In 2019, hkp/// group and the Global Equity Organization once again conduct the Global Equity Insights study - the biggest research on global market practices regarding equity-based compensation. Last years' results showed one more time that long-term variable compensation has established itself worldwide as a core compensation instrument and that employee participation is on the upswing again. hkp.com spoke to hkp/// group compensation experts David Voggeser and Andrew Thain about the dynamics and intensity of these developments and the benefits of equity-based compensation.
Mr. Voggeser, Mr. Thain, companies have been making great efforts for years to compensate their executives and employees with company ownership to develop an equity culture. What has changed over the last year when it comes to equity-based compensation and employee participation?
David Voggeser: We see an uninterrupted global trend towards the use of equity-based elements in the compensation of specialists and managers. However, it appears that national regulatory requirements act as a hurdle on one hand, and on the other hand provide the impetus for differentiated implementation.
Andrew Thain: The number of companies active on a global level is always rising, and with it the strategic need to design and optimally manage compensation systems more uniformly across borders. However, heterogenous local frameworks for general issues regarding the implementation of equity-based compensation or even quite technical aspects such as local tax regimes are proving to be stumbling blocks to this.
Before we get into the detailed results of the GEIS analysis 2018: what concrete data is behind the results of the current Global Equity Insights study?
Andrew Thain: The study, which has been conducted for the sixth year in a row and in collaboration with the Global Equity Organization (GEO), is one of the most comprehensive analyses of global equity-based compensation market practice. Just over 150 companies from the strongest national economies have participated, in its current version with a regional focus on North America and Europe. Not only is it a quantitative review of equity-based compensation, but it also identifies the link between compensation and corporate performance, enabling experts to align and optimize corporate compensation plans with market-leading international approaches.
David Voggeser: In order to attain such valid results, we rely on the support of Professor Michael Wolff and his team from the University of Göttingen, who are leading international scholars in the field of the impact of equity-based compensation and employee participation, as in previous years.
Andrew Thain: The study, which has been conducted for the sixth year in a row and in collaboration with the Global Equity Organization (GEO), is one of the most comprehensive analyses of global equity-based compensation market practice. Just over 150 companies from the strongest national economies have participated, in its current version with a regional focus on North America and Europe. Not only is it a quantitative review of equity-based compensation, but it also identifies the link between compensation and corporate performance, enabling experts to align and optimize corporate compensation plans with market-leading international approaches.
David Voggeser: In order to attain such valid results, we rely on the support of Professor Michael Wolff and his team from the University of Göttingen, who are leading international scholars in the field of the impact of equity-based compensation and employee participation, as in previous years.
What role do the sponsors of the study play?
Andrew Thain: Sponsors of the study are companies which, as global organizations, have a strong interest in valid global data providing them with information of the central mechanisms in connection with equity-based compensation and its influence on the performance of employees, teams and the whole company. In this respect, the study offers almost incomparable results, especially in more detailed evaluations that are available apart from the public report.
David Voggeser: Moreover, the participating companies also deal with very tangible issues such as costs and processes in the administration of such programs. The concept of the study envisions that the basic questions remain relatively stable, but that special topics desired by the sponsors may be added or adjusted year after year.
Andrew Thain: Sponsors of the study are companies which, as global organizations, have a strong interest in valid global data providing them with information of the central mechanisms in connection with equity-based compensation and its influence on the performance of employees, teams and the whole company. In this respect, the study offers almost incomparable results, especially in more detailed evaluations that are available apart from the public report.
David Voggeser: Moreover, the participating companies also deal with very tangible issues such as costs and processes in the administration of such programs. The concept of the study envisions that the basic questions remain relatively stable, but that special topics desired by the sponsors may be added or adjusted year after year.
A key finding of the study is that successful companies increasingly rely on long-term incentives. Did that surprise you?
David Voggeser: This development has already been indicated in previous years. The current study shows that the proportion of equity-based long-term compensation in successful companies – measured by return on assets over three years – is significantly higher at the upper hierarchical levels than for less successful companies. The differences between the members of Management and Executive Boards are most obvious. The portion of long-term equity-based compensation in total compensation in particularly successful companies is around 8 percentage points higher than in less successful companies.
