October 31, 2019
Why Give Front-Loaded Equity?
– Broc Romanek
Here’s the intro from this piece by Semler Brossy’s Seamus O’Toole and Olivia Tay:
When Actavis PLC (now Allergan Inc.) compensation committee members voted in 2014 to award the company’s named executive officers (NEOs) with a front-loaded long-term equity incentive, they had a convincing rationale (Actavis 2015). The company was in the midst of executing a new transformational strategy focused on growth, as well as absorbing the recent $28 billion acquisition of Forest Laboratories Inc. The complex and multifaceted strategy would take several years to execute, so the new compensation plan aimed to focus executives on just one set of goals for the next three years.
The long-term incentive — and the strategy — was a big bet. Executives would forgo annual equity awards for three years. But if they delivered the transformation and achieved an annual total shareholder return (TSR) of at least 10%, they would earn awards ranging from a grant-date fair value of $5.6 million to $34.5 million — the top figure for CEO Brent Saunders. The equity, in the form of performance stock units and options, would fully vest in 2019.
Front-loaded awards typically lump into one sum the expected value of grants that will be made over the ensuing three to five years. Instead of an annual grant schedule, the full award is made upfront (see Figure 1). Oftentimes, companies will design these awards to have a higher-than-normal risk profile as well, but that isn’t always the case.