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Are Performance Shares Shareholder Friendly?
Author(s) -
Hodak Marc
Publication year - 2019
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/jacf.12367
Subject(s) - shareholder , incentive , equity (law) , institutional investor , business , shareholder value , stock (firearms) , accounting , monetary economics , corporate governance , finance , economics , market economy , mechanical engineering , political science , law , engineering
Performance shares, or PSUs, have become the largest element of pay for top executives in corporate America. Their spread was ignited by institutional investors looking for more “shareholder‐friendly” equity awards—as opposed to restricted stock and stock options, which have been characterized as “non‐performance” equity. Although that characterization has been challenged by many directors and compensation professionals, proxy advisers like Institutional Shareholder Services have continued to insist that the majority of stock be granted based on performance, compelling public companies to conform to that standard. With over a decade of experience with PSUs, the evidence is in regarding their net effect: PSUs greatly complicate long‐term incentives. Pay disclosures are dominated by discussion of PSUs, including metrics, goals, performance and vesting, and any differences in one grant year versus the next over three overlapping periods. PSUs may be contributing to the increase in pay. Companies issuing a significant portion of their long‐term incentives in the form of PSUs have been granting about 35% more in value than companies granting only restricted stock and stock options. Shareholders don't appear to be getting anything for that added complexity and cost. S&P 500 companies using PSUs have underperformed their sector peers, and companies using solely “non‐performance” equity have significantly outperformed their sector peers, and in every single year over the last decade. Given these findings on PSUs, it is time for institutional investors and their proxy advisors to reconsider their view of these vehicles as “shareholder‐friendly,” and rethink their unqualified promotion of their use by the companies they invest in.