Annual Survey Shows Fewer Large Companies Using Shareholder Return as a Sole Metric in Incentive Plans

December 11, 2015

The annual Frederic W. Cook & Co. survey of long-term incentive grant practices finds that the share of large companies using total shareholder return (TSR) as a sole metric in long-term performance plans dropped from 34 percent in 2014 to 30 percent in 2015, perhaps reflecting a gradual move toward metrics more aligned with the strategy of the business.  The survey, which covers the largest 250 companies in the S&P 500 index, also found a continuing decline in the prevalence of stock options use, with 63 percent reporting the use of options in 2015 compared to 71 percent in 2014.  The report notes that 90 percent of large companies used performance shares in 2015, up from 89 percent in 2014, while the prevalence of restricted stock usage declined from 63 percent to 61 percent.  The report further identifies several factors affecting long-term incentive design trends, including:

  • Large institutional investors conducting their own analysis of say on pay focused on pay delivery relative to financial results based on accounting rules (as opposed to adjusted results) and TSR that is perhaps more nuanced than the analyses of the proxy advisory firms;
  • The elimination of "problematic pay practices" putting the focus on core incentive design; and
  • A refocusing by companies on connecting incentive plan metrics and goals to strategic considerations, even as long-term incentive design has become less variable.
Half (50%) of the top 250 companies used two incentive metrics in their long-term incentive (LTI) plans in 2015, the highest level over the past four years, while the share of companies using three LTI vehicles dropped to 33 percent, the lowest over the last four years.  The report also notes that a slightly higher percentage of restricted stock grants vest over a period of years (i.e., ratably) instead of vesting all at once (i.e. cliff vesting), which is likely the result of the greater use of performance awards that cliff vest as well as using restricted stock for replacement awards as companies move away from stock options.