The Value Proposition - My Fidelity Site Value... · statement The Value Proposition 6 Value Target...
Transcript of The Value Proposition - My Fidelity Site Value... · statement The Value Proposition 6 Value Target...
The Value PropositionWhich Value is This Again?
Sandra Pace, Steven Hall & PartnersTed Manley, Dunkin’ Brands Group, Inc.Kristin Johnson, Quintiles IMS Holdings, Inc.CJ Van Ostenbridge, Aon plc
The 9th Annual New England NASPP Regional Conferenceco-hosted by the Boston and Connecticut NASPP ChaptersJuly 14th, 2017
CPE Credits…
The Value Proposition2
Continuing Professional Education (CPE) Credits are Available! You will receive one (1) CPE credit after attending this session You must attend the entire session to be eligible In order to earn the available credit(s) for this session, you must see
the room monitor at the end of the session to receive your stamp to be officially signed out.
Electronic certificates will be emailed to you a few weeks after the conference with the cumulative number of credits earned
The National Association of Stock Plan Professionals (NASPP) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. Web site: www.nasba.org
Agenda…
The Many Types of Value Award Sizing Award Design vs. Value RSUs Options PSUs (Non-Market Based) PSUs (Market Based)
Questions
The Value Proposition3
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
The Many Types of Value - Target
Target Value The “intended” value of the
grant Often equal to a percentage of
base salary Target Value must be
converted to target number of award using a divisor Stock price at grant Average stock price over
the month prior to grant Accounting fair value
The Value Proposition4
The Many Types of Value – Accounting Fair Value
Accounting Fair Value Dictates the amount of
compensation expense recognized by the issuing company
Originally estimated on the grant date, but can change throughout the life of the award in certain situations Non-employee awards Liability awards
The Value Proposition5
Value
Target
AccountingFair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
The Many Types of Value – Compensation Expense
Compensation Expense Equal to Fair Value x Target
Awards Vested for options and market-based PSUs
Equal to Fair Value x Actual Awards Vested for options and non market-based PSUs
Impacts company’s income statement
The Value Proposition6
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
The Many Types of Value - Disclosed
Disclosed Value Displayed in the “Summary
Compensation Table” of a company’s proxy statement
Equal to the Accounting Fair Value x Awards Probable to Vest as of the grant date
Receives scrutiny from shareholders and governance firms
The Value Proposition7
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
The Many Types of Value - Realizable
Realizable Value Displayed in the “Grants of
Plan-Based Awards Table” of a company’s proxy statement Threshold Value Target Value Maximum value
Can also be expressed as threshold, target, and maximum number of awards
Specific to performance awards
The Value Proposition8
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
The Many Types of Value - Perceived
Perceived Value The value that an award holder
believes an award has Hard to quantify Closely related to motivation
and/or retentive value
The Value Proposition9
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
The Many Types of Value – Realized
Realized Value The value that an award holder
ultimately receives Hard (or impossible) to predict Closely related to motivation
and/or retentive value
The Value Proposition10
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
A Simple Relationship
Example: A company increases a target grant of time-based RSUs from 100 shares to 150 shares Target value increases by 50% Accounting fair value does not change Compensation expense increases by 50% Disclosed value increases by 50% Perceived value increases by 50% Realized value increases by 50%
This is easy!
The Value Proposition11
A Complex Relationship
Example: A company decides to grant cash-settled PSUs awards whereby the Target Value ($1,000,000) is converted to target shares by dividing the Target Value by Accounting Value. The company is considering a maximum payout of either 150% or 200%.
This is hard!
The Value Proposition12
150% Max Payout 200% Max PayoutTarget Value $1,000,000 $1,000,000
Accounting Fair Value $11.00 $12.50
Target Awards 90,909 80,000
Compensation Expense Dependent on Performance Dependent on Performance
Disclosed Value $1,000,000 $1,000,000
Realizable Shares 180,000 200,000
Perceived Value ??? ???
