July 30, 2008
Some Thoughts on Performance Awards
– Mark Poerio, Paul Hastings
The May-June issue of the NASPP’s Advisor notes on the cover that “performance awards are the plans of the future” and then follows up with support from a Buck Consultants study giving “performance scores” for different types of approaches – with time based awards being rated badly (no surprise). I could not agree more, and suspect future dialogue about this will focus on three different structures for performance awards.
The first would use performance to determine the amount of a cash or stock award. The second would use performance to determine vesting for an award. And the third, and best, approach would incorporate both of these components into a single award that encourages solid performance over the longest period (both during the pre-grant performance period and the post-grant vesting period). The resulting double-layer of performance criteria should be best from an employer and shareholder perspective, and should be a first step toward establishing greater public comfort with executive compensation generally.
The reason? It strikes me that executives – like corporate directors – should not reap huge compensation from short-term success. The long view encourages appropriate risk-taking, better accountability, and riches for those who show the ability to lead their companies toward sustained success. The public would welcome that, I imagine.