The Advisors' Blog

Sometimes you just need to step back and consider what you’d do if you had a blank slate. This FW Cook memo observes that at some companies, it’s worth using the summer comp committee to discuss whether the current LTI program still matches the company’s current strategy – even if you don’t end up making any changes. Here’s why it’s worth the time:

LTI is the largest piece of executive pay, the piece most visible to shareholders, and the piece that most directly translates board intent into management behavior. It is also the piece that tends to evolve through small, defensible adjustments year over year — a metric swap here, a weighting tweak there — until the cumulative shape of the program reflects historical accommodations more than current strategy.

Specifically, the memo recommends considering whether the following plan elements still align with the company’s current compensation philosophy, goals, and strategy:

– Vehicle mis: Longstanding assumptions that drove many companies to use a mix of PSUs, restricted stock and/or options have been tested in recent years. Committees that haven’t recently asked whether the current mix is still the best expression of their pay philosophy may find the answer has drifted from where they thought it would be.

– Performance period: The assumption that three years is the right answer because three years has always been the answer deserves at least one honest conversation per cycle.

– Vesting and post-vest holding: Cliff versus ratable vesting, post-vest holding requirements, mandatory deferral, and stock ownership guidelines all interact in ways that are easy to specify individually and harder to evaluate as a system. One mechanism that has largely faded from current practice but could be revisited is the management stock purchase program — an arrangement under which executives can elect to receive a portion of their bonus, or other earned compensation, in restricted stock rather than cash, typically with a premium or matching component that compensates for the lockup.

As always, members who are navigating these issues can access a library of resources in our “LTIPs” Practice Area. You can sign up for a CompensationStandards.com membership by contacting our team at info@ccrcorp.com or at 800-737-1271. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.

– Liz Dunshee