Time for Performance: Can extended equity vesting periods break the dominance of performance-based compensation?

The full paper is available for download from ISS-Corporate’s resources page. 

Performance based awards have long been championed by proxy advisors and investors as the best way to align executive incentives with shareholder outcomes. Performance awards with a three-year performance period have emerged as the dominant performance horizon in the U.S. as a result. Despite this broad market consensus, some investors have begun to show support for simpler equity structures that de-emphasize performance in favor of longer time-based equity vesting periods. 

Norges Bank, the investment arm of Norway’s sovereign wealth fund, is one of the most prominent proponents of an extended equity vesting period. The bank argues that performance-based equity can be expensive and complex and result in higher overall compensation than non-performance-based plans with an extended equity vesting period. 

In this paper, ISS-Corporate examines these two different approaches to CEO compensation across Russell 3000 companies, comparing performance, compensation levels, investor and non-investor perceptions and governance data. 

Key takeaways: 

• “Standard” companies, which incorporate performance-based awards, generally show stronger long-term shareholder returns and more measured CEO compensation growth than companies that rely solely on time-based equity. Vote support for Say on Pay was higher at these companies as well. 
• Standard companies perform better across all Governance QualityScore categories, including non-compensation categories suggesting a broader pattern of stronger governance practices where performance-based awards are used. However, this is partially due to the inclusion of factors related to performance-based awards in the Compensation category. 
• No-Performance Based Awards (NPBA) and Extended-Timed Based Awards (ETBA) programs remain minority practices and are becoming even less common, reinforcing performance-based equity as the dominant market expectation 
• Companies with extended time-vesting awards and companies with no-performance-based awards are smaller in size than companies with a “Standard” compensation program. They also have a similar distribution to Standard companies.