Realized Value Dependent on Performance Dependent on Performance
A Key Decision
How Target Value is converted to target shares is a critical decision Divisor equals Accounting Value at grant:
Target Value = Compensation Expense = Disclosed Value for employee equity awards
Design decisions (and therefore Accounting Value at grant) affect the number of target shares granted, complicating the relationship between Target Value / Compensation Expense / Disclosed Value and Perceived / Realized Value
Can result in angry employees if they get fewer awards than they expected (Accounting Fair Value > Stock Price)
Divisor equals stock price at grant (or similar): Target Value only equal to Compensation Expense and Disclosed
Value if Accounting Fair Value equals divisor Design decisions flow more directly to award holders and issuing
company
The Value Proposition13
RSUs – Dividend Equivalents
Simplest value relationships because often Accounting Value = Stock Price Exception when company does not provide dividend equivalents
The Value Proposition14
Grant Size Based on Accounting Fair Value
Dividend Equivalents
No Dividend Equivalents
Target Value $1,000,000 $1,000,000
Accounting Fair Value $10.00 $9.40
Target Awards 100,000 106,383
Compensation Expense
$1,000,000 $1,000,000
Disclosed Value $1,000,000 $1,000,000
Perceived Value ??? ???
Realized Value Higher at lower future stock prices
Higher at higher future stock prices
Grant Size Based on Stock Price
Dividend Equivalents
No Dividend Equivalents
Target Value $1,000,000 $1,000,000
Accounting Fair Value $10.00 $9.40
Target Awards 100,000 100,000
Compensation Expense
$1,000,000 $940,000
Disclosed Value $1,000,000 $940,000
Perceived Value Higher Lower
Realized Value Higher Lower
Would award holder rather have more awards or dividend equivalents?
Is perceived value of a dividend equivalents worth $60,000 in additional compensation expense and disclosed value?
Options – Divisor is Fair Value
When award size is based on Accounting Fair Value there is a trade-off between design features and number of awards granted Contractual Term: Longer contractual term means higher Accounting
Fair Value, fewer awards granted Would employee rather have 1,000 10-year options or 1,200 7-year options?
Vesting Schedule: Longer vesting schedules mean higher Accounting Fair Value, fewer awards granted Employee would prefer more options that vest over a shorter time period Company must balance retentive value with perceived value
Realized Value dependent on future stock price path and individual exercise behavior
The Value Proposition15
Options – Target is Fixed
When award size is fixed there is a trade-off between Perceived Value and Compensation Expense to company Contractual Term: Longer contractual term means higher Perceived
Value, but also higher Accounting Fair Value, Compensation Expense, and Disclosed Value Sometimes, but not always, results in higher Realized Value
Vesting Schedule: Longer vesting schedules mean higher Accounting Fair Value, Compensation Expense, and Disclosed Value but lowerPerceived value Company must balance retentive value of longer vesting schedule with other
consequences Realized Value dependent on future stock price path and individual
exercise behavior
The Value Proposition16
Options – Contractual Term
The Value Proposition17
Grant Size Based on Accounting Fair Value
7-year Term 10-year Term
Target Value $1,000,000 $1,000,000
Accounting Fair Value $4.00 $5.00
Target Awards 250,000 200,000
Compensation Expense
$1,000,000 $1,000,000
Disclosed Value $1,000,000 $1,000,000
Perceived Value ??? ???
Realized Value ??? ???
Grant Size Fixed
7-year Term 10-year Term
Target Value $1,000,000 $1,000,000
Accounting Fair Value $4.00 $5.00
Target Awards 250,000 250,000
Compensation Expense
$1,000,000 $1,250,000
Disclosed Value $1,000,000 $1,250,000
Perceived Value Lower Higher
Realized Value ??? ???
Would award holder rather have more awards or longer to exercise?
Is perceived value of a 10-year term worth $250,000 in expense to the company?
