All in equity compensation

As we fly through another holiday season let’s take a look at some of the stockings hanging on the executive compensation mantle. This is the time of year for gifts and coal. Some are based on lists and requirements, others are a tad bit more…discretionary. In the end, like every year, most get something nice, some get more than they deserve, and others finally get a reminder that being bad has a cost.

Pay has been in the news so often lately, it can be hard to choose a topic to write about. But on November 12, 2018, I read an article titled Setting a maximum wage for CEOs would be good for everyone.” The author was Mark Reiff, a person with an impressive academic resume who asks if setting a maximum wage could “be the long-awaited solution to economic inequality?”

I’m not going to bury the lead. The answer is no. No, a maximum wage is not a solution to economic inequality. In fact, it isn’t a solution for anything

I began my compensation career in 1994. People still typed things (on typewriters). Email was a new thing used by only a limited few. Equity compensation was the wild west. It cost companies nothing. It was used as liberally as salt at a corner burger joint. Few companies knew all the rules and fewer followed them. Gains were expected and repricings were performed without much thought. Importantly, equity was used to fill sometimes massive gaps between cash compensation expectations and cash compensation realities. Stock options were a secret weapon of startups and IPOs to asymmetrically compete for talent against the tech titans and other big companies of the day.

Equity is a term that has become a keystone in the world of compensation. We use it in a wide-ranging list of topics including stock-based compensation, pay transparency, gender and race. I recently did a presentation about the topic titled “Three Buzzwords and One Truth. The buzzwords being fairness, transparency, and internal equity, the truth is the continued growth in variable (differentiated) pay.

On October 11, 2018, Uber filed a request (available from Axios) with the SEC to allow these workers to receive pre-IPO equity that is compliant with Rule 701 and allow those equity awards to be registered for post-IPO use and issuance under an S-8 Registration. This would be a fundamental change to equity compensation and change the playing field for companies active in the gig economy.

Here’s the skinny. Investment advisers have a fiduciary responsibility to their clients. This means they have an obligation to act, and vote, in their clients best interests. The letters let advisers meet this responsibility by blindly voting however the proxy advisers recommended. It was easy. It was fast. It was protected (kind of.) Most of all it was generic and required no real thought or research. The advisers may have put some time into the big, media worthy companies, but the smaller companies were often voted along “party lines.” This often resulted in confusion and angst on the part of companies and poor results for clients.

Perhaps I should have titled this “Ownership without leadership is almost certainly doomed.” A business near me was recently sold to a new owner. The place ran like a top for more than a decade. It had established procedures, great service and great products. The owners regularly spent time on site, and in the mix of day to day activities. Then it was sold as a “turnkey” operation.

Performance Equity in Uncertain Times

With performance units investors, individuals, rule-makers, and regulators seemed to get what they wanted. Investors got assurances that payouts were linked to their own success. Individuals received awards that had upside potential, like stock options. Rule-makers thought they had found a key to slowing the growth of executive compensation and regulators had a framework of established processes that they could apply without too much hassle. But, companies and compensation committees had a real challenge.

43% of Millennials and 61% of Gen Z plans to leave their current jobs within two years. Only 28% of Millennials and 12% of Gen Z plan to stay for five years. First, that’s a big ol’ gap! Second, this means that the majority of these workers do not intend to benefit from the entirety of their Long-Term Incentives (LTI). In the case of LTI awards with 3-year cliff vesting (like many RSUs), they don’t plan to get ANY of the value. This creates Opportunity 1 for new, more effective, approaches to LTI.