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Since the advent of Say on Pay, executive compensation has shifted towards the notion of pay for performance. As such, the use of performance-based equity has risen over the past 14 years, reducing the weighting of time-based awards granted to executives. This trend was spurred on by proxy advisors and shareholders alike to hold executives accountable when company performance was less than ideal.
In late November, Institutional Shareholder Services (ISS) announced updates to its benchmark policies for the upcoming year. As a response to feedback from shareholders, some of the changes made by ISS signal a shift towards a longer lens on investments. More specifically, ISS changed its quantitative pay-for-performance model from evaluating the past three years to the past five years, and it will also look more positively on time-based equity awards with a longer vesting period.
To compare vesting periods of time-based equity awards before and after the introduction of Say on Pay, Equilar analyzed the longest vesting period of annual equity grants at 500 of the largest companies at the time.
Before Say on Pay, vesting periods were more spread out, with 40.5% of companies granting equity that vested three years after the grant date, 35.7% with four-year vesting periods and 11.6% of companies with vesting periods of longer than four years. However, after Say on Pay, we now see the majority of companies granting time-based equity with a vesting period of three years, coinciding with most performance-based awards having a three-year performance period. Only 6% of companies now grant annual equity that vests more than 4 years after the grant date.
Holding periods that restrict the sale of equity after vesting will also be considered when evaluating if the equity grant is considered “long-term.” However, less than 2% of companies require holding periods.
While this change may come as a relief for companies where time-based equity awards make up more than 50% of executives’ pay mix, it will remain to be seen how trends shift in the next few years. Moving away from performance-based awards and not having to set performance targets for an uncertain future may be helpful for some compensation teams, but this will need to be balanced with providing the right motivation for executives to still work in both the company’s and shareholders’ best interests. A more balanced pay mix between performance-based awards and time-based awards may be in store for the future.
Director of Research at Equilar
Courtney Yu, Director of Research at Equilar, authored this post. Please contact Amit Batish, Senior Director of Content & Communications, at abatish@equilar.com for more information on Equilar research and data analysis.
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