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Why Do Companies Share Less With Employees?

Written by Chris Crawford, Ian Keas, and Brent Longnecker of Longnecker & Associates.

Towers Watson recently compiled an analysis detailing the equity award trends of public companies in the U.S. One conclusion is that companies have dramatically reduced the amount of shares awarded to employees.  Another conclusion is that companies are using more restricted shares than in the past. The analysis begs the question, why?

Reading through any newspaper or magazine that cites the problems with CEO pay, would likely lead you to conclude that companies are providing less equity to employees because they are providing more to the CEO and have less for employees. Very simply, this is not the case.

One very central reason U.S. public companies have continued to provide less and less equity awards to employees as a percentage of the market capital (aka “overhang”) is due to proxy advisors like Institutional Shareholder Services (ISS). Over the past decade, ISS has taken advantage of a series of regulatory changes to establish their relevance in today’s executive compensation decision making process. Included in ISS’s growing power and influence over executive pay decisions is the use of equity compensation throughout the Company. ISS has developed their own methodology for determining an allowable amount of a company’s market capital awarded to employees of the organization. If the Company asks shareholders to approve “too much” then ISS recommends shareholders vote against approving the plan. In 2004, ISS provided general guidance that 15 percent of a company’s market cap was an acceptable level of dilution to shareholders. Nearly every year since that time, ISS has reset the allowable cap. However, that allowable cap continues to lower. As of 2015, the ISS allowable cap varies by industry, but it’s not uncommon to see a cap of five percent.  As a result, companies have fewer and fewer shares available to compensate the employees of the Company. 

This growing trend is exactly the opposite of what companies want to do. In short, companies want more employees to hold a greater number of shares to better align their interests with shareholders. Additionally, due to tax, accounting and interests alignment, equity awards provide some of the most attractive forms of currency available to compensate employees. These latest equity trends only reinforce that policies aimed at regulating compensation often produce the opposite of the desired effect. 

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