Figure 1: Number of Short-Term Incentive Plans Among Private and Public Companies

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1 Incentive-Pay Practices at Public and By Bonnie W. Schindler, CECP, Susan Schroeder, CECP, Vivient Consulting; Sheila C. Sever, CCP, and Gregory A. Stoskopf, CCP, Deloitte Consulting Do incentive-pay practices differ between publicly traded and privately held companies? If so, how? Research released this year by WorldatWork, Deloitte Consulting and Vivient Consulting set out to answer these questions. Incentive-pay practices do differ between public and private companies. Short-term incentives (STIs), including annual incentive plans, are structured similarly across both organizational types. However, public companies are much more likely than their private counterparts to offer STIs to the broader employee population. In contrast, private companies place greater emphasis on STIs in their total rewards programs, as STIs are the companies most effective compensation tool for attracting and retaining talent. However, private companies tend to reserve short-term rewards for exempt employees and above. On the long-term side, publicly traded companies rely heavily on long-term incentives (LTIs), such as restricted stock and stock options. Restricted stock has surpassed stock options as the LTI vehicle of choice for public companies. In contrast, private companies favor cash LTI plans, such as bonus plans with goals and payouts tied to multiyear performance, over real equity. Public companies are more likely to make broad-based equity grants to the larger employee population, while private companies concentrate LTI awards on top executives. Short-Term Incentive Practices Publicly traded and private companies report more similarities than differences when it comes to short-term incentives (STIs), according to the WorldatWork/Deloitte Consulting Incentive Pay Practices Survey for Publicly Traded Companies and the WorldatWork/Vivient Consulting Incentive Pay Practices Survey for Privately Held Companies. Both surveys were released in February Nearly all public- (99 percent) and private-company respondents (97 percent) reported having STI plans in place. Publicly traded and private survey respondents noted STI programs were among their most important retention tools for top talent. About half of public and private companies reported having two to five STI plans in place. Companies with multiple STI plans may have more than one type of plan in place and/or may have plans geared to different employee populations. For example, a company might have separate annual incentive plans for executives and for managers, while also maintaining a spot-bonus plan for other employees. Publicly traded companies are more likely to have a greater number of STI plans than their private counterparts. Of public companies, 34 percent reported six or more STI plans. In contrast, only 20 percent of private companies reported six or more plans. (See Figure 1.) This data indicate that public companies are more willing to tackle the complexity associated with operating multiple STI plans, while private companies prefer a more streamlined approach. Figure 1: Number of Short-Term Incentive Plans Among Private and Public Companies

2 Number of STI Plans Exhibit 1 > to 15 8% 2% 5% 16% 6 to 10 13% 2 to 5 54% 49% 1 17% 27% The types of STI plans included in the surveys are annual incentive plans (AIPs), spot cash awards, retention bonuses, discretionary bonus plans and project bonuses. AIPs are by far the most prevalent type of STI plan at both public and private companies. (See Figure 2.) Spot cash awards and retention bonuses are also popular at publicly traded companies, with about two-thirds of organizations reporting these types of plans. In contrast, those plans are less common at private companies. (See Figure 2.) This data indicate that private companies again favor simplicity and seem to focus their resources and efforts on their AIPs. Figure 2: Types of Short-Term Incentive Plans at Private and Public Companies Types of STI Plans Exhibit 2 Annual incentive plan (AIP) 86% 90% Spot cash awards 39% 66% Retention bonus 27% 61% Discretionary bonus plan Project bonus 13% 31% 47% 40% Annual Incentive Plans Because Annual Incentive Plans (AIPs) are the most prevalent form of STI plan (see Figure 2), the surveys asked deeper questions about plan design. At publicly traded and private companies, AIPs are typically offered to exempt, salaried employees and above. Publicly traded companies are more likely than private companies to provide AIPs to nonexempt employees, with more than half of the survey respondents reporting that they include nonexempt

