The image of a dangling carrot is often used to symbolize award-based grants generally and performance awards specifically. But the carrot is only effective because its intended recipient readily recognizes its value: Lunch. If stock plan managers over-complicate their explanation of performance awards to participants, that carrot, unfortunately, loses its power. So how can both parties win? Through an effective communication strategy! We checked in with Shareworks by Morgan Stanley’s Patty Brown for her two cents.
Q: What do participants find most confusing about performance awards?
A: Participants are used to receiving awards where the granted amount is fixed and clearly communicated at the time of grant. Performance awards that contain performance metrics are issued with a “target” granted amount with the potential to earn additional or fewer shares depending on the achievement of those performance metrics. Understanding that the “granted” amount isn’t known until a future event(s) occur is challenging to effectively communicate to participants such that they can see the value of those awards.
Q: What are some strategies that stock plan administrators can use to help employees understand the potential benefit of their performance awards?
A: Model a few “if/then” scenarios – perhaps two to three – that illustrate some potential outcomes. Giving some examples helps employees see past the inevitable stock plan admin jargon. Keep the examples as simple as possible. Remember, you’re just trying to illustrate concepts, not offer precise possibilities.
Q: Are there any other points of confusion for participants?
A: Often, companies don’t effectively communicate progress by the company or employee toward the goal during the awards life cycle – they simply wait until the end of the performance period. For example, if a participant receives an award with a performance period of three years and a company chooses to not communicate the progress towards achieving the performance metrics during that time, participants may not perceive value until the performance period is completed or at all if the metrics are not met.
Q: So, if companies don’t take the time to regularly communicate progress, they are not really leveraging the retention and reward benefits of their performance awards?
A: Exactly. Knowing how close that carrot truly is can be a powerful incentive for employees! And creating incentives is the whole strategy behind performance awards.
Q: How often do you recommend companies check in with employees regarding their performance plans?
A: This is going to be different for each company and something that may need to be adjusted from time to time to find the most optimal timing. One panelist has a performance metric component that can be monitored daily if an employee so chooses. His plan was for his senior executives so that may be an effective approach for that target audience. Communicating daily to a participants in a broad based plan may not be as effective especially when one or more metrics are market based and the stock is volatile. Daily fluctuations in price may cause unnecessary alarm and perception issues with employees.
Q: Do you think companies are designing performance awards with performance periods that are simply too long?
A: No, I think a lot of time and consideration is spent on finding the right performance measurement period based on a company’s participants, peer group and overall corporate strategies. Companies want a performance period that is long enough to measure realistic and achievable goals. You want participants to be aligned with shareholders as much as possible and hopefully your shareholders are viewing their investment in your company as a long term strategy. Your performance awards should also encourage a similar investment.
Q: What concerns were raised by the audience?
A: Communicating with former employees continues to be a great challenge for companies. People don’t naturally think of updating their address information with former employers when they move. This can be particularly problematic with performance awards as often companies pro-rate the number of shares ultimately attained by the participant at the end of the performance measurement period based on the number of days from the grant date to their termination date. The final number of shares will not be determined until the end of the performance cycle. Once determined, companies need to then communicate the number of attained shares each former employee earned, the release date of those shares and how the employee can satisfy the tax obligation due at that time. Without current address information, communication becomes more difficult and time consuming.
Q: What solutions should be explored?
A: Many online tools are becoming more sophisticated, even when it comes to communicating with former employees. Stock plan administrators should speak with their service providers, as many platforms allow participants to change their addresses directly online. That information is then sent from the service provider back to the company to update their records. Another suggestion is to leverage each employee’s exit interview to remind them of the importance of maintaining current address information with the company. Provide them with a means to update that information quickly and easily. You can even consider partnering with your service provider to target this audience. Show them what’s in it for them by keeping you both up to date.
Q: Where can stock plan administrators go for further learning on this subject?
A: Luckily, there are plenty of resources around:
- Two portals on the NASPP website come to mind – Performance Plans and Employee Communications. Both provide good overall information.
- MyStockOptions.com also has some excellent articles on performance plans
- Another source of information is other stock plan administrators in your geographical area, industry or competitive landscape. I’ve found that equity compensation professionals are always willing to share ideas and best practices with each other. Attending sessions such as this one perhaps at the local NASPP level is a great way to connect with your peers. Ultimately, however, you will need to craft any communications plan to fit within your unique corporate culture and specific strategies.
About the AuthorMore Content by Sara Pinkus