Equity Compensation All Stars Game: Silicon Valley vs. The Rest of the World A SUMMARY REVIEW OF THE 2016 DOMESTIC STOCK PLAN DESIGN SURVEY RESULTS CO-SPONSORED BY DELOITTE CONSULTING LLP AND THE NASPP Presenters: Barbara Baksa, CEP, NASPP Tara Tays, Deloitte Consulting LLP
Agenda The Line-up: Survey Overview and Participant Profile The Baseball Diamond: Plan Design At Bat: Stock Grants/ Awards On Deck: Performance Awards On the Bench: Stock Options -2-
Meet Your Commentators Barbara Baksa serves as Executive Director for the NASPP and has over 20 years experience speaking and writing on equity compensation topics. She also serves on the Advisory Board for the CEP Institute and is co-editor of The Corporate Executive. Tara Tays is the West Coast leader for Deloitte Consulting LLP s Compensation Strategies practice. Tara has over 18 years of experience advising management and compensation committees on a wide range of compensation matters. -3-
The Line-Up: Survey Overview and Participant Profile -4-
Participant Profile Industry Number of Survey Participants General Industry 434 High-Tech 145 Silicon Valley (includes companies headquartered in San Francisco, Oakland, San Jose, and surrounding areas in Northern California) 57-5-
Participant Profile Primary Industry Classification Financial Services, Energy/Mining/Oil & Gas, and Technology Services are the three largest industries represented from General Industry Technology Services, Computer Software and Services, and High Technology Manufacturing are the three largest industries represented from the High-Tech Industry and Silicon Valley (1) 21% 17% 26% 20% 18% 26% 21% 8% 9% 1% 2% 3% 3% 3% 3% 3% 3% 3% 4% 4% 5% 6% 7% 7% 8% 8% 9% 9% 9% General Industry High-Tech Silicon Valley (1) For Silicon Valley, only industries with 7 or more responses were reported. -6-
Participant Profile Location of Corporate Headquarters 100% 100% 80% 60% 40% 20% 0% 20% 23% 19% 21% 13% 10% 10% 6% Northeast Southeast Midwest Southwest West Headquarted outside the U.S. 26% 43% 4% 5% General Industry High-Tech Silicon Valley -7-
Participant Profile Publicly Traded Is your company publicly traded? What is the primary exchange your company s stock is traded on? 70% 96% 92% 91% 51% 46% 52% 47% 28% 4% 8% 9% 2% 2% 2% Yes No NYSE NASDAQ Global or Global Select Markets Other market system General Industry High-Tech Silicon Valley -8-
Participant Profile Revenues (1) 60% of General Industry participants generated less than $5B in revenues during the most recent FY 12% 9% 5% 5% 11% 8% 12% 21% 30% 19% 19% 19% 20% 18% 14% Is your company a member of the Fortune 500? 30% 13% 9% General Industry 14% High- Tech 13% 7% 7% Silicon Valley Yes 43% 30% 21% No 57% 70% 79% Less than $100 million $100 349.9 million $350 999.9 million $1 2.49 billion $2.5 4.9 billion $5-9.9 billion $10-19.9 billion $20 billion and above General Industry High-Tech Silicon Valley (1) For Silicon Valley, only ranges with 7 or more responses were reported. -9-
Participant Profile Market Capitalization Approximately 50% of participants have a market capitalization less than $5B 14% 14% 13% 13% 13% 11% 10% 8% 8% 19% 19% 17% 16% 14% 13% 14% 14% 13% 22% 15% 20% Less than $350 million $350 999.9 million $1 2.49 billion $2.5 4.9 billion $5-9.9 billion $10-19.9 billion $20 billion and above General Industry High-Tech Silicon Valley -10-
Participant Profile Full-Time Employees General Industry 24% 19% 14% 16% 16% 18% 14% 2% 2% 5% 3% 7% 6% 9% 7% 10% 8% 9% 4% 5% 1-100 101-250 251-750 751-1,500 1,501-2,500 2,501-5,000 5,001-10,000 10,001-30,000 30,001-100,000 More than 100,000 In the U.S. Globally -11-
