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Retention & Equity Diversification: Key Differentiators in Today’s Marketplace

Written by: Brent Longnecker, Kevin Kuschel, and Megan Frommel

Retention awards are rising in popularity throughout the energy industry. This is being driven primarily by 1. Uncertainty by key employees and 2. Increased stock burn due to lower prices and diminishing share pools.

As a result, those companies that DO have stock are attacking retention concerns with more restricted stock. Additionally, we’ve had a few clients that thought their annual bonus – formula based payouts – were high when factoring in year-over-year TSR—so they are using negative discretion to bring the cash bonus payout down, while giving additional restricted stock as a form of “offset.” Also note, we do have a few who are even adding an additional year of vesting to 1. Aid the retention, while 2. Having a better expense amortization per year.

Finally, as an “old” financial planner, I believe an executives compensation should be “diversified”. One way to do that is to use multiple LTI vehicles like restricted stock and performance share; or SARS, RSAs and PSAs; or any combination that effectively diversifies and protects from cyclicality. Also, a performance based plan can be strategic in nature w/ certain strategy goals in place to be accomplished (this is what Pepsico did when they first came up w/ this idea in the early 70s) and have the other plans more market/ stock driven.

If LTI is attacked correctly, it creates a ‘smoothing” effect over time, not unlike a diversified investment portfolio with dollar cost averaging.

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