3 employees in their AIPs. Given this important finding, public company employers to be fully competitive in their compensation programs may want to consider including all employees in AIPs. More than half of survey participants at publicly traded and private companies reported using one to three distinct performance measures in their AIPs, indicating a strong preference toward emphasizing only a few measures tied to specific business goals. Financial and individual performance measures dominate AIPs at publicly traded and private companies. Financial measures are the most prevalent, with nearly all publicly traded and private companies using them in AIPs. The most common categories of financial measures used are profit/income and revenue/growth at both publicly traded and private companies. Individual performance measures also help determine award payouts at both types of organizations. Publicly traded companies make greater use of operational measures, such as customer satisfaction and safety, than their private counterparts. STI and AIP practices are fairly consistent among publicly traded and private companies, with some important variations, most notably the inclusion of all employee groups in AIPs at publicly traded organizations. In contrast, private companies emphasize their AIPs and cite these plans as one of the organizations most critical retention tools. Publicly traded companies are more willing to handle the complexity associated with operating multiple STI plans, while private companies again prefer a more streamlined approach. Long-Term Incentive Practices Publicly traded and private companies take very different approaches to long-term incentives (LTIs). Of the publicly traded survey respondents, 88 percent reported using an LTI plan, while only 56 percent of private companies reported LTI use. When the incentive-pay survey was first conducted for private companies in 2007, only about onethird reported LTI plans. This number spiked to 61 percent in 2011 and dropped slightly in the latest survey. This indicates that private companies that had implemented LTIs may be scaling back slightly in favor of simpler incentive approaches, such as STIs. Of the private companies that use LTIs, 86 percent reported having only one plan in place. In contrast, 48 percent of publicly traded companies have one plan in place and 28 percent reported two plans. Publicly traded companies with more than one LTI plan in place could have distinct plans for different employee groups or could have distinct plans using different vehicles, such as separate equity and cash LTI plans. Because LTI plans are more complicated to design and operate, both publicly traded and private companies offer fewer LTI plans than STI plans. Publicly traded and private companies use distinct vehicles to deliver LTIs. Publicly traded companies favor restricted stock/units, or full-value shares, over stock options with 88 percent offering restricted stock vs. 64 percent offering stock options. The 2013 Domestic Stock Plan Design Survey, conducted by Deloitte and the National Association of Stock Plan Professionals, found that for the first time in the survey s 18-year history, restricted stock has replaced stock options as the most prevalent LTI vehicle at publicly traded companies. The Deloitte/WorldatWork survey also confirms this trend, which represents a sharp shift in stock compensation practices particularly considering that nearly 10 years have passed since stock options had to be treated as an accounting expense. At private companies with LTI plans, half report using a long-term cash plan. The emphasis on cash over real equity at private companies has been a consistent finding since the first Vivient/WorldatWork survey in Long-term cash plans allow executives at private companies to share in the economic success of the company while preserving owners control of the organization. (See Figure 3.) Figure 3: Long-Term Incentive Vehicles at Private and Publicly Traded Companies

4 LTI Vehicles Exhibit 3 Long-term cash plan Stock option Restricted stock/ unit Performance units Performance shares Phantom stock Stock appreciation right (SAR) 31% 23% 22% 12% 11% 8% 9% 44% 51% 49% 64% 88% For private companies that use real equity, key considerations are valuation and liquidity, as private companies lack a readily available market for their stock to set share prices and allow sales. The private-company survey found that organizations using real equity are twice as likely to use an outside valuation firm to perform an independent appraisal as other methods, such as formulaic valuation. Liquidity is generally reserved for the time when the company has a value-realizing event, such as a sale or public offering. Both the public- and private-company surveys asked about overhang, an important measure of the shares of stock allocated to current and future employee grants as a percentage of common shares outstanding (CSO). Publicly traded companies generally have higher levels of overhang than their private counterparts. At publicly traded companies, overhang levels typically range from 5 percent to 25 percent of CSO, with overhang levels following more of a bell-curve distribution. In contrast, private companies typically have overhang levels of less than 15 percent of CSO, with 43 percent of respondents reporting no equity overhang. At the other end of the spectrum, the private company survey found an increased number of companies reporting equity overhang of more than 25 percent of CSO in This indicates that some companies have added grants or share authorizations but have not provided employees with the opportunity to cash out grants. Private companies tend to take an all or nothing approach to equity incentives, which results in more of a bimodal distribution for overhang. Similar to their STI practices, publicly traded companies are much more likely to provide LTI awards to the broader employee population, while private companies reserve LTI awards for top executives. The surveys asked how real equity was allocated to each employee group during the most recent grant cycle. Public companies typically allocate 10 percent of the equity grant to the CEO, 50 percent to executives and 25 percent to exempt salaried employees. In contrast, private companies typically allocate 19 percent of any real equity grant to the CEO and 63 percent to other executives. Real equity grants at private companies rarely occur below the executive level and are concentrated on top talent. Conclusion Publicly traded companies provide a larger number of STI plans to reward their employees, with eligibility extending throughout the entire employee population at the majority of companies. Private organizations tend to focus on just one important plan, the AIP, with eligibility generally reserved for the exempt employee population and above. Public companies have an LTI edge over private companies in that they have shares of equity valued and traded on a public stock exchange. Because of this, public companies are more likely to provide LTIs and can grant real equity to executives and the broader employee population. The trend toward using full-value shares provides an even more attractive feature, a higher probability of the grant delivering real value to the recipient.

5 In contrast, at private companies cash incentives are king to motivate and retain executives and employees because of owners desire to retain control. Private companies also have more freedom in designing incentive programs because they are not subject to the same level of scrutiny and disclosure as their publicly traded counterparts. Proxy statements for publicly traded companies disclose executive and employee ownership of company stock, with ownership often cited as a positive to shareholders. In contrast, private companies owners wish to maintain organizational control and prefer the simplicity of providing both annual and long-term incentives in cash. Bonnie Schindler, CECP, is a partner at Vivient Consulting in Chicago. She can be reached at bschindler@vivient.com. Susan Schroeder, CECP, is a partner at Vivient Consulting in Los Angeles. She can be reached at sschroeder@vivient.com. Sheila C. Sever, CCP, is a senior manager in the compensation strategies practice at Deloitte Consulting LLP in Houston. She can be reached at ssever@deloitte.com. Gregory A. Stoskopf, CCP, is the director and northeast compensation strategies practice leader at Deloitte Consulting LLP in New York. He can be reached at gstoskopf@deloitte.com. Contents Reprinted with permission from WorldatWork. Content is licensed for use by purchaser only. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.