The Advisors' Blog

After years of investors saying that time-based awards don’t count as “pay for performance,” some are starting to see benefits in long-term time based awards as compared to complex performance-based plans. At this point, that would be a big change for many companies, but compensation committees may want to discuss the pros & cons of a simplified structure. This Meridian article summarizes potential benefits of long-term vesting restricted stock as:

– focusing on the sustained health of the company for an extended period after the grant date,

– avoiding complexity that can misfire in volatile markets,

– maintaining retention value through short-term ups and downs, and

– broadcasting the company’s commitment to sustainable, long-term profitable growth.

On the other hand, the memo also summarizes potential challenges of this structure, which include:

– the potential to miss out on candidates who prefer shorter vesting periods offered by other employers,

– a demand for higher cash compensation or grant values to offset delayed equity realization,

– investor concerns that time-vested awards of any kind are not sufficiently based on performance,

– an inability to highlight specific near-term or long-term priorities through incentive payouts, and

– increased stock plan overhang from awards being outstanding for longer periods of time.

For companies that do take a closer look at moving to a compensation program that is more focused on time-based awards, the article also walks through transition issues to consider.

– Liz Dunshee