What guidelines do employers use to determine how many stock options or restricted shares to grant?
Guidelines about grant sizes vary among industries and corporate peer groups. Most companies use a combination of pay and performance to determine how many options or shares of restricted stock (or RSUs) to grant an individual. Other factors may be the value of company stock, the practices of competitors, the frequency of equity grants, other benefits offered by the employer, pressure from institutional investors and large shareholders, the size of the share grant pool, the number of shares used in the past and the number expected to be used in the future, and current economic and stock market conditions.
Large companies with compensation departments have internal written guidelines with ranges of possible grants based on job title or pay level. The guidelines aim for target amounts of compensation that stem from a certain number of shares or values for the options and restricted stock. The size of the grants specified by the guidelines may be adjusted over time to reflect fluctuations in the company's stock price, depending on whether it uses some form of fixed or variable guidelines (see related FAQs on stock options and restricted stock).
Example: In March to the Beat of Your Own Drummer: Amazon’s Executive Compensation Practices, a partner at the law firm McCarter & English explains that Amazon avoids predetermined objective performance criteria as conditions to awards or their vesting. Instead, Amazon focuses on subjective performance achieved and projected. Among the factors it does consider are "an executive's level of responsibility, past contributions to the company's performance, expected future contributions, the compensation of similarly situated executives at other companies, the expected value of the executive's existing equity awards, and the expected value of the proposed award." For details on RSU grants at Amazon, see a commentary from Avier Wealth Advisors.
Survey Shows Prevalent Guideline Criteria
In its survey 2015 Trends And Developments In Executive Compensation, Meridian Compensation Partners presents its findings on executive compensation practices at 114 large publicly traded companies in several industries. The firm found the following about the criteria that the surveyed companies use to determine the size of long-term incentive grants for their most senior executives.
|Criterion||Primary factor||Additional factor||Not a factor|
|Competitive market data||74%||25%||1%|
|Internal equity (e.g. grouping by level)||35%||58%||7%|
|Prior year grant size in dollars||17%||60%||23%|
|Share pool dilution||10%||25%||65%|
|Prior year grant size in number of shares||3%||18%||79%|
Other Survey Data: Burn Rates And Run Rates
Many companies consider their annual burn rate or run rate—either the number of equity awards that a company is granting as a percentage of total outstanding shares or the number of available shares to be granted. (High-tech firms now often manage their broad-based stock option programs according to company burn-rate targets instead of applying a purely "pay" perspective.) Concerns about share dilution also now play a role. This focus, along with the earnings charge for stock options, increasingly determines how many options/shares to grant in aggregate and thus for each individual grant and employee level at your company.
For a further discussion of why your company may switch from stock options to restricted stock, and for ratios of restricted stock to options, see a related FAQ.