The Advisors' Blog

I sure have been learning a lot this week at our Executive Compensation Conference and the NASPP Annual Conference – including creative approaches to equity awards. For example, time-based RSUs are attractive for their simplicity and predictability, but they aren’t perfect. In this memo, the Infinite Equity team outlines the challenges that can arise, such as:

1. “Rest & vest” criticism – shares vest regardless of whether shareholder value has increased, held flat, or declined, which can create misalignment between pay and performance and may raise questions with shareholders.

2. Settlement during challenging times – companies must satisfy employee tax withholding at each vest date, which can affect the market price if it involves large sell-to-cover transactions and can affect the balance sheet if the company uses net share withholding. If the company’s stock price is depressed or trading at low volumes, vesting events can have negative consequnces to the company.

3. Grant guideline confusion – for awards based on a dollar value at grant date, an employee that receives shares at a time the stock price is materially lower, may feel they are not getting the full value that the parties understood the award to represent.

The memo makes the case that “price-protected” RSUs could address these challenges – not by adding a performance condition, but by deferring delivery until the stock price recovers. Here are the key takeaways:

– Traditional time-based RSUs vest on schedule no matter what happens to the stock price. In our analysis of Russell 3000 companies that IPO’d after 2010, 41% of scheduled vesting events occurred while the stock traded below its grant price.

– The Price-Protected RSU keeps everything about a traditional RSU the same, except one thing: at each vest date, the tranche only vests if the stock price has held at or above the grant-date price.

– Missed tranches aren’t forfeited outright. They carry forward and remain eligible to vest later. Most eventually would have vested in the same analysis noted above; only 16% were ultimately forfeited assuming a three-year quarterly design with a two-year grace period.

– The design flexes by population: longer grace periods and carry-forward windows for broad-based grants, tighter parameters for executive awards.

The memo notes that for many companies, automatic vesting will still be the best approach. But for others, a modest amount of built-in flexibility may better align equity design with shareholder expectations, employee outcomes, and long-term program objectives. Always make sure to consider the accounting and legal implications if you are making a change!

– Liz Dunshee