Rate of Equity Incentive Granting Remains Relatively Flat at Large Companies According to Meridian Compensation Partners Study
LAKE FOREST, Ill.--(BUSINESS WIRE)--Meridian Compensation Partners, LLC, a leading executive compensation and corporate governance consulting firm, has released a new study of annual “run rate” and “overhang” levels among Fortune 100 companies. Meridian found the median annual run rate for Fortune 100 companies was 1.5% and the median three-year average run rate was 1.6%. The median total overhang at these organizations was 11.3%, including shares approved for future grants.
“Board members clearly consider burn rates and dilution levels when approving long-term incentive awards. Although these dilution levels have been relatively flat, there has been a shift from stock options to performance shares which may be causing the existing overhang to decrease at a more noticeable rate”
Run rate measures the rate at which a company is using its shares as incentives under its shareholder-approved equity plans. The higher a company’s run rate, the earlier it will need to seek shareholder authorization for an increase in its share pool. The median run rates are very consistent with prior years; however the overhang levels are down slightly. Overhang levels may be going down as companies continue to shift from granting stock options to full value shares and share prices improve. A company’s overhang is the aggregate of equity awards currently outstanding plus authorized but unissued shares approved by shareholders, as a percentage of fully diluted weighted average common shares outstanding. Higher overhang results in greater potential dilution to which existing shareholders are exposed.
“Board members clearly consider burn rates and dilution levels when approving long-term incentive awards. Although these dilution levels have been relatively flat, there has been a shift from stock options to performance shares which may be causing the existing overhang to decrease at a more noticeable rate,” explained Gerard Leider, partner at Meridian. “Even though the economic situation is generally improving, Boards continue to focus on share pool usage. Board members must balance protecting shareholders’ investment and retaining top talent.”
In addition to calculating the median run rates and overhang levels, Meridian measured annual run rates and overhang levels at the 25th and 75th percentiles. Among Fortune 100 companies, Meridian found the annual run rate at the 75th percentile was 2.6% and total overhang was 14.9%.
“Run rate and overhang levels vary significantly by industry. Companies within high growth industries and that rely heavily on the use of stock options, such as Information Technology, continue to have higher dilution levels. Most organizations regularly monitor their share use levels compared to other industry peers to avoid unwanted scrutiny from shareholder advisory groups,” Leider added.
Meridian’s analysis was based on data collected from annual report (Form 10-K) filings through June 2014. In calculating the run rates, full value shares are converted into stock option equivalents using multiples of 1.5 to 4, based on each company’s 36-month stock price volatility.
About Meridian Compensation Partners, LLC
We are independent executive compensation consultants providing trusted counsel to Boards and Management at hundreds of large companies in North America. We consult on executive compensation and its design, amounts and governance. Visit us at www.meridiancp.com.