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back to index backEUROtalk August,  2005

New Equity Incentive Programs Gain Favor With Employers Around the World

In the U.S., Canada and the U.K., equity incentives -- especially stock options -- have been common practice among major employers for at least a decade. And in many other countries, especially the developed markets of continental Europe -- equity awards for employees have grown in popularity in recent years as employers have come to accept them as a good way to link pay and performance.

For most companies, stock options remain the preferred form of equity-based incentive for executives and other employees. But with the introduction of mandatory expensing of options by the Financial Accounting Standards Board and the International Accounting Standards Board, companies are exploring alternative incentives because the new rules remove the more advantageous accounting treatment for options and place all forms of long-term incentives (LTIs) on a level playing field.

As a consequence, companies are showing more interest in restricted stock and performance shares, and the global environment for employer award programs appears to be shifting once again, at least in subtle ways. According to a new report, Towers Perrin's Equity Incentives Around the World, non-option types of equity incentives -- particularly restricted stock and performance shares -- are gaining in popularity among employers in a number of countries. Restricted stock consists of shares that are subject to trading restrictions, with vesting determined by length of service. Performance shares vest according to performance, typically over a period of three years or longer.

These trends are shown in the exhibit. Not surprisingly, stock options remain the most prevalent type of incentive by far in all of the 21 countries surveyed. France led with 90% of companies reporting the use of stock options, followed by Belgium, Canada and the U.S. (85%). Companies in China, represented by Hong Kong SAR and Shanghai, reported usage levels of 55% and 35%, respectively, and trailed companies in most large industrial nations but ranked ahead of regional competitor India, at 20%.

Changing practices

Performance shares, however, are clearly on the world map as a form of equity-based compensation for many employers. They're used by 60% of the companies in the U.K., 55% of the companies in the Netherlands and 40% of the companies in Australia, and levels of usage in all three countries are higher than the 35% reported by U.S.-based companies. Fully 25% of the companies in Singapore and Sweden reported using performance shares. These types of plans are expected to increase as companies focus more on incentive programs that link pay to performance.

LTI practices at multinational organizations are changing in other ways as well. A Towers Perrin survey, Global Long-Term Incentive Policies, published earlier this year, found that nearly 40% of U.S. multinationals no longer grant the same number of options to all employees at an equivalent organizational level worldwide, but instead differentiate awards according to geography. These companies basically decided that they could tie award levels in other countries to local market rates, which in most cases results in a reduction in the size of the awards.

Here are some other key findings in Equity Incentives Around the World:

•  The most prevalent practice is to award stock options at fair market value, and on an annual basis.

•  Though eligibility criteria for stock option grants vary widely from one country to another, an individual's reporting or organizational level and position appear to be the two most important criteria.

•  The practice of setting LTI grant levels at the discretion of management is no longer predominant in most countries. Instead, companies are using LTI grant guidelines that are based on the employee's position, grade or a combination of both criteria.

Local conditions count

Global companies need to keep in mind that, when they're implementing an equity compensation plan, it is common to encounter a complex set of regulatory and public policy issues that will vary from one country to the next but nonetheless need to be addressed. Share utilization, corporate financial accounting requirements, taxation, and public disclosure about share plans and participants are all important issues. Special events ranging from termination for cause to change in control can trigger changes in stock option conditions that require the attention of HR management.

Continued expansion of equity incentives around the world, especially in Asia, suggests that companies will be wrestling with the best way to deploy these awards. Employers can help themselves in this regard by putting in place a global compensation philosophy, establishing clearer criteria for eligibility and participation, selecting sound plan designs, developing grant guidelines that work in all geographic regions and communicating their incentive programs clearly to all employees.

Equity Incentives Around the World updates a 2001 Towers Perrin report entitled Stock Options Around the World.

Source: Towers Perrin - GAI

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