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Three Key Decisions for Handling Equity in Retirements

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Authors: Megan Wolf

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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.

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