Participant Profile Full-Time Employees High-Tech Industry 25% 22% 11% 7% 13% 14% 12% 10% 10% 9% 14% 14% 11% 11% 6% 7% 1% 1% 1-250 251-750 751-1,500 1,501-2,500 2,501-5,000 5,001-10,000 10,001-30,000 30,001-100,000 More than 100,000 In the U.S. Globally -12-
Participant Profile Full-Time Employees Silicon Valley 25% 26% 18% 20% 19% 19% 20% 13% 13% 9% 9% 9% 1-250 251-750 751-1,500 1,501-2,500 2,501-5,000 More than 5,000 In the U.S. Globally -13-
The Baseball Diamond: Plan Design -14-
Prevalence of Equity Vehicles Prevalence of LTI Vehicles Employee Participants 89% 88% 91% 79% 80% 91% 84% 81% 91% 77% 77% 86% 77% 66% 52% 35% 19% 57% Restricted Stock/Units CEO, CFO and Named Executives Other Senior Management Middle Management Other Exempt Employees Non-Exempt Employees 81% 69% 70% 80% 67% 68% 69% 59% 57% 24% 14% 7% 11% 6% 5% 3% 3% 0% Performance Shares/Units CEO, CFO and Named Executives Other Senior Management Middle Management Other Exempt Employees Non-Exempt Employees 51% 51% 48% 50% 50% 48% 45% 44% 41% 26% 25% 23% 19% 18% 13% 15% 7% 9% Stock Options/ SARs CEO, CFO and Named Executives Other Senior Management Middle Management Other Exempt Employees Non-Exempt Employees General Industry High-Tech Silicon Valley -15-
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Plan Design Source and Use of Shares Approximately one third of surveyed participants have plans that use a flexible share reserve (or fungible share reserve), whereby full value awards count more against the share reserve than stock options 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2.43 2.29 2.20 2.00 2.00 2.00 1.61 1.50 1.65 25th Percentile 50th Percentile 75th Percentile General Industry High-Tech Silicon Valley -17-
Plan Design Overhang* 92% of General Industry surveyed companies, 79% of High-Tech surveyed companies, and 77% of Silicon Valley surveyed companies averaged less than 15% overhang during the last three years 60% 46% 27% 27% 24% 24% 23% 21% 23% 8% 9% 9% Less than 7.5% 7.50% - 12.49% 12.50% - 14.99% 15.00% or more General Industry High-Tech Silicon Valley *Overhang is equal to the equity award shares outstanding plus shares available for future grant divided by common shares outstanding. -18-
Plan Design Burn Rate* 76% of General Industry surveyed companies, 55% of High-Tech surveyed companies, and 40% of Silicon Valley surveyed companies averaged less than 2.5% burn rate for the last three years 76% 55% 40% 40% 18% 20% 11% 12% 24% Less than 0% to 2.49% 2.50% - 3.99% 4.00 or more General Industry High-Tech Silicon Valley *Burn rate is equal to the total number of options and restricted shares granted in a year divided by the total number of common shares outstanding. -19-
Plan Design Clawback Provisions The majority of surveyed companies have clawback provisions that are applicable to the following levels of employees: 99% 99% 100% 96% 89% 92% 63% 49% 50% The most common events that could cause grants to be forfeited include: Event Financial Restatement Due to Fraud or Misconduct General Industry Prevalence (1) High- Tech 90% 88% CEO/CFO Other NEOs Other Senior Management General Industry High-Tech Silicon Valley Ethical Misconduct / Fraud / Intentional Misconduct Inappropriate Use of Trade Secrets / Breach of Confidentiality Violation of Non-Compete Agreement 69% 69% 37% 36% 37% 39% -20- (1) Silicon Valley companies were excluded from the table due to the low number of responses.
