4 Trends in Equity Award Usage and Eligibility

I recently interviewed Ian Dawson of Deloitte Consulting on trends in equity incentive programs for the NASPP’s Equity Expert podcast.

Ian has spent the last 13 years advising compensation committees and management on executive compensation issues, including equity programs. We discussed the results of the 2021 Equity Incentives Design Survey, which is co-sponsored by the NASPP and Deloitte Consulting, and Ian’s own observations on the state of equity compensation.

Here are some highlights from our conversation:

Trend #1: The Rise of Full Value Awards and Decline of Stock Options

One trend Ian highlights is that, since the early 2000s, full value awards have risen considerably in popularity while stock options have declined. In 2000, nearly all public companies granted stock options; today less than half do. Over this same period, the percentage of companies that currently grant full value awards has risen to close to 90%.

Ian attributes this to several factors:

• From the mid ‘80s through the 2000s, the stock markets did very well, and options delivered a lot of value for executives. But in the early 2000s, that landscape started changing.
• In 2006, the accounting rules changed, resulting in a charge against earnings for option grants.
• The financial crisis occurred in 2008, which ended in a recession and economic uncertainty. Because stock options require stock price appreciation to deliver a return, they can be a problematic form of compensation during periods of economic decline.
• In 2010, the Dodd-Frank Act was enacted, which mandated Say-on-Pay votes for US public companies. This increased the influence of proxy advisors and the focus on pay-for-performance.  

Ian notes that companies have now shifted to performance-based grants for executives. These awards are supplemented with time-based full value awards to ensure that, in the event the performance awards don’t pay out, the executives still have some equity that aligns their interests with shareholders.

Trend #2: Many Companies Grant Equity Broadly

I often encounter the myth that companies only offer equity to executives, but Ian points out that the survey shows that many companies grant equity well below the executive rank and this is a trend he is seeing grow among his clients.

Over 80% of companies grant full value time-based awards to middle managers and half grant these awards to junior management. Although performance-based equity awards are typically reserved only for senior executives, time-based awards often reach further down into the organization, as companies look to build their corporate culture and drive the collaboration that results from having a sense of ownership of their work and the company.

Ian is a big proponent of broad-based equity:

What's the old saying? Culture eats strategy for breakfast. I think making people owners really supports culture and makes people feel part of something, like they're moving the ship in the same direction.

Ian further notes that we're living in a period of huge transformation in the employment market; companies need to think of more creative ways to pay employees. Cash can’t always be the answer. When companies offer equity to employees, not only does this support their corporate culture, but—with the right vesting conditions—it hopefully locks them in for at least a couple of years as well.

One caution Ian offers, however, is that dilution can be a significant concern with broad-based equity. Companies need to model out their share usage under different pricing scenarios for three to five years into the future to ensure they can support their grant program.

Trend #3: Technology Companies Are Driving Broad-based Equity

Another trend that Ian points out is that technology companies grant equity deeper into their organizations than other industry sectors and are arguably driving the shift towards broader equity.

As noted in the feature article in the Fall 2021 issue of the Advisor (“ Five Trends in the Usage of Equity Awards”), technology companies outpace other industries in the use of equity at all levels of their organizations, but especially at lower ranks:

• Nearly all technology companies (94%) offer discretionary equity awards to middle-management employees compared with only 84% of non-technology companies.
• Almost 70% of tech companies offer equity to junior-management employees, compared with only 44% of non-tech companies.
• Over 40% of tech companies offer equity to employees in their general workforce, compared with only 15% of non-tech companies.

Ian notes however, that when it comes to the types of equity vehicles offered, technology companies are generally on the same page as other industries sectors.

Trend #4: Companies Split Down the Middle on ESPPs

The survey reveals that, overall, about half of companies offer an ESPP. Ian notes that ESPPs do a great job at delivering equity broadly but they can be very difficult to administer globally. While he is optimistic that more companies will offer ESPPs in the future, where companies don’t offer one, it is often because they have a lot of employees outside the United States, where ESPPs can be challenging to operate.

More Information

Here are additional resources on the 2021 Equity Incentives Design Survey:

• Podcast with Ian Dawson: Trends in Equity Award Usage and Eligibility
• Webcast: Top Trends from the 2021 Equity Incentives Design Survey