David Voggeser: This development has already been indicated in previous years. The current study shows that the proportion of equity-based long-term compensation in successful companies – measured by return on assets over three years – is significantly higher at the upper hierarchical levels than for less successful companies. The differences between the members of Management and Executive Boards are most obvious. The portion of long-term equity-based compensation in total compensation in particularly successful companies is around 8 percentage points higher than in less successful companies.
What is the situation at the lower hierarchy levels?
Andrew Thain: The answer to this very question is an important indication of the benefits of equity-based compensation. The study shows that in successful companies, a larger proportion of the workforce is entitled to participate in the respective programs.
Andrew Thain: The answer to this very question is an important indication of the benefits of equity-based compensation. The study shows that in successful companies, a larger proportion of the workforce is entitled to participate in the respective programs.
Is equity-based compensation therefore an issue not only affecting top management?
Andrew Thain: On the contrary: the inclusion of broader groups of employees offers considerable opportunities: it contributes to an improved equity culture in the company, promotes long-term thinking and decision making by employees and ultimately creates substantial economic added value.
David Voggeser: The number of such compensation programs, however, decreases significantly in descending hierarchies - from 43% for management to 17% for middle management. But there is also a clear trend towards a wider application of equity-based compensation at lower management levels. We are by no means at the end of its development.
Is this also a sustainable trend on an international level?
David Voggeser: Yes, although with differentiated regional characteristics. There are significant differences between the global economic regions. More than 75% of North American companies also offer equity-based long-term compensation to middle management, and more than half include other employees outside management. In European companies, on the other hand, middle management and lower employee levels are much less common among those eligible.
You mentioned regulation as an obstacle to a stronger and more uniform expansion of equity-based long-term compensation. Are there other limiting factors and how do companies deal with them?
Andrew Thain: Companies have learned from their mistakes, compared to the early results of the Global Equity Insights Study. They focused, for example, on simpler plan designs as well as invested heavily in the communication of the plans. As a result, the participation rate in employee share participation plans rose significantly worldwide, from 34% to 41%.
David Voggeser: Companies would like to optimize further. However, they see themselves in a balancing act between an increased cross-border administration effort and the advantages of an optimized design. There is a tendency to adjust both plan types and vesting criteria, especially for groups with subsidiaries in rapidly developing sectors such as the technology sector.
Andrew Thain: Companies have learned from their mistakes, compared to the early results of the Global Equity Insights Study. They focused, for example, on simpler plan designs as well as invested heavily in the communication of the plans. As a result, the participation rate in employee share participation plans rose significantly worldwide, from 34% to 41%.
David Voggeser: Companies would like to optimize further. However, they see themselves in a balancing act between an increased cross-border administration effort and the advantages of an optimized design. There is a tendency to adjust both plan types and vesting criteria, especially for groups with subsidiaries in rapidly developing sectors such as the technology sector.
According to the study, almost 20% of companies intend to adjust their equity- based plans for different industries. Is this a high value?
David Voggeser: From our point of view, absolutely yes. In a sense, this contradicts the trend towards standardization that we’re seeing in most aspects. International companies, in particular, want their equity-based compensation plans to be as uniform and easy to administer as possible. They are seeking global harmonization.
David Voggeser: From our point of view, absolutely yes. In a sense, this contradicts the trend towards standardization that we’re seeing in most aspects. International companies, in particular, want their equity-based compensation plans to be as uniform and easy to administer as possible. They are seeking global harmonization.
How do you explain this development?
David Voggeser: We see the need to respond strongly to the more individual requirements of specific sectors, as an explanation. This applies particularly to corporations that are now also active in the field of technology, software and digitization in addition to traditional industries.
Andrew Thain: We see major differences from the traditional industries in terms of the portion of LTI in the compensation pay mix. In these industries, it translates to compensation with a higher risk/reward profile and also a stronger focus on equity. Companies should consider and include this in their plans.
David Voggeser: We see the need to respond strongly to the more individual requirements of specific sectors, as an explanation. This applies particularly to corporations that are now also active in the field of technology, software and digitization in addition to traditional industries.
Andrew Thain: We see major differences from the traditional industries in terms of the portion of LTI in the compensation pay mix. In these industries, it translates to compensation with a higher risk/reward profile and also a stronger focus on equity. Companies should consider and include this in their plans.
Mr. Thain, Mr. Voggeser, thank you very much for the interview!
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