LTIs Tied to Performance are Rising in Prevalence

August 5, 2010 (PLANSPONSOR.com) - After being hit hard during the economic downturn, many U.S. executives are seeing the value of long-term incentive (LTI) grants rising in their 2010 compensation packages, according to an analysis by Hewitt Associates.

However, an increasing number of companies are tying LTIs to specific performance goals.

Hewitt recently conducted a detailed analysis of 2010 Form 4 Securities and Exchange Commission (SEC) filings of the Fortune 250, excluding newly hired executives, and found the total median economic value delivered through LTI grants increased 23% in 2010 from 2009, nearly reversing the 20% drop in value that took place during the economic downturn in 2008 and 2009. The number of shares awarded through LTI grants in 2010 fell by a median of 19% compared to 2009, bringing annual run rates more in line with historical norms.   

According to a press release, more companies are moving away from totally unrestricted grants and establishing performance plans that require executives to hit specific business goals to pay out. The prevalence of LTI performance plans has steadily increased over the past seven years, from 18% in 2003 to 35% in 2009.   

The analysis found the most common mix for an LTI plan consists of 40% stock options, 40% performance plan options, and 20% restricted shares. The second most common combination is dividing the mix into thirds.   

“While LTI values are coming back as the economy slowly recovers, Compensation Committees now want something for these grants,” said David A. Hofrichter, principal and business development leader of Hewitt’s Executive Compensation Consulting practice, in the press release. “They are expressing this additional requirement through performance plans, which target key metrics and support the strategy of the organization.”

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