Hostettler, Kramarsch&Partner: Successful Companies Compensate with Shares
(firmenpresse) - (DGAP-Media / 12.06.2013 / 12:14)
Successful Companies Compensate with Shares
Company performance driven by employee understanding and satisfaction with
equity-based compensation plans
Different regulatory and tax requirements prevent companies from offering
equity-based compensation vehicles to employees
hkp/// study results of global equity-based compensation market practice,
on behalf of Global Equity Organization (GEO) and supported by Siemens
Frankfurt am Main, 12 June 2013. Over the past two decades, equity-based
compensation has become a globally used compensation instrument. Long-Term
Incentive Plans (LTIP) - often reserved for executives in the past - have
become nearly universal for companies and the use of broad-based Employee
Share Purchase Plans (ESPPs) is on the rise. More successful firms
implement equity-based compensation on a broader scale. Company performance
is driven by employee understanding and satisfaction of equity-based
compensation plans. These interrelated drivers can be significantly
improved by better communication; however, companies do not invest
sufficiently in their communication efforts. Furthermore, country-specific
regulatory frameworks are the main obstacle of straightforward and globally
harmonized plan designs and hinder the expansion of an equity culture.
These are the major findings of the study 'GEO Global Equity Insights
2013', initially presented to the public on June 12, 2013, at GEO's 14th
Annual International Conference in Munich. The study was conducted by
Hostettler, Kramarsch&Partner (hkp///), a consultancy with focus on
performance management and compensation, on behalf of GEO and supported by
Siemens AG.
'Our analysis offers the most current, comprehensive and detailed insights
with regard to equity-based compensation plans for board members,
executives and managers, as well as employee share purchase plans. It gives
companies the opportunity to assess their current practices and tells how
equity-based compensation, despite a high level of regulation, can
successfully be aligned with compensation-, HR- and corporate strategies',
explains GEO's Executive Director, Danyle Anderson.
The most important results of the 'GEO Global Equity Insights 2013' study
include:
1) Long-Term incentive Plans lose their exclusivity while impacting
organizations more broadly
Long-Term Incentive Plans (LTIP) have gained importance in the compensation
of a broader employee group. They are no longer just an exclusive
compensation instrument for the company's top-executives. This observation
holds true for both European as well as North American companies. Above
all, 75% of survey participants grant LTIP down to executive level 3 below
the Board, and between 30% and 40% grant LTIP to level 4 and 5 below the
Board.
Significant regional differences become apparent for senior employees and
experts. About half of the European companies surveyed offer LTIP to this
employee group, contrasted to 39% of North American companies. However,
North American countries are more likely to grant LTIP to all employees
(26%), while in Europe it is only 4% taking that approach.
2) In more successful companies LTIP participation is compulsory
The hkp/// analysis confirms the prevailing view that LTIP are related to
company performance, showing participation compulsory for more successful
companies. Moreover, companies perform better if they require LTIP
participants to make a self-financed investment of a certain percentage of
their LTIP award level. This suggests that company success is related to
the extent executives hold a stake in the company.
'From our perspective, compulsory LTIP's seem to represent an adequate
instrument to pursue the objective of shareholder alignment - for
executives, managers, as well as broader employee groups', explains hkp///
Managing Partner, Michael H. Kramarsch. However, he refers to a limiting
factor if programs become extended to broader employee groups: 'The success
of such programs is not for free. Companies have to improve the degree of
comprehensibility and to communicate better. Only through these can they
increase employee satisfaction and assure the LTIP success.'
3) The use of plain-vanilla stock options declines sharply
According to the study, plain-vanilla stock options are on a sharp decline,
particularly in North America where just a quarter of survey participants
still use the classic form of LTIP grants. In Europe only 13% of companies
use stock options, according to hkp/// observations mainly in France; in
Germany they are of minor importance since 2004/5. LTIP grants in North
America are primarily Restricted Stock (38%) followed by Performance Shares
(22%). A slightly different picture emerges for companies across Europe,
where Performance Shares (33%) are the prevalent LTIP type, resulting from
European regulatory regimes long clamoring for performance conditions.
Restricted Stocks are used by about a fifth of European survey
participants. Regardless of region, other plan types, like Performance Cash
or Share Matching, are of minor relevance. 'In general, the survey gives
evidence to increasing use of compensation elements with a more balanced
chance-risk profile. Due to the more predictable pay-outs, employees are
most satisfied when the LTIP is designed as a performance share plan', says
hkp/// compensation expert Michael H. Kramarsch.
4) Communication and design drives employee satisfaction
37% of employees are satisfied overall with their LTIP, although in some
areas their satisfaction with LTIP is surprisingly low. For instance,
considering the area of tax treatment, only 15% had high satisfaction,
contrasted with 85% moderately/not satisfied. This, while satisfaction with
plan design and communication, was just 34% and 33% respectively.
