The Advisors' Blog

As Liz blogged last year, nearly all big companies use long-term incentive plans to encourage performance over periods greater than one year – usually three. But sometimes macro forces or a company’s specific circumstances make setting appropriate and rigorous multi-year performance goals extremely challenging. This Thoughtful Pay Alert from Compensia discusses best practices for adding PSU awards to long-term incentive programs, particularly for life sciences and technology companies. The alert notes that companies will sometimes choose to use a one-year performance period but will usually structure the awards in one of the following ways so that they still encourage long-term performance and retention:

–  a one-year performance period with any earned shares subject to an additional time-based vesting requirement of anywhere from two to four years to increase the focus on long-term value sustainability and retention; or

– multiple (typically three consecutive) one-year performance periods with the performance objectives for each period to be established at the beginning of each year and any earned shares “banked”; to be distributed to executives at the end of the entire three-year performance period.

Per Compensia’s research, when a company uses a single, one-year performance period, the additional time-based vesting period is typically three (36%) or four (36%) years for life sciences companies and three years (81%) for technology companies.

– Meredith Ervine