A compelling alternative to stock options.

• Author: Charlebois, Stephen
• Position: COMPENSATION MATTERS

Compensation committees might consider a Combination Price-Vested Equity vehicle. Here is how a CPVE works.

Today, compensation committees seem to have fewer tools in their arsenal to directly incentivize a company's stock price growth. Increasingly since 2007, stock options have been replaced by various performance-based vehicles. As a result, long-term incentive plans (LTIPs) may be paying for achievement of operational or financial performance goals while shareholders fail to benefit from a similar growth in share value.

Many companies have attempted to solve this issue by incorporating relative total shareholder return (rTSR) with operational performance metrics. However, rTSR does not necessarily work well for many companies, and rTSR does not directly incentivize the management team to grow share price in a sustainable way.

An alternative to this approach is something called a "Combination Price-Vested Equity" (CPVE) vehicle. This vehicle is a full-value share that acts like a stock option; however, it also directly incorporates operational goals by requiring a minimum threshold level of financial performance (e.g., return on capital, operating margin, earnings per share) to gain access to the share price accelerators. CPVEs enable compensation committees to appropriately balance three key factors in today's executive compensation environment: i) performance orientation, ii) executive retention, and iii) sustainability, all within a single vehicle.

CPVEs are a grant of performance-based restricted stock which incorporate two performance requirements over a period of four years. The primary metric is a financial measure that requires the organization to meet a minimum level of performance over a four-year period. If the primary financial requirement is not met, then no shares are earned. However, once the hurdle is achieved, executives have the opportunity to benefit from share price appreciation.

Attaining various pre-established share price hurdles will result in increasingly higher equity payouts (like a traditional performance share plan). The hurdles mimic the value creation that would be achieved with an option grant. To the degree the financial performance requirement is met but the share price does not meet the minimum hurdle, the overall grant may be reduced by 25% to 50%. This design helps to preserve some of the retentive value, but still provides significant leverage and potential payout to the executive if they meet...