Equity-based compensation works - this is the major conclusion of the Global Equity Insights Survey 2017, an annual analysis of international market practice in the area of equity-based compensation. hkp.com spoke to hkp/// group experts Dr. Nina Röper and Dr. Björn Hinderlich about the study’s key findings.
The Global Equity Insights Survey is now in its fifth year. Do we truly need a study like this every year?
Andrew Thain: As study initiators, we regularly assess the demand for new data on international market practice in the area of equity-based compensation – and we see that the demand for these kinds of insights is still unbroken. Thus, more than 160 of the world's leading companies took part in this year's Global Equity Insights Survey, continuing the study’s history of a large and international participant group.
David Voggeser: Naturally, interest in the study is particularly high in countries which already have a rather strong equity culture. Consequently, half of the participating companies are from the United States followed by companies from Germany, Switzerland, South Africa, the United Kingdom and Australia. Blue-chip firms from many other nations are also represented. This gives the study a truly global scope, which is the intention of the study's patron, the Global Equity Organization (GEO), and the other study partners Equatex, Fidelity, SAP, Siemens and the University of Goettingen.
Each year the Global Equity Insights Survey focuses on a different topic. What is the focus of this year's study?
Andrew Thain: In 2017, the focus was on long-term incentives (LTIs) and share purchase plans (SPPs). We analyzed the different plan designs around the world, how the plans relate to company performance and how they are perceived by plan participants.
David Voggeser: We also analyzed the objectives for introducing LTIs and SPPs as well as potential implementation obstacles and associated communication and administration issues.
Companies want to know whether equity-based compensation works and if respective plans are worth the costs. What does the study find in this regard?
David Voggeser: The study finds that equity-based compensation does work. There is a positive correlation with company performance: Financially successful companies allow more employees to participate in equity-based LTIs, have a stronger LTI focus in their compensation packages and have higher participation rates in their SPPs.
The study also includes analyses of the different regions North America, Europe and the rest of the world. Are there regional differences in the design of LTIs and SPPs?
David Voggeser: Yes. In North America, restricted stock is the dominant LTI plan type, while European companies prefer performance share plans. North American companies also use ratable vesting much more often, whereas Europe and the rest of the world prefer cliff vesting.
Andrew Thain: In connection with their SPPs, companies in North America primarily apply discount plans. In Europe, companies also use share matching plans in addition to discount plans. Free shares only play a role in companies outside North America and Europe.
Are there also regional differences regarding equity culture in general? Is North America still the forerunner when it comes to equity-based compensation?
Andrew Thain: Yes, the equity culture in North America is still much stronger than in Europe. In North America, employees at all levels of the corporate hierarchy receive a bigger portion of their compensation from equity-based LTIs than in European companies. Plus, the majority of plans in North America are settled in real shares, while European companies often settle their plans in cash.
David Voggeser: The significantly weaker equity culture in Europe is at least in part the result of regulatory obstacles such as the rather unattractive accounting and tax consequences. In the study, particularly European companies rated regulatory requirements as the main obstacle for the implementation of LTIs and SPPs.
In the study, you find that strong communication is a driver for success of equity-based compensation.
Andrew Thain: SPP participation rates are often rather low – despite the ambitious participation goals companies have set themselves. On global average, only about 35% of eligible employees actually participate in offered SPPs, although the programs are quite attractive.
Isn't that rather a result of the plan design?
Andrew Thain: Yes and no. In addition to a clear plan design and a user-friendly platform and technology, participants rated a good plan communication as very important criterion for a high SPP participation. However, relatively few companies currently make use of advanced communication methods to market their programs internally. This is something that will surely change in the future.
How exactly might communication change?
Andrew Thain: The key areas in which companies are planning to invest include communication services, participant experience, and mobile or web solutions.
David Voggeser: Although effective communication of equity-based compensation plans is one of the main levers for high participation rates, there is still considerable room for improvement in companies’ communications practices. The more complex the plan design and the associated legal and tax implications, the more difficult it is to communicate the mechanisms as well as the attractive advantages of the plan. So, the more complex the plan design, the more communication effort companies need to make to ensure a high level of plan acceptance.
Mr. Voggeser, Mr. Thain, thank you very much!