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Plan Design Treatment of Change-in-Control Majority of companies allow assumption/substitution of awards upon a CIC > 70% of General Industry > 80% of High-Tech > 90% of Silicon Valley Does your plan allow for single or double trigger acceleration upon a change in control? General Industry 62% 60% 18% 17% 17% 17% Restricted Stock/Units Performance Awards Single Trigger Double Trigger At Discretion of Board/Committee High-Tech Silicon Valley 51% 50% 16% 28% 17% 28% Restricted Stock/Units Performance Awards 31% 38% 30% 39% 18% 18% Restricted Stock/Units Performance Awards Single Trigger Double Trigger At Discretion of Board/Committee Single Trigger Double Trigger At Discretion of Board/Committee -22-
At Bat: Stock Grants / Awards -23-
Stock Gants/Awards Current Participants (1) Percentage of surveyed companies with employees currently receiving the following types of stock/unit grants: 100% 80% 83% 83% 90% 60% 40% 20% 0% 31% 26% 13% RS (not in lieu of cash) 6% 7% RS (in lieu of salary or bonus) RSUs (not in lieu of cash) 14% 15% 18% RSUs (in lieu of salary or bonus) General Industry High-Tech Silicon Valley 4% 6% 2% 4% Unrestricted stock Unrestricted stock (not in lieu of cash) (in lieu of salary or bonus) 24 (1) For Silicon Valley companies, only answers with 7 or more responses were reported. -24-
Stock Grants/Awards Grant Approval Procedures (1) Grants to non-section 16 insiders are approved by: 80% 60% 58% 50% 59% 40% 25% 28% 24% 20% 0% 1% CFO CEO Committee of the board 6% 7% Full board 9% 14% Other management General Industry High-Tech Silicon Valley 25-25- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
Stock Grants/Awards Grant Approval Procedures (1) (cont.) Grants to non-section 16 insiders are approved as follows: General Industry High-Tech Silicon Valley When the compensation committee meets 26% 27% 27% Once a month (at the same time every month) 22% 33% 44% Once a quarter (at the same time every quarter) 17% 18% 22% On hire date 9% 7% N/A Once a year (at the same time every year) 8% 5% N/A When the board meets 5% 7% N/A We do not issue new hire grants 3% N/A N/A Only during open-window periods 3% N/A N/A After earnings are released 2% N/A N/A Other 2% N/A N/A No set schedule 14% 7% N/A 26-26- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
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Stock Grants/Awards Graded Vesting (1) For General Industry participants, graded vesting is the most commonly utilized vesting form (72%), followed by cliff vesting (29%). Graded vesting is even more common in High-Tech (87%) and Silicon Valley (98%) The chart below illustrates the length of graded vesting schedules: 100% 80% 60% 40% 20% 0% 80% 64% 44% 43% 24% 8% 6% 4% 3 years 4 years 5 years Other General Industry High-Tech Silicon Valley 28-28- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
Stock Grants/Awards Post-Vesting Holding Periods (1) Are awards subject to a post holding vesting period? 100% 80% 60% 82% 88% 90% 40% 20% 0% 14% 9% For executives only 2% 2% For a broader group of employees, but not all employees For all employees No General Industry High-Tech Silicon Valley 29-29- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
Stock Grants/Awards Termination/Forfeiture Provisions: Normal Retirement Below are the extent to which stock grants/awards are forfeited for each industry under normal retirement: General Industry 31% 27% 7% 36% High-Tech 20% 14% 8% 56% Silicon Valley 16% 4% 8% 73% 0% 20% 40% 60% 80% 100% Accelerated Vesting Continued Vesting Other/Discretionary Forfeiture 30-30-
