We use cookies to collect information about how our website is used and to improve the visitor experience. You can change your browser’s cookie settings at any time. Please review our privacy policy for more information. OK
Peter Lupo, Managing Director at Pearl Meyer, notes that stock options continue to be popular—and in some sectors more than others. Companies new to the public markets, especially those in industries like IT and life sciences where results are very volatile, often prefer stock options “because it’s so difficult to set goals and select metrics,” Lupo explains. He also notes that companies with diversified lines of business typically experience difficulties setting performance criteria and so may default to stock options.
Some argue that ISS and investor advocates have made long-term incentive awards a cookie-cutter exercise—and that this is worrisome. While ISS likes to see long-term awards tied to a quantifiable benchmark, in a perfect world compensation committees would have the courage to vest executives who performed well even if market conditions meant they didn’t clear certain hurdles.
Envisioning longer time horizons might make sense, but Lupo says companies whose pay plans deviate too far from common practices must be prepared to defend themselves vigorously. “If a company has been successful for decades and is highly respected, it’s easier to do something different,” he says.
In the end, the amount of latitude a company has to take a more creative approach to executive compensation incentives may come down to the company’s reputation—and its overall financial performance. Lupo emphasizes that shareholders tend to probe deeply into long-term incentive plans only when performance is flagging. “If you’re a successful company, investors don’t care about how you design your compensation program to get results,” he says. "They care about the results."