The Advisors' Blog

As you continue to work through the technicalities of your upcoming pay vs. performance table, this FW Cook blog gives a heads up on valuing equity awards that use relative total shareholder return as a performance metric. Here’s an excerpt:

Companies often estimate the value of “in-flight” awards (awards partway through the performance period) by using the “Intrinsic Value method,” which estimates value by determining a payout percentage based on the current percentile ranking and then multiplying that payout by the current stock price.

It turns out that in many cases the Intrinsic Value method produces a value quite different from the “Fair Value,” which is the value used for accounting purposes and required for the PVP table. The difference is most acute for awards tracking at no payout, where the valuation required for the PVP table can produce valuations near target payout in some cases.

The blog includes a table from Infinite Equity that may be helpful in estimating fair value of these awards at different points during the performance period. The FW Cook team explains:

As companies develop estimates for CAP for their 2023 proxy statements, we believe that a table like this can be a reasonable placeholder for estimated Fair Values (at least until the end of the year when a final Monte Carlo simulation to determine Fair Value will be required). Although the table reflects a specific set of assumptions, so that results may diverge for some plan designs, we think it is still a useful tool for companies that would like to develop insight into their 2023 PVP table and have not yet started full valuations.

The table may be particularly helpful in cases where current percentile rankings are extremely high or low and there is significant time for the awards to run since this is where the divergence between Intrinsic Value and Fair Value is the greatest.

Make sure to register and join us for our 3-hour special session next Thursday, November 10th, on the SEC’s new pay vs. performance rules. We will be explaining how to handle major interpretive questions and how to put this new disclosure in context for say-on-pay, and will also walk through our sample disclosures – which registrants of this special session will be able to download in real-time. That resource alone is well-worth the price of admission!

– Liz Dunshee