Equity incentives have gone global

Aug 26 2005 by Brian Amble Print This Article

Large employers in nearly every industrialised nation have increased the use of equity incentives as an integral part of their compensation packages, according to a new global survey.

Towers Perrin's HR Services business 2005 Equity Incentives Around the World Survey found that the use of long-term incentives (LTI) is now seen as a common practice in many countries and that the policy has been adopted by more than eight out of 10 companies in Belgium, Germany, Italy and Switzerland.

In Asian nations, however, the use of equity LTIs is more divided. Stock options remain a minority practice in China, Japan and South Korea; however, their use is widespread in Hong Kong and Singapore.

"Historically, stock options and other forms of equity awards have been nearly universal components of incentive plans for companies based in the world's major developed nations," said James Matthews, principal in Towers Perrin's Compensation practice.

"Now the world's emerging markets are playing 'catch up,' granting more equity to executives.

"But while equity awards in the growing markets of the world are likely to take the form of options, firms in the U.S., Canada and the UK are moving away from a strong reliance on options and instead are turning to new long-term incentive plans, including those with added performance measures," added Matthews.

Non-option types of equity incentives have also gained prevalence over the past year, mainly in the form of restricted stock and performance shares. The introduction of mandatory expensing of stock options by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) has driven companies to explore alternative incentive programs.

"We used to say, what you see in the U.S. today, you will see in Europe tomorrow and the rest of the world the next day," said Matthews.

"But performance-based equity plans have been prevalent for some time in the UK, Netherlands and Australia, and so now U.S. companies may be in a position to learn from other countries' experiences."

The continual growth of equity incentives worldwide suggests that the question for the future is not whether to use equity incentives, it's how to most effectively define and deploy them.

"In the recent past, many multinationals simply exported their home country approach around the world. But now we're seeing much more emphasis on understanding the local market practices and regulations, and this is impacting both the design of plans and the size of awards," said Matthews.