Options vest annually over 3-years, strike price equal to stock price
Options
Considerations Value Cap – Limit gain on option to a certain level (i.e., 600% of exercise
price) Lower Accounting Fair Value, magnitude of discount will depend on volatility Impact on Perceived Value may be low Could lower Realized Value
Indexed Options – Tie exercise price to Index return Lower Accounting Fair Value, magnitude will depend on volatility and correlation to Index High impact on Perceived Value, will affect Realized Value Can result in adverse tax consequences (exercise price may be lower than stock price at
grant) Valuation
Lower expected life and/or volatility assumption will lower Accounting Fair Value with no impact on Perceived or Realized Value, but must stay within accounting guidance
Same with exploring a different valuation model (i.e., Lattice Model instead of Black-Scholes)
The Value Proposition18
PSUs – Not Market Based
Accounting Fair Value = Stock Price at Grant Disclosed Value depends on most probable level of performance at
grant Compensation Expense based on number of awards that actually
payout Perceived value dependent on the performance goals set and buy-in
from award holders Realized value dependent on actual performance, as well as stock
price movement, and can vary widely
The Value Proposition19
PSUs – Not Market Based
The Value Proposition20
PSUs
Target Value $1,000,000
Stock Price at Grant $10.00
Accounting Fair Value $10.00
Target Awards 100,000
Most Probable Performance at Grant 100%
Disclosed Value $1,000,000
Realizable Awards 200,000
Low Performance High Performance
Stock Price at Vest $5.00 $20.00
Payout Percentage 50% 200%
Compensation Expense $500,000 $2,000,000
Perceived Value Equal at Grant Equal at Grant
Realized Value $250,000 $4,000,000
PSUs pay out 0% to 200% depending upon EPS over a 3-year performance period
PSUs – Not Market Based
The Value Proposition21
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
Rea
lized
Val
ue
Payout Percentage
Realized Value vs. Payout Percentage
$5 Ending Stock Price $10 Ending Stock Price (Compensation Expense)
$15 Ending Stock Price $20 Ending Stock Price
PSUs – Not Market Based
Considerations Setting performance goals that are probable to be achieved at a
target level as of the grant date will ensure that disclosed value equals target value
After grant, many of the types of value diverge Perceived value will be impacted by performance Compensation expense will ultimately equal fair value x actual shares earned Realized value will depend on performance and stock price movement
The Value Proposition22
PSUs – Market Based
Accounting Fair Value determined using Lattice or Monte Carlo model and incorporate probability of possible payout scenarios
Disclosed Value equals target shares x Accounting Fair Value Equal to Target Value if Accounting Fair Value used to determine
target shares Often greater than Target Value if stock price used to determine
target shares, as Accounting Fair Value is often greater than stock price
Compensation Expense equal to Disclosed Value and fixed at grant Perceived value dependent on the performance goals set and buy-in
from award holders, can be very different from Target / Disclosed Value and Compensation Expense
Realized value dependent on actual performance, as well as stock price movement, and can vary widely
The Value Proposition23
PSUs – Market Based
3-year relative TSR award with maximum payout of either 150% or 200%
The Value Proposition24
Grant Size Based on Accounting Fair Value
150% Max Payout
200% MaxPayout
Target Value $1,000,000 $1,000,000
Accounting Fair Value $10.50 $12.50
Target Awards 95,238 80,000
Compensation Expense
$1,000,000 $1,000,000
Disclosed Value $1,000,000 $1,000,000
Realizable Shares 142,857 160,000
Perceived Value ??? ???
