Three Key Decisions for Handling Equity in Retirements
Retirement eligibility and equity award requirements are “all over the map,” according to the newest NASPP survey. A recent blog post explores key decisions when designing retirement provisions.
What they’re saying: Three out of four companies pay out in-flight performance awards for retirement, while 65% pay out time-based share awards and vest options.
Decision #1: Continued or Accelerated Vesting. One of the first forks in the road is whether equity awards continue vesting on schedule or accelerate upon retirement.
Performance awards: Most companies stick with the original vesting schedule, paying out at the end of the performance period. This prevents the unintended consequence of executives retiring prematurely if earnouts look bleak.
Time-based awards: Companies are split.
27% accelerate time-based shares and 22% accelerate options.
32% continue vesting time-based shares and 38% continue option vesting.
The blog provides a detailed breakdown of the pros and cons of each approach, including the complexity of tracking retirees for vesting events, tax and accounting implications and clawback considerations.
Decision #2: Full or Pro-Rata Payouts. Another major crossroad is whether retirees receive full payouts or pr-rated distributions based on service time.
- Performance awards: 36% provide a full payout and 34% take a pro-rata approach.
Time-based awards: Full payouts are more common at 38%. For options, 45% provide full vesting, compared to just 15% that prorate.
See the deep dive on the significant accounting implications – particularly for restricted stock.
Decision #3: Defining Retirement Eligibility. A very company-specific decision, but there are trends:
About 40% of companies require a minimum age and minimum service requirement (only 8% make it contingent on age alone).
The other 57% use a variety of definitions:
Age plus service formulas (such as 55 years of age plus 15 years of service = 70); used by 16%.
Tiered approaches, where employees must meet an age/service sum or reach an older age regardless of service (used by 10%).
Multi-criteria definitions, blending multiple retirement qualifications (used by 23%).
Mapping the best route: Check out our survey on how Center members structure equity treatment for various termination scenarios.
Megan Wolf
Director, Practice, HR Policy Association and Center On Executive Compensation
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