Human Capital & Careers

Stock Awards: Fewer Shares, More Value

With rising market values, employees are getting more value from equity grants even as the number of shares granted dwindles.
David McCannSeptember 23, 2016
Stock Awards: Fewer Shares, More Value

While more companies are using stock awards as a compensation vehicle, the number of shares granted has declined in recent years as stock prices rise and fewer shares are needed to deliver intended pay levels, according to a new report from compensation research firm Equilar.

Among S&P 500 companies, the average number of restricted shares or restricted stock units granted to employees was 3.2 million in 2015. While that amount rose from 4.1 million shares in 2011 to more than 4.6 million in 2012, it has since decreased.

Consider, for example, that the S&P index has grown from about 1,220 in September of 2011 to more than 2,170 as of September 2016. Given this growth, when you do the math, companies are granting more overall value despite any decline in the number of shares granted.

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In the past few years, a shift in pay design at the executive level has also contributed to this trend. For example, more than 80% of the S&P 500 companies now use performance equity awards for their top officers, compared with about 65% just five years ago, the report found. As a result, executive pay is now often tied to reaching specific performance goals in order to earn those shares.

“To some degree, companies have curtailed certain larger grants to their top executives in light of shareholder scrutiny and say on pay votes, and instead afford management an upside by tying company performance to equity pay,” said Matthew Goforth, research and content specialist at Equilar. “By doing so, executives may earn more shares than were targeted, but only if they deliver superior performance.”

By far, S&P 500 companies in the technology sector granted the most stock in 2015, awarding a median amount of approximately 2.8 million shares. That figure is a little over two-and-a-half times as large as the next highest sector, utilities. The tendency of technology companies to grant share-based compensation deeper within the organization is likely one cause of the tech sector’s lead.

The financial sector granted the least amount of stock, awarding a median 578,703 shares in 2015. Beyond top executives, companies in the financial sector tend to favor cash-based incentive compensation for employees, though often linked to a required deferment period.

In general, equity compensation is meant to align employees’ financial future with that of the company. The competitive talent market has led some companies to become more creative, particularly in the tech sector.

“Some companies are taking the road less traveled, offering an à la carte or elected plan, which allows employees to self-select and weigh their cash rewards against different levels of equity,” said Carrie Kovac, senior vice president of relationship management for E*TRADE Corporate Services, which contributed to the report.

“However, in our experience, adoption of this type of equity plan is rare outside of the tech and startup world,” Kovac added. “À la carte equity plans like this require robust education and training by the company to help ensure employees make informed decisions. Typically those who understand its value will self-select into equity, while those who don’t will lean toward cash.”

Image: ThinkStock