Across various aspects of LTIP, only plan design and communication
significantly drives employee satisfaction. Moreover, communication is the
main driver of employees' understanding of LTIP, and thus their
satisfaction with them. Despite that correlation, companies do not seem to
invest sufficiently in communication, spending the smallest portion of
their overall budget for equity-based compensation on communication
efforts. Their LTIP investments are primarily devoted to legal, banking,
accounting and tax issues.
5) Broad-based Employee Share Purchase Plans (ESPPs) are on the rise
As LTIP typically aim to incentivize an employee's behavior, they are
primarily offered to top executives and key employees. In contrast, ESPPs
are predominantly used to enhance employee identification with the company
by creating a spirit of common responsibility and ownership - and
accordingly are offered to a broader employee base globally. Furthermore,
they can be a significant asset in attracting and retaining new talent and
supplementing employee saving efforts. Hence, it follows that more than 60%
of companies surveyed have already implemented such plans.
The survey shows that two types of ESPP dominate: in North America 79%
offer Share Discount Plans (employees granted discounted company shares).
In Europe Share Matching Plans dominate at 57%. An example is the Siemens
Share Matching Plan that provides employees 1 share for every 3 purchased
if they retain their shares for 3 years. The Siemens ESPP is one of the
largest worldwide. It currently counts 127,000 participants from 54
countries.
6) Tax and legal restrictions hinder ESPP participation
In the context of the positive effects of equity-based employee
participation, the survey shows a significant dissatisfaction: 68% of all
companies are not or only moderately satisfied with the legal and
regulatory requirements, 69% with the tax treatment. The root cause of this
dissatisfaction is different national regulatory and tax environments,
making the design and implementation of ESPP very complex and expensive.
'As a company with one of the largest ESPPs worldwide, international
harmonization of the very heterogeneous legal requirements for equity-based
employee participation, as well as the harmonization of tax encouragements
would be really helpful - within the European Union, but also beyond
Europe', says Bettina Gohm, Vice President Compensation&Benefits at
Siemens AG.
Background on the Survey
The study 'GEO Global Equity Insights 2013 was conducted by Hostettler,
Kramarsch&Partner (hkp///), a consultancy with focus on performance
management and compensation?on behalf of GEO and supported by Siemens AG.
The survey was conducted in April to May of 2013. The online questionnaire
included 117 questions with regard to equity-based compensation (LTIP and
ESPP). In total 133 corporations participated in the survey, representing a
broad selection of the world's largest companies in 13 countries and across
10 major industry clusters: 39 companies listed in the Fortune 500 and 41
listed in the STOXX 600. Companies surveyed generated revenues between $
5,000m to more than $ 1,000,000m in fiscal year 2012.
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About Global Equity Organization (GEO)
GEO is a member-founded and member-driven not-for-profit organization
dedicated to advancing knowledge and understanding of equity compensation
worldwide through a global community of well-informed professionals. GEO
provides its members opportunities to share and learn about the strategic,
governance, financial, cultural, legal, tax, communication and
administrative issues affecting equity-based employee compensation around
the world, from the fundamentals to the latest market intelligence. GEO was
founded in 1999 to support corporate executives and equity compensation
professionals dealing with the challenges of creating, managing and
administering employee share plans large and small, national and global.
GEO has more than 4,500 individual members representing over 1,500
companies and professional firms in more than 60 countries around the
world. Further information: http://www.globalequity.org
About Siemens
Siemens AG (Berlin and Munich) is a global powerhouse in electronics and
electrical engineering, operating in the fields of industry, energy and
healthcare as well as providing infrastructure solutions, primarily for
cities and metropolitan areas. For over 165 years, Siemens has stood for
technological excellence, innovation, quality, reliability and
internationality. The company is the world's largest provider of
environmental technologies. Around 40 percent of its total revenue stems
from green products and solutions. In fiscal 2012, which ended on September
30, 2012, revenue from continuing operations totaled EUR78.5 billion and
income from continuing operations EUR4.7 billion (incl. IAS 19R and
reclassification of the solar business into continuing operations). At the
end of September 2012, Siemens had around 370,000 employees worldwide on
the basis of continuing operations. Further information:
http://www.siemens.com.
About Hostettler, Kramarsch&Partner (hkp///)
hkp/// is an independent and partner-led international consulting firm
specializing in performance management and compensation. The hkp///
approach to performance management integrates the requirements of financial
and HR strategies with management concepts. At the same time it aligns the
performance management criteria and processes at the corporate level with
those at individual level. Based consistently on a value- and
values-oriented implementation, this approach helps our clients achieve
sustainable long-term success. The hkp/// partnerspossess many years of
international consulting experience. They are recognized experts in the
market for compensation, talent, financial and risk management. Further
information: http://www.hkp.com.
Contact: Thomas Müller, Manager Marketing&Communication hkp///
F: +49 69 175 363 323, M: +49 176 100 88 237, E-Mail:
thomas.mueller(at)hkp.com
End of Media Release
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Issuer: Hostettler, Kramarsch&Partner
Key word(s): Enterprise
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