DGAP-Media: hkp/// group: Broad-based Equity Culture fosters Company Performance

(DGAP-Media / 12.05.2014 / 10:55)

Broad-based Equity Culture fosters Company Performance 

Company-wide implementation of Equity-based Compensation and higher Equity
Portion within Compensation Packages are key to Equity Culture and Company
Performance

Complex and disparate Regulatory and Tax Requirements prevent Companies
from offering Equity-based Compensation and Employee Participation more
widely

Results from the most recent GEO Global Equity Insights 2014 study

New York/London/Frankfurt am Main, May 12, 2014. Equity-based compensation
has become an established compensation instrument globally. While in the
past Long-Term Incentive Plans (LTIP) often have been reserved for
executives, today they are nearly universal for companies. In parallel, the
use of broad-based Employee Share Purchase Plans (ESPP) is continuously on
the rise. In parallel, equity-based compensation has been implemented on a
broader scale by firms that are more successful. Company performance is
driven by employee satisfaction with equity-based compensation plans. The
level of employee satisfaction with equity plans can be significantly
improved with better communication. Furthermore, country-specific
regulatory frameworks are the main obstacles to straightforward and
globally harmonized plan designs. They hinder expansion of company-wide
equity culture.

These are the key findings of the "GEO Global Equity Insights 2014" study -
a project conducted on behalf of Global Equity Organization (GEO) by the
consulting firm hkp/// group, under academic monitoring of the Institute of
Management and Controlling of the University of Göttingen in Germany, and
supported by Computershare, SAP and Siemens as partners with high stake in
equity based compensation. For 2014, 169 companies participated from 20
countries.

"This years' GEO study offers the most comprehensive and detailed insights
with regard to equity-based compensation plans as well as employee share
purchase plans. It gives companies the opportunity to assess their current
practices and shows how equity-based compensation can successfully align
with compensation, HR and corporate strategies", explains Danyle Anderson,
Executive Director at GEO.

LTIP Share in Compensation and Eligibility down the Hierarchy as
Performance Drivers
Survey results show that the lower the hierarchical level, the lower LTIP's
portion is within the total compensation. In particular, the lower portions
of such plans for middle management leave considerable room for a better
incentive alignment with the interests of shareholders. In this context,
European companies lag behind North American companies. On all hierarchical
levels, executives in European companies are granted lower portions of LTIP
as compared to their North American counterparts. For example, Top
Executives below board level in North American companies receive 42% of
their compensation in equity-based LTIP, in Europe only 29%.

LTIP are no longer an exclusive compensation instrument for executives.
More than half of all companies surveyed offer such plans down to middle
management, 45% also to levels further down. LTIP eligibility down the
corporate hierarchy is a driver of company performance. High performing
companies offer such plans much more frequently (92%) also to other
employees than executives, compared to 78% for low performing companies.

"A broad-based equity culture across corporate hierarchy seems to foster
company performance", explains Prof. Dr. Michael Wolff, Chair of Management
and Control at the Georg-August-Universität Göttingen. Consequently, he
favors the concept of implementing LTIP not only to selected executives,
but also to as many employees as possible: "That seems to represent an
adequate instrument to pursue the objective of shareholder alignment - for
executives, managers, as well as broader employee groups."

Fig.1: LTIP eligibility per level in % of companies

Outdated Plain-vanilla Stock Options 
Compared to the results from the 2013 study, the use of stock options is
dropping further. Whereas only a decade ago, stock options were the
predominant plan type, now they rank only third amongst companies from
Europe and North America, with restricted stock and performance shares as
top plan types. Apart from this, the distribution of plan types is
remarkably different between Europe and North America. European companies
prefer performance shares as a long-term incentive (30%). In contrast,
North American companies prefer restricted stock (43%).

"The preference for performance shares and restricted stock reflects the
common perception that an award of full-value stock provides a more
balanced risk profile compared to stock options. During the financial
crisis, the public debate mainly focused on stock options when criticizing
large payouts for executives and excessive risk-taking. Public and
investors' pressure, as well as changes in regulation, have contributed to
the popularity of performance shares and restricted stock", explains
Michael H. Kramarsch, Managing Partner hkp/// group, current market
practice confirmed by the GEO study.

