The Advisors' Blog

As we’ve shared on this blog, investors have become slightly more open to companies motivating performance through equity awards that vest over an extended period of time (e.g., 5+ years) – rather than based on performance objectives.

For example, in response to the Policy Survey conducted last fall by ISS Governance, 38% of investors said time-based awards were acceptable as one component of compensation plans – and 31% said that time-based awards were acceptable as all or part in certain industries.

However, a new report announced by ISS Corporate (available for download) flags that relying on time-based awards is still a minority practice, and perhaps performance awards have not been misguided after all. Here are the key takeaways:

– “Standard” companies, which incorporate performance-based awards, generally show stronger long-term shareholder returns and more measured CEO compensation growth than companies that rely solely on time-based equity. Vote support for Say on Pay was higher at these companies as well.

– Standard companies perform better across all Governance QualityScore categories, including non-compensation categories suggesting a broader pattern of stronger governance practices where performance-based awards are used. However, this is partially due to the inclusion of factors related to performance-based awards in the Compensation category.

– No-Performance Based Awards (NPBA) and Extended-Timed Based Awards (ETBA) programs remain minority practices and are becoming even less common, reinforcing performance-based equity as the dominant market expectation.

– Companies with extended time-vesting awards and companies with no-performance-based awards are smaller in size than companies with a “Standard” compensation program. They also have a similar distribution to Standard companies.

My personal view is that every company should do what their board thinks is best – taking into account how to motivate performance and retention, administrative burdens, and investor preferences. But it can be helpful to revisit the conversation from time to time, with consideration of the trends and data points covered in reports like this one. In this blog from last summer, I also shared some pros & cons of shifting to time-based awards.

– Liz Dunshee