June 13, 2011
Study: Share Utilization at Fortune 500 Companies – Return to Normalcy
– Ella Hale and Travis Oliver, Towers Watson
As noted in a recent study we conducted, the most recent three-year performance of virtually any broad-based stock index will bear a strong resemblance to the Mariana Trench, charting how stock prices tumbled in late 2008 and spent the next two years recovering. During this period, many Fortune 500 companies granted their executives a larger number of shares to partially make up for the depressed values of the company’s stock. An early review of 2010 grant levels shows reductions in the number of shares granted compared to 2009, as stock values have recovered to near pre-recession levels.
Our firm monitors equity incentive practices and trends by conducting an annual review of run rate, long-term incentive (LTI) fair value and overhang at Fortune 500 companies. Run rate is the number of shares awarded during a company’s fiscal year as a percentage of the average outstanding common shares during the same year. LTI fair value is the reported fair value of annual equity awards at the time of grant as a percentage of the average market capitalization over the same year. Overhang is the aggregate number of shares granted and reserved for outstanding awards and future grants, calculated as a percentage of the total outstanding common shares.
Our latest review focused on full-year data disclosed by Fortune 500 companies for the years between 2005 and 2009, the most recent full year available. We also reviewed the Fortune 500’s quarterly filings to get an early preview of fiscal 2010 grant levels. The Fortune 500 sample used for this 2010 analysis includes 156 companies that meet a set of common criteria. Taken holistically, these data can provide the information necessary to compare an individual company’s stock compensation practices with those of the broader market.
The study’s key findings include:
– The median grant date fair value of equity awards as a percentage of market capitalization has increased steadily between 2006 and 2009. The total increase over this period was approximately 30%, although the latest year-to-year change was only 2%. The median dollar value of aggregate equity awards increased between 2006 and 2008, but dropped by 23% between 2008 and 2009, reflecting the sharp decline in the equity markets in late 2008.
– In contrast to falling LTI fair values, the median run rate increased by approximately 9% in 2008 and 21% in 2009 as companies increased the number of shares granted to make up some – but not all – of the value lost due to declining share prices.
– Overhang held steady in 2009 at approximately 10% at the median. The mix of overhang was also consistent with the prior year, as approximately 51% was made up of outstanding awards and 49% was made up of reserved shares.
– Based on our review of quarterly filings for a sample of Fortune 500 companies, it appears that fiscal 2010 run rates fell by approximately 23% at the median. Almost half (46%) of companies in our 2010 sample decreased the number of shares granted in 2010 by more than 25%, offsetting the 51% of companies that increased the number of shares granted in 2009 by more than 25%. (Complete fiscal 2010 figures will not be available until early 2011 for most companies.)