Performance-Based Options Grants Still Popular

January 29, 2010 (PLANSPONSOR.com) – A new PricewaterhouseCoopers (PwC) study found that performance-based equity compensation continues to gain favor among companies indicating that the health of the markets will determine their future granting practices.

PwC said in a news release that more than 50% of companies polled will not reset performance targets in response to market conditions, with only 29% having reset some or most of their targets. Still, 80% plan to make changes to equity grants.

The percentage of respondents expecting option grant decreases did not change significantly from 2007 to 2009, but nearly half of the companies that envision drops expect to cut grants at every staff level except for sales and technical, PwC said in a news release.

Meanwhile, half of those surveyed expect to increase option grant levels, and nearly two-thirds expect increases in grant levels for other types of equity compensation. Many companies set grant levels based on delivering a percentage of base pay in option fair value. This formula generally means an increase in option grant levels to achieve the same fair value of options at a lower exercise price.

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Others base grant levels on expected benefit at exercise, rather than option valuation. While this practice requires additional analytical work prior to grant, it helps decrease the chance that more shares will be granted than appropriate when the stock price is expected to rebound before the option’s contractual term is reached, PwC said.

Shareholder Approval 

As of spring 2009, companies were somewhat reluctant to submit new or revised stock plans for shareholder approval: only 50% sought such support in 2009, down from 60% in 2007 and 67% in 2005. “Yes” votes on the issue still prevailed for 90% of PwC’s survey respondents, but a significantly higher percentage of companies — 57% compared to 11% in 2007 — said that these votes fell in the lowest margin reported (51%-70% of votes).

The survey was conducted during the winter/spring of 2009 based on responses from 340 participants. Respondents represent companies with headquarters in more than 24 countries and with employees in more than 38 countries worldwide.

A summary of the report is available here

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