Incentive Pay, CII update

Strong emphasis on time vesting awards:

CII overhauled its policy on executive compensation, urging public companies to dial back the complexity of pay plans for top executives and set longer periods for measuring performance for incentive pay. The new policy cautions against the pitfalls of performance-vesting awards and encourages companies to explore adopting simpler plans comprised of salary and restricted shares that vest over five years or more. The policy also recommends that companies consider barring the CEO and CFO from selling stock awarded to them until after they depart, to ensure management prioritizes the company’s long-term success. Although performance vesting share plans can work well for some companies, recent studies suggest they may not provide a strong enough connection to long-term company performance on a broad level, and use goals and metrics that can be numerous, overlapping, flexible and hard to understand.

CII notes:

For some companies, emphasis on restricted stock with extended, time-based vesting requirements—for example, those that might begin to vest after five years and fully vest over 10 (including beyond employment termination)—may provide an appropriate balance of risk and reward, while providing particularly strong alignment between shareholders and executives.Extended vesting periods reduce attention to short-term distractions and outcomes. As full-value awards, restricted stock ensures that executives feel positive and negative long-term performance equally, just as shareholders do. Restricted stock is more comprehensible and easier to value than performance-based equity, providing clarity not only to award recipients, but also to compensation committee members and shareholders trying to evaluate appropriateness and rigor of pay plans.

This is in line with work I’ve mentioned previously that Alex Edmans and Tom Gosling have done via the Purposeful Company.