The Advisors' Blog

This article from Meridian Compensation Partners addresses managing a company’s run rate — the number of shares granted from the incentive pool during the year divided by the average common shares outstanding used for basic EPS. The article notes that, last year, the ten top shareholder return performers in the S&P 500 increased their run rate by an average of approximately 5% year over year, while the bottom ten increased by about 40% on average. While the article discusses three approaches to comparing run rate relative to peers — gross shares granted at target, gross shares earned and net number of shares granted (excluding forfeitures and cancellations) — Meridian recommends using target number of shares granted for the best comparative assessment.

Going into 2025, for companies experiencing depressed stock prices, significant volatility or an otherwise high relative run rate, the post has this reminder of various options to reining in dilution:

– Apply a long-term stock price average to derive the number of shares: Use a 6- or 12-month stock price average that may smooth out temporary dips.

– Below the executive level, grant a portion of the intended equity value in restricted cash: Maintains employee satisfaction and retention without diluting shareholders (at the expense of reducing alignment with shareholders).

– Reduce equity eligibility: Reserve equity for positions that are difficult/impossible to recruit and retain without equity awards.

– Reduce vesting period in connection with a lower grant date value: Annualized value delivered will feel similar to the employee despite a smaller number of total shares granted.

– RSUs in lieu of stock options: RSUs provide greater retention, cannot be underwater and use fewer shares for a given targeted dollar amount.

– Reduce dollar value of equity awarded: When a company’s share price decrease is precipitous (e.g., energy companies in 2020), companies may decrease the dollar value of equity awarded to manage both the run rate and upside leverage on share price rebound.

– Meredith Ervine