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Cash Long-Term Incentive Use Rises
Equity-based long-term incentives still dominant; stock option awards continue to decline

By Stephen Miller, CEBS  4/2/2014
 

 

A significant increase in employers' use of cash-based, multiyear long-term incentives (LTI) as part of employee compensation programs was revealed in a survey released by Buck Consultants. Since 2012, use of cash LTI awards increased from 10 percent to 14 percent of surveyed employers in the U.S., and from 9 percent to 18 percent in Canada.

Overall, however, the survey shows that full-value equity (employer stock) awards remain the most prevalent LTI vehicle, with the most value being delivered in the form of time-based restricted stock/units. Stock options continued to decline in use.

The consultancy's annual Global Long-Term Incentive Practices Survey confirmed that companies are substituting cash LTI for awards based on equity where they believe it is appropriate. “Companies are taking a hard look at the use of equity-based incentives and determining that, in some cases, cash may be the more effective motivator,” said Sandra Sussman, a director in Buck Consultants’ compensation practice.

A 2014 WorldatWork survey similarly showed an increase in employers' use of cash short-term incentives, through a variety of bonus awards.

According to Buck's survey, the use of cash LTI awards increased in the U.S. at all employee levels (except the CEO level) and more than doubled over the past two years at the vice president, director and manager levels.

Equity Plans Less Broad-Based

Overall, however, participation in LTI plans (overwhelmingly equity-based awards) continued to decline for lower-level employees across the globe, except in Europe and Canada, which saw a rebound.

“In the U.S., participation rates have been on the decline for manager-level employees and below since 2010, while high participation rates for VP and director-level positions have remained stable,” said Sussman. “We see the greatest declines in participation amongst lower-level employee groups, which could be an indication that employers are becoming more concerned about motivating and retaining key senior employees whose roles and decisions are perceived to have a stronger and more direct connection to success drivers and stock price performance.”

Other findings from the survey include:

  • Employee retention is the most often cited reason for making off-cycle grants, increasing from 77 percent of respondents in 2012 to 97 percent in 2013.
  • Overall median value of equity delivered to U.S. employees continues to be significantly higher than that to employees in other countries and has remained stable over the years.

The survey examined the global long-term incentive compensation practices of more than 130 participating companies in 40 countries.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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