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As nominating and corporate governance committees adopt a more structured approach to boardroom succession planning, directors are debating accelerated equity vesting at retirement, as a way to promote board refreshment.
Compensation consultants report that boards are asking questions about the way equity grants are treated when directors retire from the board and the various approaches boards can take to ensure that directors can resign without leaving compensation on the table. Boards are investigating equity with an eye toward formalizing their approach to director succession planning in light of increased pressure from investors to focus on board refreshment, says Jan Koors, managing director at Pearl Meyer.
Historically, directors’ equity grants don’t continue to vest after retirement, Koors says. More often, directors forfeit any equity that hasn’t vested if they resign mid-year, or if they retire before the equity has fully vested if grants vest in annual installments.
“To vest the equity at retirement is a way, I think, of helping to encourage board members who may be ready to leave to make that decision without feeling like they’re leaving anything on the table,” Koors says.
For boards that grant equity that vests in multi-year installments, resigning before the awards have fully vested could mean forfeiting a large amount of stock or stock units. Among boards that grant directors equity that vests immediately, accelerating equity vesting isn’t an issue.
In the realm of executive compensation, however, accelerating equity vesting at retirement isn’t considered good governance because the point of equity for executives is to retain and motivate them.
The intent of equity compensation for directors is to align them with shareholders while they serve on boards. Koors points out that retention of directors isn’t an issue. In fact, boards have “almost the opposite problem,” she quips.
“You wouldn’t want a director to stay on the board if they’ve had a really long tenure and it’s their time to leave, but they don’t want to lose out on equity awards and don’t want to forfeit them when they leave,” Koors says.
Koors says boards have tended to take a more ad hoc approach to director retirement and equity. When a director is on the verge of leaving, board members scramble to figure out how equity should be treated. Now, however, Koors says boards are spending more time trying to create a formal structure and process around board succession planning and turnover.
“Increasingly, I see boards taking a more structured, programmatic approach to their board refreshment,” Koors says. “It’s really about boards’ saying, ‘We shouldn’t wait to address these issues until we’ve got somebody about to leave. We should have policies in place.’”