The complexity of equity-based compensation has never been more extreme.  In public companies the mix of stock options, restricted stock units, restricted stock awards performance share units,  and stock appreciation rights (cash-settled and stock-settled) presents difficult analytical challenges in understanding the market.

Combinations of time-based vesting and performance-based vesting, company-specific goals and peer-relative goals, and the use of discretion by the Compensation Committee have led to a competitive landscape where no two companies seem to have the same long-term incentive program.  And in private companies, the variety of design is still greater.

The days of time-vested stock options with a uniform vesting schedule (25% after one year, then monthly for 3 years) are long gone. Pre-transaction companies are experimenting with a wide variety of cash and equity-based compensation tools. The traditional metric of “percent of the company” must be interpreted across the multiple forms of equity being granted (options, restricted stock units, performance equity) and developing practices in vesting (performance conditions), liquidity opportunities, and changes to the “permanence” of equity.
Private companies share a variety of characteristics presenting a challenge for long-term incentive program design.
Twenty years ago, companies used primarily stock options, occasionally restricted stock awards, and rarely had performance conditions on awards.  Today, we see the use of performance-based options, time-vested options, restricted stock awards, restricted stock units (RSUs), performance share units, and cash-based long-term incentives.  Most peer group analyses yield the surprising result that every company is different.

Making it more difficult, these get combined into a single “long-term incentive” dollar amount which most consultants and analysts treat as a comparable number – $1 million in Black-Scholes value of stock options is equal to $1 million of RSUs.  Most executives and employees will tell you that is not true.

Twenty years ago, a survey of vesting schedules used would show one of three of four common schedules was used by 80% or more of companies.  Today, the typical peer group analysis shows that in a group of 20 companies, 30 or 40 different vesting schedules are being used.  Few analysts delve into this detail of plan design, and most consultants treat equity awards with different vesting schedules as the same.  $100,000 of RSUs with incremental 3-year annual vesting is the same as $100,000 of RSUs with 4-year cliff vesting – but they’re not.  Does your analysis capture these important differences?  Ours does.

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