Equity Compensation and LTI Practices:
Trend Towards Diversifying LTI Portfolio Mix Continues
May 2010

Results from the 2010 Culpepper Equity Compensation & Long-Term Incentives Practices Survey reveal that an increasing number of technology and life science companies are diversifying their equity compensation and long-term incentive programs for U.S. employees with a portfolio mix of plans.

Topics covered in this report include recent changes to LTI plans, types of equity and LTI plans offered, eligibility by job level, stock ownership guidelines, frequency of grant cycles, vesting, performance measures, risk assessment, and clawback provisions.

Key Survey Findings and Trends

• Changes for 2010: Fifty-five percent of companies reported making one or more significant changes to their 2010 LTI plans. The most common changes included reducing the number of employees eligible for LTI plans and increasing the size of LTI grants to eligible employees.

• Most Companies Ride Out the Storm of Underwater Stock Options: Despite facing challenges with underwater options, most companies have chosen to hold steady with their option plans and not take action to address underwater options or drop options in favor of another type of LTI plan.

• Stock Options Continue Reign as LTI King: For most companies (65%), stock options remain the LTI vehicle of choice.

• Restricted Stock Plans: Restricted stock plans continue to gain in popularity with over 50 percent of companies offering them to employees.

• Performance-Based LTI Plans: Nearly one-third of companies use performance-based LTI plans. However, few companies rely solely on performance-based LTI plans due to challenges caused by economic uncertainties in setting performance targets.

• LTI Portfolio Mixes Increase: An increasing number of companies with LTI programs are diversifying their LTIs with a portfolio mix of different types of LTI plans. Seventy-four percent of companies provide a combination of two or more types of LTI plans.

• Eligibility Rises with Job Level: The most common criteria used to determine whether an employee is eligible for long-term incentives is job level. In most companies, executives and management-level employees are significantly more likely to be eligible for long-term incentives than non-management employees.

• Stock Ownership Guidelines: Most companies do not require their employees or board directors to own company stock. However, large public companies are much more likely to have stock ownership guidelines for executives and board directors than small and mid-size companies.

• Clawback Provisions: On average, about one-third of companies reported having clawback provisions in their LTI plans. However, over 50 percent of large companies have clawbacks.

• Stock Plan Evergreen Provision: Only nine percent of companies have stock plans with an evergreen provision that automatically gives the board of directors a renewable pool of stock shares each year to distribute to employees.

• ESPPs Increase: An increasing number of companies are turning to employee stock purchase plans as an alternative vehicle to provide broad-based employee ownership.

Recent Changes to LTI Plans
Respondents were asked to report significant changes to equity compensation and LTI plans over the past two years. Fifty-five percent of companies reported making one or more significant changes to their 2010 LTI plans. The most common changes included reducing the number of employees eligible for LTI plans and increasing the size of LTI grants to eligible employees (Table 1).

Types of Equity Compensation & LTI Plans Offered
Stock options continue their reign as king of long-term incentives and remain the LTI vehicle of choice for 65 percent of companies (Table 2). 

Restricted stock plans continue to gain popularity with 52 percent of companies offering them to employees. Nearly one-third of companies use performance-based LTI plans.

However, few companies (6%) rely solely on performance-based LTI plans due to challenges caused by economic uncertainties in setting performance targets. 

An increasing number of companies are turning to employee stock purchase plans as an alternative equity vehicle to provide broad-based employee ownership.

Comprehensive Report
A comprehensive version of the report includes data tables, figures, and breakouts for the following key benchmarks: