The use of performance-based equity in a CEO compensation packages has gained popularity over the last five years, as shareholders are increasingly demanding that companies provide compensation that attempts to link pay and performance, says Equilar, an executive compensation data firm. A study of S&P 1500 companies by Equilar revealed that shareholders no longer feel time-based restricted stock, including stock options, are sufficient to tie pay to performance.

“An executive must be able to execute against specific metrics and goals and successfully implement corporate strategies in order to receive a predetermined level of stock,” said the report.   

2010 Proxies showed that 49 percent of S&P 1500 companies gave CEOs performance-based equity grants, up from 43 percent in 2006. Over 60 percent of chief executives received shares with performance periods that spanned multiple years. Total equity granted to CEOs and other named executives also increased from 2006 to 2010. Equilar found the number of stock options assigned to CEOs increased from 6.2 percent (2006) to 7.4 percent (2010). Restricted shares grant to CEOs, as a percentage of total restricted shares granted, increased from 1.2 percent in 2006 to 3.4 percent in 2010.

“CEOs and named executives are getting larger slices of the equity pie,” noted the report.

Between 2006 and 2010, the median number of stock options granted among the companies fell 3.8 percent annually, with an average of 646,797 shares granted per company in 2010. The healthcare industry continued to grant the highest number of stock options, with an average of 950,000 units granted, trailed by the technology (876,200) and consumer goods (703,100) industries. The prevalence of companies granting stock options fell from 81.4 percent in 2006 to 72.4 percent last year. Financial companies granted the fewest shares in 2010, awarding an average of just 410,307 total options.

In the same time period, companies reported an increase in restricted stock grants for employees, from 74.9 percent (2006) to 89.9 percent (2010). The median number of these shares per company increased at an annual rate of 11.8 percent over the 2006 to 2010 period. The practice is most frequently observed among companies in the technology and basic materials sectors.

Equilar also found that the frequency of companies asking for shareholder approval to increase the share cap under the equity incentive plan rose from 23.8 percent in 2006 to 32.5 percent in 2010. Of those who made the request, 81 percent asked shareholder for them to be made available under Omnibus plans. The technology sector required the most shares in 2010, with 41.1 percent of technology companies asking shareholder to raise the cap.