The Advisors' Blog

I blogged last year that it was way too early to write off performance awards, despite gripes from some that they’re overly complex and can result in outsized and/or misaligned payouts.

ISS is asking about the topic again in this year’s benchmark policy survey – specifically, whether respondents’ organizations consider time-based equity acceptable for all or part of executive long-term incentive awards. To me, that wording doesn’t seem to presume a tidal wave of time-based awards, but at any rate, since tomorrow is the response deadline, we’ll likely get to see within a month or two whether investors are open to not penalizing companies who use time-based awards.

In the meantime, Pay Governance worked with IR Impact to survey 100+ institutional investors and public pension funds about their views on performance stock units – and this memo reveals what they found. Here are a few takeaways:

– 49% all investors indicated they were satisfied / very satisfied with the CEO pay alignment at their portfolio companies.

– 26% were dissatisfied or very dissatisfied.

– As shown in Exhibit 2, the results of our survey largely support the preference for PSUs in contrast to time-based stock awards (RSUs) with longer vesting schedules than typical: 71% preferred PSUs that would be earned/vested over a multi-year period or PSUs in concert with a balance of time-based RSUs.

– 51% would rather have issuers award mostly or 100% PSUs, while 86% desire that PSUs comprise at least 50% of total LTI value.

– Importantly, from most executives’ point of view, the upside payout of the number of PSUs (150-200% of target) is extremely compelling and motivational relative to RSUs that do not have that type of upside.

– Investor opinions are split on whether standard stock options with time-vesting are considered performance-based (52%) or time-based (48%).

Pay Governance urges companies not to rush into changing their plan design based on anecdotal criticisms of performance-based awards, as investors seem to remain pretty supportive of how PSUs are being used. Pay Governance predicts that most companies will continue with their overall approach to performance-based pay.

– Liz Dunshee