Stock Grants/Awards Termination/Forfeiture Provisions: Disability Below are the extent to which stock grants/awards are forfeited for each industry under disability: General Industry 66% 15% 6% 23% High-Tech 40% 8% 8% 45% Silicon Valley 33% 4% 63% 0% 20% 40% 60% 80% 100% Accelerated Vesting Continued Vesting Other/Discretionary Forfeiture 31-31-
Stock Grants/Awards Termination/Forfeiture Provisions: Death Below are the extent to which stock grants/awards are forfeited for each industry under death: General Industry 69% 6% 5% 20% High-Tech 51% 2% 10% 37% Silicon Valley 33% 4% 63% 0% 20% 40% 60% 80% 100% Accelerated Vesting Continued Vesting Other/Discretionary Forfeiture 32-32-
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On Deck: Performance Awards -34-
Performance Plans Current Participants Percentage of surveyed companies with employees currently receiving the following types of performance awards: 120% 100% 95% 93% 97% 80% 60% 40% 20% 0% Performance awards paid out in stock 19% 8% Performance awards paid out in cash General Industry High-Tech Silicon Valley 14% 6% 8% 6% Stock options 35-35-
Performance Plans Performance Metrics (1) Percentage of surveyed companies with the following types of performance metrics: TSR 35% 52% 49% EPS 28% 26% Revenue 21% 33% 48% ROIC/RONA 0% 9% 17% EBITDA 13% 12% 16% 0% 10% 20% 30% 40% 50% 60% General Industry High-Tech Silicon Valley 36 (1) For Silicon Valley companies, only answers with 7 or more responses were reported. -36-
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Performance Plans Performance Metrics For surveyed companies that grant Total Shareholder Return (TSR) awards, is TSR relative? 120% 100% 92% 92% 100% 80% 60% 40% 20% 0% 8% 8% Yes No General Industry High-Tech Silicon Valley 0% 38-38-
Performance Plans Performance Metrics (1) For surveyed companies that grant Total Shareholder Return (TSR) awards, do awards pay out if TSR is negative but the company outperformed its peers? 100% 80% 81% 85% 60% 40% 20% 19% 15% 0% Yes General Industry High-Tech No 39-39- (1) Silicon Valley companies were excluded from graph due to the low number of responses.
Performance Plans Performance Metrics (1) For surveyed companies that grant Total Shareholder Return (TSR) awards, are TSR awards subject to a payout cap? 80% 60% 69% 69% 40% 31% 31% 20% 0% Yes, in all instances General Industry High-Tech No 40-40- (1) Silicon Valley companies were excluded from graph due to the low number of responses.
Performance Plans Performance Metrics How many performance metrics are your awards typically subject to? 60% 55% 40% 39% 47% 42% 41% 29% 20% 19% 12% 16% 0% 1 2 3 or more General Industry High-Tech Silicon Valley 41-41-
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Performance Plans Performance Metrics Are the performance metrics different than the measures utilized in the company s annual incentive plan? Approximately 90% of respondents measure performance at the corporate level only. 80% 60% 62% 51% 55% 40% 20% 18% 27% 21% 20% 22% 24% 0% Yes No Combination General Industry High-Tech Silicon Valley 43-43-
Performance Plans Performance Period and Holding: General Industry (1) Indicate the length of the performance period (period in which performance is measured): Performance Options/SARs 15% 15% 42% 27% Performance Cash/Units 13% 2% 78% 5% 2% Performance Shares 12% 4% 78% 4% 0% 20% 40% 60% 80% 100% 1 Year 2 Years 3 Years 4 years or longer Other 44-44- (1) High-Tech and Silicon Valley companies were excluded from graph due to the low number of responses.
