The Advisors' Blog

You might’ve thought that executive “mega grants” disappeared a decade ago, along with new episodes of Jersey Shore. But this Pearl Meyer memo says they could be making a comeback. The memo defines “mega grants” as awards that have at least some of these characteristics:

– A grant date value of more than 10x the CEO’s (or other executive’s) salary;

– Represents a significant percent of common shares outstanding (e.g., 3% to 12% or more of common stock outstanding [CSO]);

– A one-time multi-year award, with an expectation of no further equity awards being provided to the recipient for several years; and/or

– Extended vesting/performance horizons, often seven to 10 years.

While proxy advisors and investors tend to dislike outsized awards, there may be situations where the benefits outweigh the risks. This Aon memo walks through ways to align mega grants with stakeholder interests – and gives examples of terms & conditions. Here are a few suggestions:

– Expressing the award’s ultimate value as a percentage of the value created for shareholders helps to articulate the value sharing between executives and shareholders. Targeted values of the award often range between 1-5% of total company value, with the majority on the lower end of the spectrum. Going above this range comes with substantially more risk, and in turn, should be accompanied with more performance rigor and justification.

– It is not uncommon for executives to forgo other compensation during the performance period of awards like this to help justify the quantum.

– Even if shareholder approval is not required, we recommend seeking approval to help mitigate risks.

– Some companies have chosen to roll out special broad-based programs at the same time to allow others to share in the success of the company, such as an employee stock purchase plan.

– There are also the optics to manage if the award does not ultimately payout, potentially impacting retention of key executives. Even entertaining a modification if the award becomes unlikely to pay out can make the problem worse. This may also tie up compensation plans for the executives over that timeframe, limiting flexibility to a changing environment. These risks should be weighed carefully during the design phase, so the company is comfortable with this potential outcome.

– Consider including design features that help to create even stronger alignment with shareholders, such as a post-vest holding period.

– Explaining directly to shareholders why this program is necessary and why you believe in it can be very impactful to getting shareholder support.

– Articulating explicitly why this program aligns with the company’s goals and is valuable to all stakeholders helps with the qualitative review of these programs and gaining shareholder support. Companies should make sure the rationale behind the award is one the company believes and can support publicly.

– Liz Dunshee