- Continued worldwide expansion of long-term variable compensation in lower levels of corporate hierarchy
- Volatile markets and difficult economic conditions reinforce how important equity is for employee engagement and retention
Frankfurt am Main, 15.07.2020 Ownership and employee engagement are the key objectives of equity-based compensation for companies worldwide, according to the recent Global Equity Insights Survey from the management consultancy hkp/// group. The survey reveals key differences in the way equity-based compensation plans are designed across various economic regions. Furthermore it shows that companies are increasingly adapting their plans to meet their needs following difficult economic conditions and volatile markets.
“The Global Equity Insights Survey, now already in its eighth consecutive year, is the most comprehensive analyses of worldwide market practice of equity-based compensation. Each iteration of this survey reveals key trends and actionable takeaways for practitioners designing and administering compensation systems. As new topics and development areas are added, the results over time of core topics are reinforced with new trend data annually. The survey thus offers experts the opportunity to evaluate their company’s compensation plans in challenging economic conditions as a result of global crises and to consider how to make necessary adjustments,” explains David Voggeser, survey leader and Senior Manager of hkp/// group.
The survey flyer is available for download at www.hkp.com/GEIS2020.
Key result 1: Broad LTI and participation is still a mega trend
Since the inception of the survey in 2013, LTI eligibility, especially for lower levels of the organization, has generally increased. As in the past years, a direct relationship between the use of equity-based compensation on a broad basis and overall company performance can be observed. Higher performing companies tend to grant LTIs to a larger population of their workforce at the median: 10% of the total employee population for high performing companies in comparison to 2% for low performing companies. This relationship also holds for the connection between eligibility and participation. In companies where eligibility guarantees a LTI grant, performance tends to be higher. Finally, companies with overlapping LTI tranches perform better, as the full retention effect remains in place year after year.
“The link between company performance and equity culture remains in 2020 unbroken and isn’t just relevant for top management. Quite the contrary – including employee groups lower in the corporate hierarchy in equity-based compensation programs offers companies considerable opportunities. It contributes to an improved equity culture within the company, promotes longer term thinking and decision-making of employees, and moreover creates a substantial economic value add,” explains compensation expert David Voggeser.
Key result 2: Higher performance correlates to larger LTI portions in the pay mix
The pay mix of more successful companies tends to be more long term in nature. The LTI portions, based on both ROA as well as TSR, are up to 5% more for high performing companies throughout the entire organization. Further, applying Share Ownership Guidelines (SOGs) can help translate the pay mix into an even longer term element. In 92% of high performance companies, SOGs are in place in comparison to 66% of low performing companies.
Key result 3: Companies promote equity ownership to “make their employees owners”
The survey also helps formulate constructive arguments in favor of equity programs and helps to draw the link between company performance and equity culture. Overwhelmingly, companies reported various forms of employee entrepreneurship (essentially “make your employees owners”) as their main objective. Although the survey has illustrated that actual participation rates remain significantly below target participation rates, a high participation rate is a strong indicator for company performance. In high performing companies, the actual participation rate is 13% higher than in low performing companies (41% compared to 28%).
A similar result for SPP eligibility at the median is observed as above: higher performing companies tend to make 87% of their workforce eligible compared to 65% in lower performing companies. “When communicating the advantages of equity programs to decision makers as well as participants, underlining entrepreneurship in addition to employee ownership is key, especially in uncertain economic conditions,” explains Andrew Thain, survey coordinator and consultant at hkp/// group: “In addition, a compensation strategy that aims at a deeply integrated and well-balanced equity culture is a crucial factor for company success.”
Key result 4: An increase in individualization and flexibility during challenging times
The 2020 survey builds upon a growing trend identified in 2019 concerning individualization and flexibility. Companies are increasingly adjusting their plans where the positive impact of such changes outweigh the increased effort of adapting them. Companies that allow for differentiation of their plans based on function, management level, operating country and legal entity tend to perform better. Further, the most frequent basis for equity plan differentiation at the country level is for tax optimization.
Since 2019, a spotlight has been pointed at equity plans in challenging global markets such as China. “Offering equity compensation in these countries can be a strong competitive advantage in the talent market,” explains David Voggeser. “Even further, a lack of equity compensation may be a strong competitive disadvantage, as top talents are desiring the rewards that come with their own ‘skin in the game’.” In fact, in 35% of high performing companies compared to just 22% of low performing companies, LTI plans are adjusted for China. This trend will no doubt continue as employees become even more mobile.
A further area of industry adjustments is for the technology and finance industries. For large corporations with divisions active in separate industries such as technology and finance, companies are making adjustments for the specific requirements or needs of employees in that field. “For corporations with a broad portfolio, a ‘one size fits all’ approach to equity plans may not work as desired due to regulation or varying employee profiles in these distinct industries,” says survey leader Voggeser.
Key result 5: Increased measurable communication with a focus on financial education
Companies worldwide overwhelmingly reported financial education as a critical feature in successful communications of their equity plans. “Understanding company success and what leads to it is thus seen as a top priority in addition to understanding how the compensation scheme is designed,” says survey coordinator Andrew Thain. 83% of high performing companies reported “financial education” as a crucial component of a successful communications plan for equity compensation.
Other trends in communications include movements towards more digital communication. While e-mails are still the most important means of information, other digital means of information are becoming increasingly important. This includes digital brochures or flyers as well as the intranet.
Background information of the Global Equity Insights Survey
The “Global Equity Insights Survey 2020” was conducted in Winter/Spring 2020 in cooperation with the Global Equity Organization (GEO) under the academic guidance of the Chair for Management and Controlling at Georg-August University of Göttingen. The survey is supported by Computershare, Fidelity Stock Plan Services, SAP and Siemens as premium sponsors as well as the Rutgers University School of Management and Labor Relations. In total, 167 companies from 21 countries and 10 industries took part in the survey – predominantly global players with a special focus on North America and Europe.
Background information hkp/// group
The hkp/// group is a partner-led, international consulting company. hkp/// Partners are accomplished transformation consultants and respected leaders of innovation in HR. They advise large and medium-sized international corporations as well as start-ups with whom they develop tailor-made and practical solutions. hkp/// group partners all have many years of international consulting and business experience. They are recognized in the market as experts for executive compensation, board services, performance and talent management along with HR strategy and transformation, HR and compensation benchmarking. Our partners are regarded as competent contact persons by regulators and boards of directors, board members and senior executives, as well as HR managers and specialists. www.hkp.com