Long-Term Incentive and Equity-Based Compensation Plans: Trend Continues Towards LTI Diversification - www.Culpepper.com - July 28, 2008

Stock options,
once the king of long-term incentives, are gradually losing
their status as the predominant form of equity-based
compensation. Results from
a recent Culpepper Pay Practices & Policies Survey reveal
that long-term incentive (LTI) plans for U.S. employees in
technology and life science companies continue to shift away
from plans using only stock options towards plans using a mix of
multiple types of long-term incentives.

Most
technology and life science companies report that they continue
to offer long-term incentives to employees. However, the types
of LTI plans used, number of eligible employees, and size of
equity awards have changed dramatically in recent years.

Are
stock options losing their grip?

Historically, stock options were the LTI vehicle of choice, used
by nearly all companies offering long-term incentives. However,
the use of stock options has declined significantly over the
past three years, with only 59% of companies now offering
options to employees
(Table 1). Accounting
rules requiring companies to expense options, backdating
scandals, and declines in the stock market have had a dramatic
impact on the use of options and other types of LTI awards.

As the use
of stock options continues to fall, the prevalence of other
types of LTI plans is
rising. Restricted stock (51%), performance-based LTIs (38%),
SARs (11%), and phantom stock (8%) are all gaining ground on
stock options.

Diversification of LTI
Plans



Instead of using a "one-size-fits-all" approach, over half of
companies (53%) diversify their long-term incentives with a mix
of different type of plans (Figure 1).

Only 17% of
companies use stock options as their sole long-term incentive,
while 42% offer stock options with a mix of other types of LTI
plans.

Restricted
stock and performance-based plans have both gained popularity in
recent years; however, only 19% of companies offer either of
these types of plans as their only LTI option.

Criteria to Determine LTI
Eligibility

The most common criteria used to determine whether an
employee is eligible for long-term incentives is job level
(Figure 2). Individual employee performance, salary grade/level
and job title are also frequently used as factors to determine
eligibility for LTI awards.

LTI Trigger Events and
Award Frequency

The most common event triggering LTI
awards is at the time of hire. Seventy-two percent of companies
offer long-term incentives to newly-hired employees (Figure 3).
Although hiring someone may trigger an LTI award, eligibility
requirements or waiting periods may apply.



The second most common situation to trigger an LTI award is an
annual grant process. Sixty-two percent of companies grant new
LTI awards as part of an annual grant process.

While nearly
three-quarters of companies offer long-term incentives at the
time of hire (Figure 3), only 2% restrict LTI awards to only at
time of hire (Figure 4). Most companies continue to grant new
LTI awards to eligible employees on an annual basis.

Alternatives to
LTI Plans

Organizations without
long-term incentive plans were asked to report what other
rewards and incentives they use to attract, retain, and motivate
employees. The most common strategies for companies without LTI
plans are to offer above-market benefits plans, non-cash awards
& perks, and short-term cash bonuses & incentives
(Figure 5).

Additional LTI Data and Breakouts

In addition to the
data tables and figures above, we provide a more comprehensive
report

with 18 additional data tables and figures, including:

• 
  

  
  Percent of Companies Offering Different Types of LTI
  plans.

  
  

  
  (Breakouts by number of employees, industry
  sector, and corporate status)

  
  


• 
  

  
  Eligibility by Job Level and Function for Different Types
  of LTI plans
  
  (Breakouts for executives, director
  level, manager level, professional level, hourly/non-exempt
  employees, technical & scientific employees, sales
  employees, operations employees, and new hires)

  
  


• 
  

  
  LTI Plan Features
  
  (Vesting Schedules, Performance Features,
  Performance Measures, Length of Exercise Term for Stock
  Options, Percent of Stock Option Plans with an Evergreen
  Provision, ESPP Look Back Feature, ESPP Purchase Discount)

  
  

The
comprehensive version of this report with additional data is
available to:

• 
  

  
  Participants in
  2008 Long-Term Incentive and Equity Compensation
  Practices Survey

  
  


• 
  

  
  Subscribers of
  Culpepper Pay
  Practices & Policies Surveys

  
  

Data Source: Culpepper Pay Practices & Policies
Survey of 145 organizations.
Survey Dates: June - July 2008


Breakdown by Industry Sector:
Technology 75%, Life Science 12%, Other Sector
13%

Breakdown by Number of Employees:
Up to 100: 21%, 101 to 1000:
35%, 1,001 to 5,000: 26%, Over
5,000: 18%

Breakdown by Corporate Status:
Private
51%, Public 46%, Non-Profit 2%, Other 1%

Authors:
Leigh Culpepper,
CCP, GRP, CBP
Jeremy Greenup,
CCP

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Culpepper
Pay Practices & Policies Surveys, July 2008,
www.culpepper.com"