Long-term incentive plans (LTIPs) play a critical role in aligning executive compensation with shareholder interests, promoting sustained organizational performance, and retaining critical talent. However, managing the share utilization inherent in LTIPs can be particularly challenging during periods of heightened stock price volatility.
Since the beginning of 2025, the stock market has experienced significant volatility, with the S&P 500 specifically declining more than 17%. This not only impacts the economic value realized by executives but can also significantly influence dilution rates, shareholder perception, and future equity availability. Effectively navigating these challenges demands thoughtful planning, clear communication, and proactive governance strategies.
The Impact of Volatility on Share Utilization
Stock price volatility affects LTIP share utilization in multiple interconnected ways:
- Dilution Impact: Lower stock prices during market downturns require a higher number of shares to maintain targeted award values. This increased share usage can accelerate equity depletion, adversely impacting dilution metrics and potentially triggering negative reactions from shareholders and proxy advisory firms.
- Participant Perception and Retention Risks: Sudden fluctuations can affect participant perceptions of LTIP value, potentially undermining incentive alignment and retention effectiveness. Executives and key personnel might perceive volatility-driven valuation shifts as unrelated to corporate performance, creating morale and retention concerns.
- Proxy Advisory and Investor Scrutiny: Elevated share utilization in volatile markets often attracts heightened scrutiny from shareholders and proxy advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis. Excessive dilution can negatively affect Say-on-Pay votes and governance assessments, placing additional pressure on compensation committees and boards.
6 Strategies to Manage Share Utilization During Volatile Periods
Successfully managing equity incentive programs amid volatility requires proactive and responsive strategies, including:
- Dynamic Equity Budgeting
Adopt a flexible equity budgeting approach. Rather than strictly adhering to fixed share utilization annually, companies can implement multi-year share pools or equity "banking" systems that permit borrowing against future allocations. These dynamic frameworks allow greater responsiveness to volatile conditions, smoothing utilization peaks and preserving share availability over longer cycles.
- Shift Toward Cash-Based and Hybrid Plans
Temporarily shifting the composition of LTIP awards from equity-heavy structures toward cash-based or hybrid cash-equity awards can reduce share depletion. For example, performance units that settle in part or full in cash can alleviate immediate dilution concerns while still aligning incentives closely with shareholder value.
- Using Average Pricing or Longer Measurement Periods
To mitigate impacts from short-term volatility, companies can adopt award methodologies based on longer-term average stock prices rather than point-in-time valuations. For instance, determining the number of shares granted based on a trailing 30-, 60-, or 90-day average stock price can moderate share usage, stabilize valuations, and align incentive awards more closely with sustained performance rather than short-term fluctuations.
- Performance-Based Vesting Adjustments
Performance metrics and vesting targets may require recalibration to remain realistic yet challenging. Adjusting targets to emphasize relative performance metrics (such as relative TSR against a peer group or industry index) rather than purely absolute stock price performance can better account for macroeconomic factors and external market conditions, maintaining fair incentive alignment for executives.
- Enhanced Communication and Transparency
Clear and transparent shareholder communications are essential. Proactively disclosing LTIP strategies, including rationale behind share utilization decisions, equity budgeting approaches, and dilution management plans, can maintain shareholder confidence and mitigate adverse reactions from investors and proxy advisors.
- Plan Reserve Replenishments and Share Buybacks
In cases of sustained volatility, deliberate share repurchase programs may offset dilutionary impacts of higher share utilization. Combining proactive share buybacks with strategic equity reserve replenishments, authorized by shareholders, can sustainably manage dilution pressures and optimize equity utilization over time.
Governance and Oversight Considerations
Boards and compensation committees have a critical oversight role amid volatility:
- Regular Stress Testing and Scenario Planning: Boards should regularly perform scenario analyses and stress tests for their equity compensation programs under various market volatility assumptions, ensuring preparedness and adaptability.
- Ongoing Review of Peer Practices: Continuously benchmarking against peer companies allows organizations to calibrate incentive structures effectively and ensure competitive and sustainable equity practices.
- Engagement With Shareholders and Proxy Advisors: Active and ongoing engagement with shareholders and proxy advisory firms fosters a clear understanding of investor expectations, enhancing the credibility and support of equity management strategies.
Managing LTIP share utilization effectively during stock price volatility is a nuanced process requiring strategic flexibility, rigorous planning, and thoughtful governance. Organizations must balance the objectives of preserving incentive alignment, minimizing dilution, retaining critical talent, and maintaining shareholder trust.
By adopting dynamic budgeting approaches, diversifying award structures, employing averaged valuation methods, and maintaining transparent communications, companies can successfully navigate volatile conditions and sustain robust, effective incentive plans aligned with long-term shareholder value creation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
