How Much Unvested Stock to be Effective for Retention

It really depends upon the country in question, actual level of position and competitive industry practices. The mix of annual long-term grant opportunity varies from country to country primarily due to concern over taxation. However, I think it would be safe to say that for the U.S., a conservative estimated range of grant opportunity as a percent of annual base salary, would be anywhere from 50% to 100% of base.

I hope this helps.

Kind Regards;

John Hurley

Hi John,

Thanks for your response, but to clarify, we aren't looking necessarily at the size of the grant an individual receives, but rather the value of unvested shares an individual may have at any given point in time. 

For example, would an unvested share value equal to 100% of a VP's base salary or 150% of an SVP's base salary be considered sufficient from a general retention standpoint? 

Thanks,

Jan Olson

Hi Jan - it's an interesting question.  The standard "consultant" answer that "it depends" certainly applies here.  I think your guideline of 1x - 2x base salary sounds reasonable. 

However, in my opinion, if a competitor really wants to recruit one of your people, then they can always buy out the unvested equity.  Also, let's say you have a senior leader who is thinking about leaving to join a competitor - let's say they are interested in the role, but the size of their equity handcuff is so large that the recruiting company walks away.  Since that decision is likely to come very late in the process, your senior leader's head has already been turned (if that expression makes sense).  In that scenario, would you really want to keep them? 

One way you could look at this would be to look back at senior level hires you have made in the past - how does what your people hold compare to what you have had to pay as buy-outs?  This, of course, is unlikely to be a large or statistically valid sample, but it gives you a sense of where you are vs some of your competitors.   Getting survey data on this is very tricky - I'm not aware of any survey companies that can come close to answering this sort of stuff - comparing relative grant sizes isn't enough - you also need to look at what actual performance has been on a company-by-company basis.  It's doable from proxy-disclosed data but this is very time-consuming. 

The next big question is, assuming there is a gap - how do you fill it?  "Just pay more" is one answer, but you could also think about longer vesting periods - some companies in our peer group have vesting which goes until retirement (or beyond), which means that over time executives do build up significant unvested shareholdings.  See the ExxonMobil proxy for an example of this. 

One more thought - there are also potential unintended consequences if the exec's unvested shareholding (or shareholding in general) starts to become too large a proportion of their personal wealth.  I can't speak from personal experience, but if my personal (and my families) financial well-being was very linked to one company's share price, then that might lead me to become more risk-adverse in the decisions I made - the corporate monitor report on the MCI/Worldcom bankruptcy a few years ago also made reference to the impact Ebber's personal shareholding had on the potential motivation for fraud. 

Hope this is helpful

Alan Moore   

I have thought about this since the original question was posted.  While I agree with John and Alan, I think we are missing a crucial piece of data.

What other forms of compensation are included in the individuals' Total Compensation and how does equity play into the total package.  Secondarily, How does equity fit into the compensation structure from a corporate focus?

I find that many companies work very hard to get levels "right" without ever setting clear priorities.  This is often shown in the level of communication spent on some plans Vs others.  If you are going to make equity compensation a significant piece or your retention package, you must be willing to have a clear, consistent communication program that educates people on the value of the equity awards now and in the future. 

I find that even the most senior-level people do not understand the true value of their non-cash compensation and therefore can be bought by competitors much too easily

The levels for your company, should be in line with your focus, and your competitors focus, on equity compensation.  It should also be based on the age of your participants (in general).  If you participants are  in the home-stretch to retirement, the amount and type of awards, and the length of vesting will be much different than if your staff is younger.

All the best,

Dan

Hi - I agree with Dan that it's important to see the equity plan as a component of the total reward package, and that the level of communication should be aligned with the importance of the plan.  Another question - what's a good benchmark for "spend on communication" as a % of the value of a reward plan - if I have an incentive plan which costs the company in aggregate, say $10million,- is $50k or $100k a reasonable amount to spend on ensuring participants understand it? 

A "friend of a friend" had the experience of explaining to a potential external hire exactly how they had arrived at the buyout which was being offered, and getting the response "wow, I guess I never knew how much I was getting paid" - then the candidate decided to stay with his current employer. 

Finally, in my experience, it is sometimes the cost of keeping a potential candidate "whole" in terms of pension and benefits that creates the most "sticker shock" - this is particularly true with late career hires from companies with generous defined benefit pension plans. 

Regards

Alan