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Dec. 7 — Large U.S. companies increasingly are moving toward performance awards and away from stock options as long-range incentives for chief executive officers, according to a new report from compensation advisory firm Frederic W. Cook & Co.
“The decline in stock options and proliferation of long-term performance awards has been a major shift in practice for the last decade across general industry,” Jarret Sues, co-author of the report, told Bloomberg BNA in an e-mail Dec. 4.
The report, posted to the firm's website Dec. 4, reviews the Top 250 companies of the S&P 500 that grant long-term incentives. For the fourth year in a row, performance awards ranked as the most widely used grant type with 90 percent of the companies reviewed choosing this method.
Performance awards, which consist of stock-denominated shares or share units and grants of cash or dollar-denominated units, are handed out based on performance measured against predetermined objectives over a defined period.
The “proliferation” of performance awards is largely caused by companies feeling the heat from shareholders who want a direct relationship between pay and performance, the report said.
However, when it comes to performance awards, the “devil is in the details,” meaning that “it depends on the design of the performance shares, for example, the rigor associated with the earning of said performance awards,” Sues said.
According to the report, stock options were once considered the most “shareholder-friendly” grant type because of “their inherent alignment” with shareholder interests. However, stock options and stock appreciation rights were discontinued at 12 of the 250 companies that were reviewed, and they were replaced by performance awards, it said.
The use of stock options decreased substantially in 2015, in part because of the opinion held by proxy advisers that they are not based on performance, the report added.
“Lower dilution and risk mitigation considerations are other shareholder-positive features of performance awards relative to stock options,” Sues said.
In other highlights, the report found that all of the companies reviewed in the telecommunications services industry use performance awards and none used stock options. The report also found that 91 percent of companies in the materials sector use stock options, though they all also use performance awards.
Companies in the consumer discretionary and industrials sectors reported the more infrequent use of performance awards—82 percent, the report said.
Meanwhile, the 200 highest paid executives at U.S. publicly traded companies had an aggregate current pay value of $7.16 billion, according to the Bloomberg Pay Index Dec. 7.
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The report, “The 2015 Top 250 Report,” is available at http://www.fwcook.com/alert_letters/FWC_2015_Top_250.pdf.
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