Nearly 40% of the S&P 1500 granted at least one special retention award to a Named Executive Officer between 2017 and 2021, found a new study by WTW. The report analyzed the use of one-time retention awards among the S&P 1500 over a five-year period to understand prevalence, changing award practices and proxy advisory firm reactions.
Special awards have traditionally been used as an incentive to retain key executive talent, particularly when the company is undergoing certain business challenges or during periods of considerable change – like CEO departures. The talent shortage of recent years has amplified the need to keep C-suite executives responsible for achieving operational and financial results. But, since these awards are in addition to the executives’ target compensation and typically time-based, there is a great deal of scrutiny over whether an award is deemed appropriate.
According to the study, about 37% of companies granted a special award to at least one NEO during 2017-2021 and about 38% granted in more than one year, while 12% granted awards in all five years. Setting aside the anomalous 2020, S&P 500 companies were the most likely to grant off-cycle awards and represented 44% of the companies who did so in 2021.
Other key insights include:
- Award values: The median award value in 2021 was 148% of base salary; the median for CEO was 261% while CFOs were around 154% of base salary.
- Recipients: CEOs accounted for 13% of awards; CFOs for 21%. Other common NEO roles with retention awards were Chief Operating Officer, Top Legal Executive and Business Unit heads. 2021 had the most awards for individual NEOs despite fewer companies granting overall which indicates more companies granted to the broader executive team. The proportion of retention awards received by female executives jumped to 17% in 2021 from just 8% in 2017, reflecting the dearth of women in NEO roles.
- Award Design: Time-vested restricted stock, while still the most common vehicle, is decreasing with the rise of performance-based awards, now reflected in one-third of 2021 grants. This is a jump from 23% in 2020 and 18% in 2017. A shift in the vesting schedule has also occurred with ratable vesting gaining popularity over cliff vesting in recent years (up to 65% in 2021 from 45% in 2018). Three years continues to be the most prevalent vesting period. Awards with retention length of four or more years have decreased from 35% to 24% since 2017.
- Implications: Compensation committees spend significant time reviewing criteria on how to apply judgement around discretionary awards and thoroughly consider how the award will be communicated and perceived by stakeholders. The proxy advisory firms look at award design and the Committee’s rationale as the key elements when reviewing these special awards.
ISS issued an “Against” recommendation to approximately 1 in 9 companies for their retention awards that were specifically flagged because of the award. The most common reasons cited were lack of performance criteria (45%), lack of explanation around the rationale (29%) and concerns with the performance targets set forth (26%).
While these awards continue to serve a purpose in helping companies retain the critical talent needed to deliver on their goals, the design of these awards have evolved and is expected to continue to do so as the landscape of executive compensation changes.