April 25, 2022
LTIPs: How Likely Are Payouts?
Nearly all big companies use long-term incentive plans to encourage performance over periods greater than one year – and these plans often represent the most significant portion of executive pay. With pay-for-performance in the spotlight, Compensation Advisory Partners recently analyzed LTIP structures and payouts across 120 companies with median revenue of $36B and performance cycles ending in 2015 through 2020. Here are some takeaways from their new memo:
– Based on CAP’s analysis of LTI payouts from 2015-2020, the degree of difficulty (or “stretch”) embedded in long-term performance goals translates to:
• A 95% chance of achieving at least Threshold performance
• A 70% chance of achieving at least Target performance
• A 20% chance of achieving Maximum performance
– 97% of companies in the study use LTIPs – with 97% denominated in stock (vs. cash)
– 97% use a 3-year performance period – 3% use a 4-year or 5-year cycle
– The most common long-term performance plan metrics are relative Total Shareholder Return (TSR), Return measures, and Earnings per Share (EPS). Many companies use a combination of financial and stock price metrics to balance line-of-sight for executives and direct alignment with shareholder outcomes.
– Target performance goals are most often set in line with the company’s business plan for absolute metrics or at median of the comparator group for relative metrics. Proxy advisory firm, Institutional Shareholder Services (ISS), has pushed for companies to set target goals for relative TSR above median of the comparator group. We have seen some companies follow this guidance in paying at target for performance at the 55th or 60th percentile; however, most companies continue to pay at target if TSR results are at median vs. the comparator group.
– Liz Dunshee