Companies Increase Their Use of Pay-For-Performance Incentives

Companies Increase Their Use of Pay-For-Performance Incentives

More than 60% of large-cap companies provide at least half of CEO equity compensation through performance incentives, up from just one-third five years ago, according to a report on equity compensation trends recently published by executive compensation benchmarking firm Equilar.

The report’s findings, released on September 20, are based on an analysis of the Equilar 500, an index that comprises the largest U.S.-listed companies by revenue adjusted to approximate the industry sector mix of similar large-cap indices. The study examined the equity compensation design and granting practices of Equilar 500 companies, and tracked these data for those companies over the last five fiscal years.

The results of the analysis showed that the percentage of companies in the index that provided at least half of CEO equity compensation based on performance awards increased from 52.5% in the fiscal year 2015 to 60.8% in 2016; and that the total share of Equilar 500 companies providing CEO performance awards has increased significantly over the past few years, from 69.7% of companies in 2012 to 82.1% of companies in 2016.

According to the study, the remaining portion of equity compensation was time-based, which means that awards vest at specific time periods, rather than being contingent on meeting particular performance goals to become eligible to receive allocations of stock or stock options. The research indicated that most CEOs continue to receive time-based as well as performance awards, with nearly 40% of companies in 2016 providing a majority of equity compensation in the form of time-based awards. However, the study also found that a growing share of these time-based awards are being provided as restricted stock, rather than as stock options.

Broken down by sector, the analysis showed that 90.5% of industrial goods companies, 86% of healthcare companies, and 84.6% of utilities provided performance awards to CEOs in 2016. The technology sector saw the largest growth in the percentage of companies offering performance awards to CEOs during the study period, increasing from 63.7% in 2012 to 82.3% in 2016.

From Benefit Trends Newsletter, Volume 60, Issue 10

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2017 Liberty Publishing, Inc. All rights reserved.

Conventional Performance Management Approaches Are Challenged

Although companies are spending substantial amounts of time and money on performance management, too few business leaders are confident that their approaches are supporting the workforce of the future or improving the performance of the business itself, a report released by Accenture Strategy has warned.

The findings of the report, “Is Performance Management Performing?” are based on a survey conducted December 2015 to January 2016 of 2,100 leaders and employees from organizations across North and South America, Europe, and Asia Pacific. The survey showed that while 94% of the respondents agree that performance management improves business performance, only 34% believe their organization’s current performance management approaches effectively support the delivery of business objectives, and just 32% think performance management is providing a clear line of sight between organizational and individual performance. Moreover, 89% of the employees surveyed said they believe their performance would significantly improve if performance management were changed.

Less than half of respondents expressed confidence in their company’s capacity to manage the basics of performance management, including developing and growing employees (40%), retaining employees (28%), engaging and motivating employees (40%), and making fair decisions regarding bonuses, pay raises, and promotions (36%). The leaders and employees surveyed indicated that they lack confidence in their organization’s management of more complex workforce needs, with only around one-third saying they think current performance management approaches effectively promote collaboration (35%) and creativity (32%).

Nearly half (48%) of the leaders surveyed said they think increased workforce diversity is creating a greater variety of employee motivations and expectations. In addition, 77% indicated they believe that personalizing performance management practices to individuals or groups is mandatory to meet the needs of the workforce of the future, and 41% of respondents said they believe that “one-size-fits all” performance management practices have a major negative impact on performance management. However, just 34% reported that their organization has moved away from standardized performance management approaches.

While 50% of the leaders surveyed said they believe that employees are increasingly looking for development and coaching opportunities, and 53% said they think that personalizing feedback and coaching would significantly improve employee performance; 52% of the leaders acknowledged that the annual review process is often used as an alternative to engaging in actual performance development, and 73% of the employees polled reported that they have not seen performance management practices move away from a focus on paperwork to a focus on conversations.

Yet researchers observed that some companies are experimenting with new approaches to performance management: for example, rewards can be allocated based on real performance data or survey data from all of an employee’s project leaders, or employees can determine rewards for one another in a crowdsourced approach.

From Benefit Trends Newsletter, Volume 59, Issue 5

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2016 Liberty Publishing, Inc. All rights reserved.