- Continued worldwide expansion of long-term variable compensation with increasing heterogeneity of systems due to regulation
- Comparatively successful companies in particular widely apply Equity-based compensation
Frankfurt am Main, 07.08.2018. Companies worldwide are taking strong measures to compensate their employees with equity-based compensation and develop an equity culture within the company, according to the recent Global Equity Insights Survey from the management consultancy hkp/// group. Now in its sixth consecutive year, the study is conducted in cooperation with the Global Equity Organization (GEO). It reveals that North American companies are indeed the leaders in equity-based compensation, although companies from Europe and other economic regions are successively catching up. The fundamental expansion of equity-based compensation, however, is characterized by a large variation of plan models. This variety is often the result of national regulation, making the uniformity of market practice on an international level challenging.
“The Global Equity Insights Study is among the most comprehensive analyses of worldwide market practice of equity-based compensation. But the study is not just simply a qualitative review of market trends, rather it identifies the relationships between compensation and company performance and thus offers experts the opportunity to evaluate their company’s compensation plans against approaches driving success and to consider optimizing them,” explains Dr. Jan Dörrwächter, Senior Partner of hkp/// group.
Key result 1: successful companies focus strongly on Long-Term Incentives
The study shows that the portion of equity-based long-term incentive plans (LTIP) is significantly larger in successful companies (measured by Return on Assets over three years) for the highest levels of hierarchy than in less successful companies. This result is most distinct for management boards and company leaders. The LTIP-portion of total compensation in particularly successful companies is 8% higher than in less successful companies. In addition, the study proves that successful companies make a larger portion of their workforce eligible for LTIP than less successful companies.
“Equity-based compensation is not just relevant for top management. Quite the contrary – including other employee groups in equity-based compensation programs offers companies considerable opportunities. It contributes to an improved equity culture within the company, promotes longer term thinking and decision-making of employees, and moreover creates a substantial economic value add,” explains David Voggeser, survey leader and Senior Manager at hkp/// group.
Key result 2: Equity-based compensation established as conventional compensation element.
Internationally, North American companies grant the largest portions of LTIP – and this is true for all employee levels. Nearly all North American companies grant equity-based compensation for management boards and even 97% to the level directly under (top executives).
Across all economic regions, the portion of LTIP drops significantly further down the hierarchy – from 43% for management boards to 17% for middle management. However, large differences are observed between economic regions. More than 75% of all North American companies also grant LTIPs to middle management and over half make other (key) employees outside of management circles eligible. In comparison, European companies only seldom include middle management and/or other (key) employees to the group of eligible employees.
Key result 3: Regional regulation pushing towards differentiated plan designs
Long-term demographic changes in traditionally industrial countries, combined with positive economic developments over the past decade, have intensified competition for highly-skilled workers and managers. To offer attractive compensation packages for critical talent, many companies are offering equity-based long-term compensation as well as employee share purchase plans (ESPP).
Over the period from 2016 to 2017, the participation rate in companies’ employee share purchase plans greatly increased, from 34% to 41%. With the insights from difficulties in the past, companies began simplifying plan designs and communicating them better to their workforce.
On the other hand, many large companies run up against challenges when rolling out simplified and uniform plans in the various countries in which they operate. Companies find themselves pragmatically balancing increased efforts for global administration and optimized plan designs. In particular, large corporations with subsidiaries in rapidly developing industries, such as the technology sector, reported a higher tendency for adjusting the plan type (29%) and vesting criteria (24%). Across all companies, more than a fifth of participating companies intend to or already differentiate their equity-based compensation plans based on country.
Key result 4: Regulation as an obstacle
In addition, the study identifies national regulation as the central obstacle for rolling out a completely globally standardized equity-based compensation plan. 76% of companies reported this as a large barrier – 27% described this as a barrier they are completely unable to overcome. If there were more attractive regulatory frameworks for equity-based compensation, over three fourths of companies would undertake serious efforts to expand their plans. Further, this perspective was shared in similar percentages by companies from both North America as well as Europe. Among the most challenging companies with regards to regulatory requirements of LTIPs and ESPPs are Russia, the USA and China.
“International companies would certainly prefer to design their equity-based compensation plans as uniformly as possible, in order to administer them in a standardized and simple way,” says Andrew Thain, Senior Analyst at hkp/// group and co-author of the study. “They tend to seek global harmonization which, due to heterogeneity of national and regional regulatory requirements, is often impossible and in most cases quite challenging,” adds the compensation specialist.
Background information of the Global Equity Insights Study
The “Global Equity Insights Study 2018” was conducted in Spring 2018 in cooperation with the Global Equity Organization (GEO) under the academic guidance of the Chair for Management and Controlling at Georg-August University of Göttingen. The study is supported by Equatex, SAP, Siemens and Fidelity as premium sponsors as well as the Rutgers University School of Management and Labor Relations. In total, 154 companies from 17 countries and 9 key industries took part in the study – predominantly global players with a special focus on North America and Europe. 97% of participating companies have a market capitalization of over 1 billion USD, with the top 25% having a market capitalization of over 50 billion USD as of the end of 2017.
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