Excerpts from the Ayco Compensation & Benefits Digest – April 12, 2013

Long-term incentive (LTI) awards typically account for a significant portion of the compensation received by corporate executives. Within the universe of LTI awards there are four main types: 1) stock options and stock appreciation rights (SARs); 2) restricted stock and restricted stock units (RSUs); 3) performance shares and performance units; and 4) market stock units.

More than a decade ago, almost all large U.S. companies used stock options as their primary and, in many cases, exclusive long-term incentive award for executives. There were a number of reasons for this, not the least of which was the accounting advantage that stock options offered to companies. Since then, most companies have revised their mix of long-term awards and continue to do so on a periodic basis. Part of the rationale for this is the expressed preference by corporate governance groups for more “pay-for-performance”, plus meeting the challenge of stock market volatility, and the elimination of the accounting advantages for stock options. Most companies now utilize a mosaic of awards that provide a diversification of long-term incentives, which can add to the complexity of an executive’s understanding and the planning of their LTI strategy.

Ayco recently reviewed the long-term incentive award practices of 300 of its corporate clients focusing on the awards made to senior executives. Data is derived from confidential information regarding award grants to executives, as well as disclosures made in 2013 proxy statements. Among the 4 types of long-term awards monitored for the survey group, the following chart illustrates that the majority are granting a mix of 2 or 3 award types.

Ayco LTI Mix

Here are the different types of awards and percentages found by Ayco among their survey group:

Ayco LTI Percentage

At 18 companies (6% of the survey group), executives were offered a choice as to their upcoming equity award. Commonly, this is a choice between NQ (non-qualified) stock options (or SARs) and restricted stock or RSUs. Typically, named executive officers are not eligible for this choice in awards. Despite being somewhat more challenging to communicate and explain to award recipients, choice programs are extremely popular with employees.

For further information regarding these findings contact Richard Friedman at rfriedman@ayco.com.

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