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The Equity Compensation Update

Corey Rosen

February 3, 2014

(Corey Rosen)

Court Cases

Challenge to Stock Option Award in Excess of Maximum Allowed in Plan Can Proceed: In Pfeiffer v. Leedle, No. 7831-VCP (Del. Ch. Nov. 8, 2013), the Delaware Chancery Court allowed a shareholder to proceed with his lawsuit against Healthways' CEO and board challenging a grant to stock options to the CEO that were in excess of the maximum allowed under the plan. The court said the business judgment rule, which allows boards broad leeway in making business decisions, including executive compensation, applied here. The defendants argued that performance clauses in the plan made the grants appropriate, but the court concluded that because the grants clearly violated the unambiguous language of the governing documents for the plan, the business judgment rule did not apply.

Marriott Employees Do Not Qualify as a Class in Stock Award Suit: In Bond v. Marriott Int'l, Inc., No. 8:10-cv-01256-RWT (D.C. Md Jan. 7, 2014) a district court ruled that employees do not qualify as a class in a lawsuit concerning a former deferred stock bonus award program. Marriott made the awards available to select employees from 1996 to 1991. The employees allege the awards became subject to ERISA in 1974, but Marriott contended they were exempt under top-hat rules (the plan covered over 12,000 employees during the period, however).

The court ruled that the employees did not meet the class requirement because some of the would-be class members actually were vested and received more shares under the plan than they would have if the plan had been subject to minimum ERISA standards. Other employees singed releases in some cases, which defeated the typicality of the class requirements.

New Study on Trends in M&A, Private Equity Activity

According to an article by Gian Ricco in the fall 2013 issue of the SRR Journal, based on data from S&P Capital IQ, there were 15,135 mergers and acquisitions in the 12 months ending June 30, 2013, up 2% from the same period in the prior year. The aggregate value of the deals was $920 billion. The average EBITDA multiple was 8.7 for strategic buyers and 7.7 for financial buyers. Private equity firms now hold 6,850 companies, with the median holding period for their investment at 5.4 years.

Siemens Global Share Program

Siemens, the worldwide electronics and electrical engineering company with 370,000 employees, has long had a very effective broad-based employee ownership program. In a presentation to the Beyster Fellows meeting January 14, Siemens vice-president for compensation and benefits Bettina Gohm noted that an employee who had bought the maximum number of shares allowed since 1969, investing 17,500 would now have 208,000, including over 68,000 in dividends paid over that time. The current Siemens plan has been in place since 1998 and offers employees three free shares for each share they buy. Attractive as the plan is, only about one-third of eligible employees participate, despite a very active communications program from the company.

New Surveys on Employee Attitudes Toward Stock Plans

Morgan Stanley Survey Looks at How Varying forms of Equity Affect Employee Attitudes
Morgan Stanley has published a new survey of 750 stock plan participants in large public companies that describes how employees react to these plans. The report, Attitudes and Behaviors of Stock Plan Participants (PDF), unfortunately does not provide much detail on how people were selected to participate, so the data on who is participating is not necessarily representative of the universe of stock plan participants. Nonetheless, the results do provide some useful insights.

Twenty-one percent of the participants were executives; 65% were professional, technical, supervisory, or managerial employees; and 14% were hourly. Forty-two percent had incomes of $200,000 or more. Ninety-two percent of the respondents were satisfied with their plans, and 57% very satisfied. Recipients getting options, restricted stock, or performance shares (a group that skews more towards higher-paid people) valued their plans more than 401(k) plans; ESPP participants just slightly less. Overall, participants reported having 12.1% of their pay invested annually in stock plans, compared to 7.6% in 401(k) plans. Seventy-five percent of respondents said having a stock plan made them feel more invested in the company, and 67% said it shows the company truly values its employees.

New UBS Equity Survey Analyzes Whether Employees Value Equity Awards
A new survey from UBS titled the UBS Equity Award Value Index provides a detailed look at how employees think about equity awards. The study is based on surveys of a cross-section of 600 employees. The study noted that the Russell 3,000 provided $110 million in equity awards in 2012. Unfortunately, the report does not provide information about the characteristics of the 600 employees and their companies, but it does provide some intriguing insights into what makes these awards seem more or less valuable.

The study asks employees to identify how they view equity awards on five dimensions:

The key finding is that views on equity depend on how many grants have vested (employees typically get multiple grants, each with their own vesting schedule). If there are six or more vesting events, people see the awards as key to wealth building; if there are three to five vestings, they are seen as a paycheck supplement; if there less than three vestings, they are seen as a lottery.

That the number of vesting events is the most highly correlated explanation for how positively people view their awards is in one way hardly surprising. More vested awards means employees have (1) seen that the awards are real and (2) accumulated much more value than with fewer vested grants. But the findings also indicate that employees do not prospectively think about equity award programs. Even if a company promises them repeated rewards, and they see colleagues getting them, they still have an "I'll wait till I see it" approach. That may mean companies are not communicating the value of awards very effectively, or perhaps this is just an inevitable part of the way people think about economic value.

The relationship between how many awards have vested and the various variables is not, however, an overwhelming one on every measure, as the table below indicates. It matters most in attitudes toward taking the job and staying there. Interestingly, the question on whether the awards were instrumental in taking the job is retrospective. When people took the job they had no vested awards, but as they accumulate vested awards, looking back they are more likely to think it mattered (this is similar to polls showing that years after an election, if a president is popular, more people say they voted for him than did).
Number of vesting events and attitudes toward equity awards
Number of vestings:6 or more3-50-2
Awards are a way to build wealth55%39%44%
Awards are a supplement to a paycheck33%36%42%
Awards are a lottery11%15%24%
Importance in taking job48%42%19%
Importance in staying in current jobs58%31%20%
On both of the jobs measures, equity awards rank behind the most important factors, which are base pay, healthcare, a 401(k) plans, and bonuses, but ahead of nontraditional benefits, such as childcare.

More vesting awards are only weakly linked to engagement as measured by such factors as regularly checking the stock price (about 40% do) or modeling how much the awards might be worth one day (about a quarter do). About 38% of employees say they will keep their company stock after they have vested, with little variation based on vesting.

Equity Track Set for NCEO Annual Conference April 8-10 in Atlanta

The NCEO's annual conference will feature a special track on equity compensation issues for closely held companies. See the annual conference program for details.

NCEO Equity Webinar Replays Available

The NCEO has a library of dozens of past webinars on equity compensation issues. To learn about these replays, which are available at no cost to NCEO members, see our Webinars page if you are a nonmember, or go directly to the equity Webinar replay list if you are a member (username and password required).

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