Satisfaction limited by Regulatory and Tax Framework
Employees' overall satisfaction with LTIP seems remarkably good: 57% of
companies see employee satisfaction as high or very high. Despite that
rather positive picture, across various aspects of LTIP risk profile and
tax treatment are areas that show the highest degree of dissatisfaction.

A similar picture emerges regarding employer satisfaction. Most companies
rank their satisfaction with LTIP as high. Exceptions: employers are only
moderately satisfied with the regulatory framework and tax treatment.
Hence, the reduction of legal complexity could greatly foster the equity
culture within corporations.

ESPP: High-performing Companies with higher Participation Rates 
"In contrast to LTIP, employee share purchase plans (ESPP) are
predominantly used to enhance employee identification with the company by
creating a spirit of common responsibility and ownership", explains Heike
Neumann, Global Head of Executive Rewards and Equity at SAP. The companies
surveyed seem to be aware of the beneficial impact since almost half have
implemented such plans. However, there are great regional differences.
European companies show a comparably low implementation rate (39%) and,
thus, need to catch up with their American peers (56%).

The survey also reveals that employee participation in ESPP shows a
positive relation with company performance. High performing companies have
participation rates commonly nearing 50%. In contrast, participation rate
in low performing companies drops to 40%. Bettina Gohm, Vice President
Compensation & Benefits at Siemens, interprets the survey findings as
motivating with regard to the enhancement of employee engagement and equity
culture: "ESPP are not only a crucial factor of success in a competitive
labor market. They turn a company's employee population into equity owners,
helping employees act as if the company were their own."

Fig.2: ESPP types (ranked by prevalence) in % of companies 

Share discount plans are the dominating ESPP-type around the world.
However, there are considerable differences in the regional distribution.
North American companies almost exclusively use share discount plans (80%),
whereas one-third of European companies prefer share matching plans,
however discount plans are most prevalent too (64%). Free shares only play
a role in companies from outside North America and Europe.

The global rollout of ESPP is on the rise and displays a notable increase
compared to the results from the GEO Global Equity Insights 2013 survey.
This development is particularly driven by European companies. Less than
the half of European companies surveyed in 2013 rolled out an ESPP in more
than 20% of the countries in which they were operating. One year later that
number has risen to over two-thirds.

Effective Communication and Administration as Success Factors
A key finding of the 2013's survey was that satisfaction with accompanying
communication generally drives employee perception of equity plans. This
year's analysis provides a more thorough picture. Companies with a broad
set of communication tools are better connected with their employees,
resulting in higher employee satisfaction.

With regard to equity-based compensation, companies deal with most
administrative activities in-house. Seven out of eight administration
topics are mostly administered in-house. Two prime exceptions are banking
and tax. Note: Banking and tax are also activities to which companies
allocate comparably high budget. Accordingly, the process of allocating
budget to different administrative activities is strongly constrained by
the degree of outsourced activities.

"Issuers are having to expend more effort in dealing with the increasing
complexities, especially when they're expanding equity plans globally and
deeper into their organizations. This means more reliance on technology,
and the need to better communicate to employees so as to ensure the plan's
success." says Jay Foley, Managing Director for Computershare Plan Managers
Europe.

Background on the Study
The   "GEO Global Equity Insights 2014" study was conducted in the spring
of 2014 on behalf of Global Equity Organization (GEO) by the consulting
firm hkp/// group, under academic monitoring of the Institute of Management
and Controlling of the University of Göttingen/Germany, and supported by
Computershare, SAP and Siemens as partners with high stake in equity based
compensation. In total, 169 companies participated, mostly global players
from 20 countries, with special focus on North America and Europe,
representing 10 key industries. 89% of the companies surveyed have a market
capitalization above USD 1 billion, with the top 10% exceeding USD 100
billion in market capitalization at year-end 2013.

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Figures see:
http://www.hkp.com/en/press-office/articles/texts-and-articles.html
 
Media Contact: 
Thomas Müller, Manager Marketing & Communication hkp/// group
F: +49 69 175 363 323, M: +49 176 100 88 237, E-Mail:
thomas.mueller@hkp.com


End of Media Release

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Issuer: hkp/// group
Key word(s): Industry

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267743 12.05.2014