Realized Value Higher at performance close to or below target
Higher at performance near maximum
Grant Size Based on Stock Price
150% Max Payout
200% MaxPayout
Target Value $1,000,000 $1,000,000
Accounting Fair Value $10.50 $12.50
Target Awards 100,000 100,000
Compensation Expense
$1,050,000 $1,250,000
Disclosed Value $1,050,000 $1,250,000
Realizable Shares 150,000 200,000
Perceived Value Lower Higher
Realized Value Lower Higher
PSUs – Market Based
The Value Proposition25
$40,000
$70,000
$100,000
$130,000
$160,000
25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0% 75.0% 80.0% 85.0% 90.0% 95.0% 100.0%
Valu
e to
Aw
ard
Hol
der
Percent Rank
150% Max Payout 200% Max Payout
Percent Rank Payout 1 Payout 2
75th and Above 150% 200%
50th 100% 100%
25th 50% 50%
Below 25th 0% 0%
Fair Value $10.50 $12.50
Target Awards 95,238 80,000
Assumes flat stock price over performance period*
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0% 75.0% 80.0% 85.0% 90.0% 95.0% 100.0%
Valu
e to
Aw
ard
Hol
der
Percent Rank150% Max Payout 200% Max Payout
Assumes flat stock price over performance period*
PSUs – Market Based
The Value Proposition26
Percent Rank Payout 1 Payout 2
75th and Above 150% 200%
50th 100% 100%
25th 50% 50%
Below 25th 0% 0%
Fair Value $10.50 $12.50
Target Awards 100,000 100,000
Expense $1,050,000 $1,250,000
PSUs – Market Based
The Value Proposition27
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%
Rea
lized
Val
ue
Percent Rank
Realized Value vs. Percent Rank
Compensation Expense $5 Ending Stock Price$10 Ending Stock Price (Compensation Expense) $15 Ending Stock Price$20 Ending Stock Price
PSUs – Market Based
Considerations Value Cap – Limit gain to a certain level (i.e., 6x stock price at grant)
Lower Accounting Fair Value, magnitude of discount will depend on volatility Impact on Perceived Value may be low Could lower Realized Value
TSR Cap – Cap payout if absolute TSR falls below a threshold Lower Accounting Fair Value, magnitude will depend on volatility and correlation to peers Likely low impact Perceived Value, may affect Realized Value Shareholders love it (Governance Value?)
Other Adjustments to Plan Design Lowering maximum payout will have large impact on Accounting Fair Value, Disclosed
Value, and Compensation Value, but also lowers Perceived Value and often Realized Value
Same with increasing performance necessary to reach payout levels Finding more correlated peers can lower Accounting / Disclosed / Compensation Expense
without impacting (or even improving) Perceived Value
The Value Proposition28
Post-Vest Hold Periods
An award with a post-vest hold period cannot be sold or transferred for a certain period of time after vesting Executives often hold their awards after vesting regardless, so formalizing the
requirement often has low impact on Perceived Value Can have large impact on perceived value for broader employee populations
Governance Value - Creates defined pathway to meet ownership guidelines and enforce claw-backs while further aligning executives with long-term shareholder interests
Provides discount to Accounting Fair Value Magnitude of discount depends on company volatility and length of holding period
The Value Proposition29
Holding Period Length 30% Volatility 50% Volatility 70% Volatility
1-year 5% - 8% 6% - 13% 7% - 15%
2-years 7% - 11% 10% - 18% 14% - 23%
3-years 8% - 13% 13% - 20% 16% - 27%
Value
Target
Accounting Fair Value
Compensation Expense
DisclosedRealizable
Perceived
Realized
Wheel of Take-Aways
The Value Proposition30
How Target Value is converted to Target Shares is a critical decision, with many downstream consequences
Fixed for time-based awards and market-based PSUs, variable for non-market-based PSUs
Can affect number of target shares granted, and is often higher than expected for market-based awards
Dependent on Accounting Fair Value and expected level of performance at grant (for non-market PSUs)
Possible value/shares delivered
Very nuanced –engage with your award holders!
Hard to predict, and heavily dependent on award design
Contact Us
CJ Van Ostenbridge, CEPSenior ConsultantAon [email protected]
Kristin Johnson, CEPDirector, Equity ProgramsQuintilesIMS484.567.6054KHoefling-Johnson@us.imshealth.com
Sandra PaceManaging DirectorSteven Hall & PartnersPhone: [email protected]
Ted ManleyVP, Total Rewards & HR OperationsDunkin’ Brands, Inc.Phone: [email protected]
The Value Proposition31