTSE 300 have performance share schemes<br />More than 90% of Australian companies have performance-based share remuneration<br />Say on Pay is the biggest driver of these plans<br />Countries with some version of Say on Pay rules: UK, Australia, Sweden, Norway, Netherlands, Italy, Portugal, Spain, Austria, Germany, Ireland, Croatia, Hungary, Poland, Denmark, Finland, Estonia, Luxembourg, Switzerland, and Belgium<br />What is happening in the ROW?<br />
  31. 31. What can we expect in the future?  <br />Say on Pay will become a reality<br />Use of performance-based equity will grow first in the C-suite and then push quickly down into upper and middle management<br />US plan designs will quickly catch up with ROW plan designs<br />PREDICTION – Silicon Valley will embrace these plans as a best-practice and innovate them just as they did stock options.<br />Performance plans provide a similar upside and downside risk that is better structured for our current volatile market<br />