Recently Towers Watson released its  "2010/2011 Report on Long-Term Incentives, Policies and Practices." Here are a few highlights of current trends:

Award Types and Emphasis Shifting

Back in the 1990s, companies overwhelmingly relied on stock options as their primary or exclusive long-term reward vehicle.  As we entered the 21st century, the use of restricted stock (RS) became more prevalent, especially after Microsoft and Amazon.com moved from options to restricted stock in the 2003 time frame.  The Towers Watson study showed options being granted at 89% of companies in 1999, with a steady drop to about two-thirds (68%) of companies in 2010.  During the same time frame, restricted stock usage soared from 14% of companies in 1999 to 71% in 2010.

Performance awards (shares that grant and/or vest based on meeting certain performance metrics) also increased from 48% to 69% in the 1999 to 2010 span, with most of these types of awards going to senior level managers and executives, although we are starting to see them become somewhat more prevalent at lower levels in some companies.

Blended Approaches Becoming More Common

With options, restricted stock and units (RSUs) and performance shares all fairly prevalent today, many companies today are utilizing more than one type of long-term incentive (LTI).  In 2010, more companies were granting at least two types of LTI awards -- 73% of survey respondents indicated this practice, an increase of 10% from 2009, and an even greater increase from prior years.  Larger companies are more likely to utilize two or more types of awards than smaller companies.  Pre-IPO companies are still largely reliant on utilizing options as their primary LTI tool.

Performance Awards Moving Up

Towers Watson is seeing a strong trend towards performance awards, which are now the second most common type of long-term incentive offered by survey respondents, jumping slightly ahead of stock options in the most recent study.  This trend is almost certainly going to continue.  So-called "full value shares" (RS/RSUs) were the most common type of LTI offered in 2010, but restricted stock seems to have possibly peaked, with performance shares continuing on the rise.  The National Association of Stock Plan Professionals (NASPP) 2010 Stock Plan Design and Administration Survey also showed a strong trend towards performance awards, although that study did not show them outpacing the usage of stock options as the Towers Watson study did.

LTI Award Values

For employees earning under $200,000, award sizes (as a percentage of salary) remained flat from 2009 to 2010 in the Towers Watson survey. For employees at higher salary levels, however, award sizes increased, although not quite to 2007 and 2008 levels.

Summary

Both in the Towers Watson study and in our own practice, we are seeing more companies move away from stock options as their primary LTI vehicle.  For many pre-IPO and early stage companies, however, options still make the most sense.  For public companies though, stock options are becoming a less frequentlyused and a smaller piece of total LTI package.  Due to the shifts described above, many companies are now using more than one type of equity in crafting their LTI offerings and moving a greater percentage of their offerings to full-value shares (RS/RSUs) and performance shares.

Reviewing the recently released Fredrick W. Cook Co. report "The 2008 top 250 - Long-Term Incentive Grant Practices for Executives" re-reminded me about how fast trends are moving in the executive compensation arena.

Less than a decade ago, executives were being showered with plain-vanilla stock options on a regular basis, and many executives had never even heard of terms such as restricted stock, "full-value" awards, or performance shares.  Today, those plain-vanilla options are on the decline, while restricted stock and performance shares are a regular part of the long-term incentive lexicon, especially in public companies.

The report, which focused on very large public corporations, shows a dramatic shift in long-term incentive practices in recent years, first away from stock options, then to restricted stock (or RS units - RSUs), and today more towards performance shares (essentially performance-restricted stock, instead of time-restricted stock). While some readers may wonder if trends in large public corporations are relevant to their organizations, at least in the executive compensation arena, most of the trends and innovations tend to start in larger corporations (who have the internal staff and external consultants to research and develop new or revised approaches to long-term incentives).

While stock options remain the most common form of long-term incentive (LTI) granted to executives, the percentage of execs receiving them has dropped from 90% to 79% between 2005 and 2008.  Over the same period, restricted stock, which gained ground earlier in the decade, has actually dropped slightly in usage (from 66% to 60%), largely at the expense of increased use of performance shares. 

Performance shares, which are earned (are granted and/or vested) based on the achievement of predetermined goals over a specified period of time, have gained significant traction over the past few years. In 2005, 40% of large-company executives received them, while in 2008 that percentage had increased to 60%. 

The report also states that this increasing trend toward performance shares will continue, with an increasing percentage of firms considering or planning their use in the future. According to the report, they are the only major type of LTIs that are increasing in prevalence of usage right now.

The movement towards performance shares is likely to please at least some of the executive pay critics who have claimed (often correctly) that many executive compensation plans and practices were not "pay for performance" oriented enough.