Test Your Knowledge After reading this article, test your knowledge with a fun, interactive quiz on the basics of stock grants

It is hard to find comparative data on stock options, restricted stock/RSUs, and performance shares. Fortunately, the 2021 Equity Incentives Design Survey by the National Association of Stock Plan Professionals (NASPP) and Deloitte Consulting, along with their earlier annual surveys, offers data letting you compare the terms of your equity awards to those of grants at other companies. Of course, you need to be familiar with the specifics of your company's plan, as those are the rules that apply to you.

Types Of Stock Compensation

  • Restricted stock and restricted stock units (RSUs) are the most common equity grants made by companies in the United States. The NASPP's 2021 survey revealed that 94% of the responding companies award restricted stock/RSUs.
  • RSUs in particular have become the standard type of equity award in many industries, while standard restricted stock has declined. Among the surveyed companies that grant restricted stock/RSUs, 91% award RSUs and just 18% grant restricted stock (down from 44% back in 2013).
  • Performance-based awards are also very common now, granted by 87% of the companies. "However, for employees below the senior management level, the prevalence of performance-based awards declines sharply," observe the researchers, "while the prevalence of time-based full-value awards remains higher for middle management and junior management/other exempt employees." For example, only 18% of the surveyed companies grant performance-based equity to middle managers.
  • Stock option grants continue to decrease: only 47% of the surveyed companies grant traditional time-vested stock options (or stock appreciation rights).

Eligibility

According to the NASPP's 2021 survey, the higher your employment rank in a company is, the more likely you are to receive an equity award. The table below shows the surveyed companies' eligibility practices at various levels in the corporate hierarchy (it gives the percentage of companies that make each type of grant available to the specified group).

Corporate level Restricted stock/RSUs Performance-based awards Stock options or SARs
CEO, CFO, and named executives 86% 86% 46%
Other senior management 91% 70% 40%
Middle management 82% 18% 18%
Junior management 50% 5% 6%
General workforce 23% 2% 4%

Reasons For Making Grants

The NASPP's 2016 survey gave the following as the most commonly reported corporate reasons for granting stock options and restricted stock/RSUs.

Reason for making grants to employees or executives For stock options (% of companies) For restricted stock/RSUs (% of companies)
Align with shareholder interests 79% 82%
Retention 68% 89%
Incentive/reward 75% 81%
Remaining competitive with industry peers 69% 78%
Fostering a culture of employee ownership 34% 40%
Reward for meeting specific performance targets 22% 47%
Normal practice at hiring 19% 30%

Restricted Stock & RSUs: Vesting And Withholding

The NASPP's 2021 survey found that 94% of the surveyed companies grant restricted stock/RSUs that have time-based vesting. Most (78%) use graded vesting schedules (shares vest in increments over time), and 22% have cliff vesting (all shares vest after the vesting period). Within these groups:

  • At companies with graded vesting, 59% vest the grants over a total period of three years and 33% over a total period of four years.
  • For graded vesting schedules, 83% of the companies vest shares annually during the vesting period; 5% vest shares quarterly; 7% have quarterly vesting after a one-year cliff period.
  • At companies with cliff vesting, the most common vesting period is three years (89%).

Most of the surveyed companies use share withholding to collect the taxes owed when restricted stock/RSUs vest. The NASPP's 2019 survey found that share surrender and cash payment (either by check or electronic transfer) are the most common methods that both employees and executives use to pay withholding taxes. The table below shows the percentage of surveyed companies that allow each given method, at both the executive and nonexecutive levels.

Method Executives Nonexecutives
Share withholding (surrender) 91% 87%
Cash (by payroll withholding) 27% 28%
Cash (paid by check or electronic transfer) 56% 55%
Sale of shares to cover taxes 35% 39%

The 2019 survey also found that 38% of the responding companies offer a choice of two different means to pay the withholding, and 9% offer more than two ways. However, more than half of the companies (53%) do not let employees pick the withholding method. If an employee does not bother to choose, 85% of the companies use share surrender as the default method. A significant minority (21%) will issue IRS Form 1099-B to the employee for the shares withheld.

Stock Options: Term Length, Vesting, Exercise Price

The NASPP's 2021 survey found that the traditional ten-year stock option term, i.e. the time you have between the time of grant and the expiration of the grant, is by far still the most common (at 87% of the companies). Only 9% grant options with a seven-year term.

Graded vesting of options at regular intervals is much more common than cliff vesting (i.e. the some or all the options in the grant become exercisable at the same time). For option vesting, the 2021 survey found the following among the responding companies:

  • The most common lengths of vesting schedules are three years (53%) and four years (42%).
  • Among option-granting companies with graded vesting schedules, 52% offer complete vesting after three years, 43% vest all of the options after four years, and 4% vest the options over five years.

In most cases, your exercise price for stock options is the fair market value (FMV) of the company's stock at the time of the grant (see a related FAQ on the process of granting equity awards). The NASPP's 2021 survey found most companies set FMV solely by the closing stock price on the date of grant.

Determinant of exercise price % of companies/th>
Grant date closing price 85%
Grant date high/low average price 7%
Previous day's closing price 5%
Previous day's high/low average price 1%

Next Article

Part 2 of this series digs deeper into the NASPP survey data, covering such topics as grant guidelines, expiration provisions, and what happens to options at job termination or in a merger involving the company.

Editor's Note: The NASPP is the organization that professionals rely on to keep up with practices and developments that affect equity compensation. For more information and a wealth of resources, see www.naspp.com.