Incentive Equity and Incentive Compensation
A compensation study by UBS found that more than a third of employees with equity incentives saw minimal value in them, mostly due to a lack of explanation and education around the plans.
For its latest edition of “UBS Participant Voice,” the firm surveyed 1,046 U.S. equity award plan participants across industries with at least $5,000 in investable assets between September 12 and September 24, 2019. At that time, it found that, since 2013, there’s been a steady increase in the percentage of employees who highly value their equity awards—from 26% in 2013 to 42% in 2019—yet one in three (36%) still saw minimal value in them.
While the trend is positive, the data still suggests that firms should work to educate employees on the value of equity incentives.
Source: Rebecca Moore | “Do Employees Understand the Value of Their Equity Compensation?” | PLANSPONSOR | 7/9/2020 | Visit
Options and other similar compensation instruments also have a role to play well beyond the initial transaction; in addition to being offered to new hires brought on after investment, these compensation schemes can also be used to help retain existing talent that may be at risk of leaving for another position or retiring (e.g., giving a CEO more options on top of his existing grant to keep him from leaving for a competitor or giving additional options to a VP of Finance who is being promoted to CFO). In fact, research from Morgan Stanley has shown that even amongst companies considered to have a “high employee empowerment” culture, those with generous equity incentive programs had less than half the turnover of those with no equity incentive programs at all (6.3% v. 14.4% voluntary annual turnover).
Source: Joseph Blasi, Douglas Kruse, Bill Castellano | “Thinking Strategically About Your Equity Compensation Program” | Morgan Stanley | 12/31/2018 | Visit
Back in the early 1990s, when former CEO Wendelin Wiedeking joined the company, Porsche was a struggling brand that was bleeding money. Frequently, in turnaround situations like the one Porsche found itself in, it can be very difficult to attract and retain good managers. However, Wiedeking and Porsche found a way to make joining and revitalizing the company a more appealing proposition for the CEO (who went on to turn around the company and lead it to great success over more than a decade):
When he took the position, [Wiedeking] negotiated a seemingly moot provision in his contract that would give him 1% of the company’s annual profits as bonus – in the unlikely event the company ever turned a profit. The company was losing $150MM a year at the time; no one could’ve foreseen how lucrative that provision would turn out to be.
Though he was later criticized by investors and outside observers for what became a staggering compensation package, Wiedeking stood by the maxim that continues to drive the widespread use of equity and other long-term incentive programs in private equity and elsewhere today: “I think when the company does well, then those who have contributed should share in that.” If managers know they are in a position to be well-rewarded for creating value over the long term, they are much more likely to stick around and do so.
Source: “Porsche: The Hedge Fund that Also Made Cars” | Priceonomics | 10/24/2014 | Visit
When a company is in trouble and without a CEO it can be difficult to find someone talented willing to risk the future of their career without being properly incentivized. A company's board and shareholder's will also feel pressure to find a replacement quickly to reverse the trajectory of the business. This pressure will occasionally result in compensation packages with strong incentives because the company is willing to sacrifice future upside that would otherwise benefit shareholders to stop the bleeding.
The challenge is that the risk assumed by the CEO is often forgotten when the company has recovered. Such was the case with Porsche CEO Wendelin Wiedeking:
Porsche AG Chief Executive Wendelin Wiedeking's €68 million ($100.2 million) in compensation is adding fuel to debate in Germany about executive-compensation levels at a time of stagnant wage levels for ordinary workers.
Porsche's executive-pay levels have drawn attention in Germany in part because Mr. Wiedeking has often embraced populist rhetoric while criticizing hedge funds and accusing some companies of putting the interests of shareholders above those of workers. Some industry analysts say that Porsche itself is behaving like a hedge fund.
Source: Stephen Power | “Porsche CEO Adds to Pay Debate” | The Wall Street Journal | 12/1/2007 | Visit