The Advisors' Blog

Now’s the time for compensation committees to lay the groundwork for annual compensation reviews and decisions. This FW Cook blog explains why analyzing the “holding power” of outstanding equity awards should be part of that:

Absent “perfect” succession planning, the loss of key talent is at best distracting and at worst disruptive to business operations. While no Committee can guarantee with absolute certainty that leaders will not be poached, periodically reviewing Holding Power enables proactive, informed decisions instead of reactive and costlier ones down the line. And unless managed carefully, costs incurred to onboard a replacement may prompt scrutiny from investors and proxy advisors, place undue pressure on equity budgets (absent use of inducement-plan shares), and create internal tension if remaining executives do not fully appreciate the dollars spent to entice a new hire. For these reasons, a review of Holding Power multiples is a prudent component of the annual compensation planning cycle and supports good governance.

Looking at S&P data as of September 30th, FW Cook found that CEOs have the highest proportion of at-risk unvested equity compensation. The median multiple is 2.2x target Total Direct Compensation – but the blog points out that each company should take a more nuanced approach to its own figures:

More meaningful comparisons of Holding Power come from benchmarking against executive compensation peer groups, since the output is sensitive to several factors: market and company performance (with higher returns and above-target payout estimates boosting Holding Power), the size and mix of equity awards (often correlated to market capitalization), and specific industry practices. For instance, high-growth sectors such as technology and life sciences generally rely more heavily on equity compensation and stock options, which offer additional leverage and potential for greater multiples when share prices rise. Because of these dynamics, Holding Power is best interpreted relative to target TDC and through the lens of peers facing similar market and industry conditions.

Below-median multiples should not be viewed as an automatic red flag; factors like short tenure or recent promotion can naturally depress an executive’s unvested holdings. Instead, treat the data as a guidepost that indicates whether an executive’s Holding Power appears below, in-line, or above market norms, and discuss whether action is warranted. While high unvested holdings do not guarantee retention, periodic reviews can help Committees lessen the risk of unforeseen and costly departures.

In the blog, FW Cook points out that it focused on unvested equity for its S&P 500 analysis, but when you do this in practice, forfeitable long-term cash awards can also be part of the calculation. Members of this site can visit our “Determining How Much Pay is Appropriate” Practice Area to access other resources on setting executive pay and designing awards.

We’ll also be sharing key tips for short-term and long-term incentive awards next week at our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences” – happening virtually and in person in Las Vegas.

If you haven’t registered, time is running out! The Conferences are happening next Tuesday & Wednesday – October 21st & 22nd. Register online or by emailing info@ccrcorp.com or calling 1.800.737.1271.

– Liz Dunshee