May 3, 2017
Making Pay More “Long-Term”?
– Liz Dunshee
A few days ago, I blogged about whether 3-year performance periods align with investor definitions of “long-term.”
In this article, Joe Bachelder of McCarter & English presents a case study of Exxon Mobil’s lengthy vesting periods for Rex Tillerson & suggests a fix to existing incentive programs that would place more emphasis on 5-year or longer timeframes:
New incentive awards (including annual bonuses and three-year “long-term” awards) would be made subject to a “rolling” five-year adjustment factor. The adjustment factor would be applied each year based on a five-year cumulative performance target for the five years ending with that year. For example, the five-year period January 1, 2013 through December 31, 2017 would have a performance target (e.g., return on equity for the five-year period). Actual achievement would be expressed as a percentage of target (100 percent—exactly on target, 90 percent for 90 percent achievement of target, etc.).
This percentage would be applied to incentive awards being earned out at the end of that year. For example, at a 90 percent-achievement of the five-year performance target, each incentive award otherwise earned out would be adjusted to 90 percent of the earned-out award. If the five-year performance exceeded target, a corresponding adjustment upward would be made. In this way existing incentive programs could be continued without basic change but would be subject to adjustment, taking into account how well the employer is doing in its performance over periods longer than three years.
I like the concept – but two questions come to mind:
1. Are there many companies & execs brave enough to trail-blaze longer-term programs? Tillerson’s case is unique due to Exxon’s size & the fact that he worked there over 40 years.
2. Could grant date fair values in the summary comp table easily be adjusted downward to reflect longer vesting periods? You wouldn’t want to rely on investors reading all of the narrative info about the program…
Check out our “LTIPs” Practice Area for more suggestions on plan design & effective long-term incentives.