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Article | Executive Pay Memo North America

Trends in S&P 500 share utilization

Governance Advisory Services |Executive Compensation
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By Amelia Serrano | January 4, 2021

S&P 500 continues increasing number of full-value awards and total equity value granted while monitoring key stock plan consumption issues.

Given the stock market’s recent volatility and uncertainty in future performance around a time when most companies are preparing to make 2021 equity grants, companies are monitoring the key issues of stock plan consumption and reserve pools. The Global Executive Compensation Analysis Team (GECAT) reviewed the S&P 500 overhang for fiscal years 2017 through 2019 as well as run rates and long-term incentive (LTI) fair values for fiscal years 2015 to 2019, as reported in 2020, as well as 2020 midyear filers in order to assess recent trends.

Key findings from the GECAT study include:

  • Companies have continually increased the use of full-value awards, while the use of options has steadily declined. Restricted stock usage was highest in the information technology sector (79% of LTI mix); performance-based stock usage was highest in the utilities sector (54% of LTI mix), and stock option usage was highest in the consumer staples and industrials sectors (23% of LTI mix).
  • S&P 500 median run rates have declined 19% since 2016, coinciding with a reduction in the use of stock options. The real estate sector experienced the most significant run rate decline of 36% since 2016 (Figure 2). An early look at 2020 grants shows this trend continuing.
  • The S&P 500 overhang changed slightly from 7.4% in 2017 to 6.9% in 2019. An early look at 2020 filers shows this trend continuing. The communication services sector had the highest overhang rate at 9.5%, while the utilities sector had the lowest overhang rate at 2.4% (Figure 3).
  • The highest median LTI fair value increase occurred in the communication services sector, which increased 166% over 2015 figures (Figure 4). The industrials and information technology sector experienced a 13% and a 45% increase, respectively. An early look at 2020 shows a reversal of this trend, with lower LTI fair value on both an absolute dollar basis and as a percentage of market capitalization year over year.
  • An increase in companies requesting shares to fund stock incentive plans was up from 14% in 2017 to 21% in 2019, while the average number of shares requested has decreased from 3.8% (2018) to 3.5% (2019) of common shares outstanding (CSO).
Overhang
6.9%

Run rate
0.63%

LTI fair value
$101.3M
LTI fair value % of market cap
0.42%
Figure 1. S&P 500 — Fiscal year 2019 at a glance

Measuring annual stock usage

Run rates were on a five-year overall downward trend from 2015 through 2019, but this belies a large jump in 2016 from 2015, while 2018 represents a low over which 2019 median run rates increased 5%, to 0.63% of average CSO. A review of run rates by sector shows over one-third having an uptick in rates over the prior period, with the utilities sector continuing to have the lowest run rate at 0.17%, even after a slight growth from 0.24% in 2015 to 0.25% in 2016. The information technology sector had declining run rates over the past three years even though they had the highest run rate among the sectors studied, at 1.0%, as shown in Figure 2.

Figure 2. S&P 500 median run rates by sector, 2015 – 2019
Figure 2. S&P 500 median run rates by sector, 2015 – 2019

S&P 500 median run rate – 2015: 0.69%, 2019: 0.63%

Overall stock plan inventory

Overhang measures the current inventory of shares reserved for outstanding awards and future grants. Shareholders often look at this figure to evaluate the potential dilution of their ownership stake. Companies that require additional shares are faced with the need to request shareholder approval to allocate additional shares in order to continue their grant practices. In 2019, 21% of the S&P 500 companies requested new shares as part of a new or amended stock plan. This percentage has steadily increased from 17% in 2018 and 14% in 2017, while the average number of shares requested has decreased. In 2019, 18.2 million shares (3.5% as a percentage of CSO) were requested on average, down from 23.7 million (3.8% of CSO) in 2018 and 22.7 million (3.5% of CSO) in 2017.

Thanks in large part to higher equity values, the ongoing trend of delivering larger LTI value while granting relatively fewer full-value awards has steadily reduced median overhang levels. Overhang was 6.9% at the 50th percentile in 2019, down from 7.4% in 2017. The communication services sector had the highest overhang rate at 9.5%, while the utilities sector had the lowest overhang rate at 2.4%, as shown in Figure 3.

Figure 3. S&P 500 median overhang by sector, 2017 – 2019
Figure 3. S&P 500 median overhang by sector, 2017 – 2019

S&P 500 median overhang – 2017: 7.4%, 2019: 6.9%

Equity award values

LTI fair value in dollar terms has continued an upward trend at the highest percentiles. At median levels, LTI fair values increased by 27%, and LTI fair value as a percentage of market capitalization had a 5% decrease over 2015. Among industries, the consumer discretionary had the lowest LTI fair value growth, from $73.7 million in 2015 to $75.4 million in 2019 (a 2.3% increase), as shown in Figure 4. On the other side of the spectrum, the communication services sector reported high growth in LTI fair value, from $132 million in 2015 to $350.6 million in 2019 (a 166% increase).

In terms of actual LTI fair values, our analysis shows that the real estate sector granted the lowest total awards, with an LTI fair value of $24.9 million (0.17% of market capitalization), while the communication services sector’s LTI fair value is more than 14 times greater, at $350.6 million (0.76% of market capitalization). Analysis indicates average stock prices in the communication services sector increased 71% from 2015 to 2019.

Figure 4. S&P 500 median LTI fair value by sector, 2015 – 2019
Figure 4. S&P 500 median LTI fair value by sector, 2015 – 2019

S&P 500 median LTI fair value – 2015: $80M, 2019: $101.3M

Looking ahead

Companies will have to continue to ensure their share usage is in line with their needs to retain and motivate key employees while at the same time reevaluating and adjusting LTI plans due to COVID-19 and other external economic impacts. The value and number of equity awards delivered in 2020 and beyond will continue to be impacted to some extent by the ongoing reality of operating during a global pandemic. As shown below, an early look at 2020 filers indicates a decrease in overhang and run rate levels along with lower LTI fair value on both an absolute dollar basis and as a percentage of market capitalization year over year, but this may not portend overall future trends especially as equity values continue to grow.

Overhang1
7.9%
90% of prior year's 8.8% overhang

Run rate1
0.78%
91% of prior year's 0.86% run rate

LTI fair value1
$117.3M
84% of prior year's $140.4M
LTI fair value % of market cap1
0.56%
85% of prior year's 0.66%
Figure 5. S&P 500 — Looking ahead

1 Based on 52 S&P 500 companies that have filed FY20 annual reports as of 10/20/20, compared to the same set of companies in the prior year.

Author

Senior Associate, Executive Compensation (Houston)

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