November 17, 2022
Managing Your Burn Rate in a Volatile Market
As executives and compensation committees plan for 2023, the possibility of a recession and stock price declines continue to be front-of-mind. This Semler Brossy blog offers six approaches to equity grant practices that can help manage “burn rates” – and preserve share authorizations – during volatile times. Here’s an excerpt:
1. Adjusting the Grant Date Fair Value for purposes of determining award sizes by using an average value—such as an annual average stock price—to better reflect the likely prices once the market stabilizes. Note that if this calculation results in a larger number of shares than historical, there will be greater leverage if the market rebounds.
2. Replacing shares with cash awards below the top leadership team—e.g., NEOs. Note that this may not be an option for struggling or cash-strapped firms.
3. Changing the mix of long-term incentive (LTI) vehicles from performance-based to time-based vehicles. Experience has shown that providing greater certainty of awards in volatile times makes executives more willing to accept fewer shares. There is an added benefit: fewer shares need to be reserved for time-based awards because there is no upside.
4. Reducing the eligibility for LTI awards to reflect share constraints while increasing the size of annual incentive opportunities.
5. For early-stage companies, characterizing awards as inducement awards which are not counted against share authorizations. However, these awards do need to be reported to the applicable stock exchange and in a press release. In addition, these awards would be reported as “not approved by shareholders” in the Equity Compensation Plan Information Table.
6. Targeting awards to ensure that higher value-add positions and top performers receive larger awards, especially in tight labor markets.
The blog also offers factors for boards to consider before selecting a course of action – such as how burn rates compare to peers, the date of the last request for an increase in share reserves, and whether the company could switch to cash payouts if necessary.
For additional thoughts on executive compensation trends in a volatile environment, visit the transcript from our August webcast on this exact topic, the May-June issue of The Corporate Executive newsletter, and this blog that Emily shared in May.
– Liz Dunshee