Readers may know that last week was the annual NASPP/CompensationStandards.com conference, the premier event of its kind in the country. On Wednesday, I moderated a panel titled “The Consultants Speak” with distinguished panelists Robin Ferracone, James Kim, and Terry Adamson. Several interesting points were made, and Terry boldly predicted that in five years many companies will have a mandatory deferral period written into their equity awards. Among the good reasons for a company to require a mandatory deferral of equity are:

  • Facilitates a compensation clawback
  • Aids the company and executives in complying with the company’s stock ownership guidelines
  • Tax benefits, i.e. long-term capital gains rates, are provided by a holding period
  • Proxy advisory firms such as ISS give points for plans and awards with a mandatory deferral period
  • Results in a reduced accounting expense. For example, a three-year mandatory holding period for equity awards could result in a discount to grant date fair market value of up to 20%.
    • This saves the company money, and
    • Looks better in the summary compensation table and other proxy tables (including peer comparisons)

Then the question arises, should the company increase the amount of the award to provide the same fair market value to the executive? Note that this would increase dilution.