The Future of Work – The Clear Trend is Toward Performance-Based Long Term Incentive Compensation

Time to Adapt - ClockIt’s a trend, and a growing trend. Long Term Incentive Compensation is increasingly based on a wide variety of “performance metrics” and less often merely on “time served.”

There are generally two types of vesting in Long Term Compensation Awards.

First, there is “Time Vesting,” in which employees are vested in stock, stock options and other forms of equity or appreciation “units” over time, such as one-third of each grant per year for three years. To gain value, the employee has to merely “stick around.”

Second, there is “Performance Vesting,” in which employees are vested in stock, stock options, and other forms of equity or appreciation “units” only when, and to the extent, a predetermined measure of performance is achieved.

The trend seems encouraged by two forces. One force is the desire to hold down costs where appropriate, including the demands by institutional shareholders to limit expensive awards to employees when the company’s earnings, growth and dividends do not justify them.

The other force at work is the call by the public and investors to more closely align the interests of shareholders and employees, brought on by the view that corporate compensation has gotten out of control.

And, too, Performance Vesting is being based increasingly on many and varied metrics of “performance.” In years past, simpler performance measures such as the employer’s stock price would set the “trigger” for vesting of incentive compensation awards. More and more, “pay professionals” are being tasked with setting performance metrics that are custom-tailored to induce extra effort, tied to a variety of measures of individual achievement, division performance and company-wide results.

Instead of “paying for pulse,” that is, to those who simply remain on the job for a number of years, incentive compensation is being increasingly used as a tool to do just what its name suggests: incentivize, motivate, and bring about greater accountability.

Only time will tell if, as they say on Wall Street, “The trend is your friend.” In the meantime, you’re now on notice, and you can try to adapt when, where and to the extent you can.

© 2013 Alan L. Sklover. All Rights Reserved