Performance Plans Termination/Forfeiture Provisions: Normal Retirement Below are the extent to which performance awards are forfeited for each industry under normal retirement: General Industry 61% 5% 6% 27% High-Tech 34% 6% 6% 54% Silicon Valley 17% 10% 73% 0% 20% 40% 60% 80% 100% Payout at end of performance period Other/Discretionary Payout at time of termination Forfeiture 45-45-
Performance Plans Termination/Forfeiture Provisions: Disability Below are the extent to which performance awards are forfeited for each industry under disability: General Industry 48% 30% 7% 17% High-Tech 32% 21% 14% 33% Silicon Valley 19% 16% 16% 48% 0% 20% 40% 60% 80% 100% Payout at end of performance period Payout at time of termination 46-46-
Performance Plans Termination/Forfeiture Provisions: Death Below are the extent to which performance awards are forfeited for each industry under death: General Industry 48% 35% 7% 15% High-Tech 33% 28% 10% 29% Silicon Valley 19% 20% 16% 45% 0% 20% 40% 60% 80% 100% Payout at end of performance period Other/Discretionary Payout at time of termination Forfeiture 47-47-
Performance Plans Change in Control Acceleration (1) The chart below summarizes if all or a portion of performance awards accelerate upon a change in control: 60% 48% 40% 20% 9% 24% 36% 5% 27% 25% 21% 36% 28% 15% 0% Other At Board/Committee Discretion Performance awards are Performance awards are pro-rated and settled settled at maximum grant based on the achievement value of the performance metric(s) between the start of the performance period and change in control date Performance awards are settled at target grant value General Industry High-Tech Silicon Valley 48-48- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
On the Bench: Stock Options -49-
Stock Options Current Participants (1) Approximately 55% of the survey respondents maintain a stock option plan; below are the following types of stock options/sars disclosed by individuals that currently receive stock option awards: 100% 80% 86% 81% 82% 60% 40% 20% 18% 28% 32% 8% 8% 0% ISO NQSO Stock SAR Cash SAR General Industry High-Tech Silicon Valley 50-50- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
Stock Options Vesting The majority of the surveyed companies utilize graded vesting followed by cliff vesting Industry Graded Vesting Cliff Vesting General Industry 90% 10% High-Tech 97% 3% Silicon Valley 91% 9% For surveyed companies with graded vesting, the options vest as follows (1) : 100% 80% 60% 40% 20% 0% 83% 62% 25% 1% 1% 21% 9% 45% Annually Quarterly Monthly One-year cliff, monthly thereafter 1% 3% 3% Six-month cliff, monthly thereafter General Industry High-Tech Silicon Valley One-year cliff, quarterly thereafter Other 51-51- (1) For High-Tech and Silicon Valley companies, only answers with 7 or more responses were reported.
Stock Options Termination/Forfeiture Provisions: Normal Retirement Below are the extent to which performance awards are forfeited for each industry under normal retirement: General Industry 27% 28% 7% 38% High-Tech 11% 21% 8% 60% Silicon Valley 14% 5% 5% 76% 0% 20% 40% 60% 80% 100% Accelerated Vesting Continued Vesting Other/Discretionary Forfeiture 52-52-
Stock Options Termination/Forfeiture Provisions: Disability Below are the extent to which performance awards are forfeited for each industry under disability: General Industry 50% 17% 5% 34% High-Tech 36% 6% 5% 53% Silicon Valley 34% 5% 62% 0% 20% 40% 60% 80% 100% Accelerated Vesting Continued Vesting Other/Discretionary Forfeiture 53-53-
Stock Options Termination/Forfeiture Provisions: Death Below are the extent to which performance awards are forfeited for each industry under death: General Industry 62% 4% 5% 31% High-Tech 48% 5% 47% Silicon Valley 34% 5% 62% 0% 20% 40% 60% 80% 100% Accelerated Vesting Continued Vesting Other/Discretionary Forfeiture 54-54-
Don t Miss Out on This Year s Survey 2017 Domestic Stock Plan Administration Survey is currently in progress Covers a variety of topics related to stock compensation, including: Administration and communication of stock plans ESPPs Stock ownership guidelines Insider trading compliance Outside director plans Register to participate today at bit.ly/survey17cep -55-
Contact Information Barbara Baksa, CEP NASPP 510-493-7599 bbaksa@naspp.com Tara Tays Deloitte Consulting LLP 213-688-5244 ttays@deloitte.com This publication contains general information only, and none of the member firms of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collective, the Deloitte Network ) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication. As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2016 Deloitte Development LLC. All rights reserved. -56-