Companies monitor stock plan usage and reserve pools to ensure equity incentive plans support business objectives. Understanding these issues is critical as companies continue to address employee reward and retention concerns. To assess recent equity compensation trends the Global Executive Compensation Analysis Team (GECAT) reviewed the most recent five years of S&P 500 overhang, run rates and long-term incentive (LTI) fair values for fiscal years 2017 to 2021, the most currently available full year of data as reported in calendar year 2022.
Key findings from the GECAT S&P 500 study include:For the complete report on companywide equity compensation practices and trends from the S&P 500 for fiscal years 2017 to 2021, please download the PDF (below).
| Title | File Type | File Size |
|---|---|---|
| Share utilization at S&P 500 companies: 2017 to 2021 - Equity compensation practices and trends | 1.3 MB |
Although median run rates experienced a 5% increase in 2019 over 2018 figures, they continued an overall downward trend since the study’s onset and decreased 17% in the current year to 0.51% of average common shares outstanding. Median run rates in the current year represent a 25% decrease from the high-water mark 0.69% of average common shares outstanding noted in the first year of review. The materials sector saw the greatest decrease (36%), from a 0.50% run rate to 0.32% in the current year. The financials and real estate sectors were the only sectors with a run rate increase over the five-year period of review. The highest increase of 20% was seen in the real estate sector, which saw its run rate increase from 0.20% to 0.24%.
Companies that require additional shares to fund their stock grant practices need to request shareholder approval to allocate additional shares to their equity plans. The number of companies requesting shares has trended downward over the last three fiscal years. A reduction in awards granted and performance award modifications or cancellations during times of less-than-ideal performance outcomes may have attributed to such companies having sufficient awards to continue their grant practices without the need to request additional shares.
After more than a decade of positive market returns and relatively stable market volatility, we consider how companies could mitigate share usage concerns in an era of increasing volatility and through a protracted bear market environment where shareholder approval for new plans, or additional shares, will likely face additional scrutiny around costs and alignment.
A substantial or prolonged market retraction would significantly affect retention, equity compensation strategy and business results for those companies underperforming peers. A reduced outstanding equity value can create retention concerns all on its own, but talent flight becomes a substantial risk when your company is underperforming, as its buyout value becomes relatively cheaper and the costs and efforts to replace talent have a further drag on business results. Special or one-off retention awards will likely become more prevalent among companies but selective among the employees being rewarded. Changes to overall equity grant strategy or supplemental equity grants will also require increased communications through employee education and shareholder outreach.
It is crucial that companies continually monitor their equity compensation program to ensure these are competitive and help retain and motivate key employees. We will continue to monitor and provide timely updates of equity grant practices.
