AI & Global Mobility: New topics for Equity-Based Compensation and Employee Participation

AI & Global Mobility: New topics for Equity-Based Compensation and Employee Participation

• Share purchase programs more popular than ever
• Companies see opportunities for artificial intelligence (AI) in equity-based compensation, but call for balance between AI and trained human oversight
• Results of the Global Equity Insights Survey 2024

Frankfurt am Main, July 08, 2024. Equity programs are becoming more widespread across the globe and are increasingly in focus of institutional investors in terms of their design and communication, while at the same time undergoing profound changes. European companies are placing greater emphasis on sustainability and ESG (environment, social and governance) targets in the respective compensation systems for their employees and managers. The focus lies particularly on environmental targets such as CO2 reduction. At the same time, interest in the use of artificial intelligence (AI) in equity programs is growing. Although the considerable potential of this technology is recognized, there are concerns about its reliability and accuracy.

These are key findings of the 12th edition of the Global Equity Insights Survey (GEIS), the world's most comprehensive study on market practice in equity-based compensation and employee participation. The study, conducted by hkp///group and the Global Equity Organization (GEO) under academic leadership of Georg-August-Universität Göttingen, is currently supported by Bank of America, Computershare, Fidelity, SAP, Siemens, Siemens Energy and Vialto Partners. The 2024 edition of the study focuses more intensively than ever on the inclusion of sustainability and ESG objectives in the design of equity-based remuneration (long term incentives, LTI) and share purchase plans (SPP). A new focus topic is the impact of AI on share-based remuneration and HR instruments.

"Given their increasing prevalence and importance for effectively incentivizing employees, equity-based compensation and employee share ownership are moving more than ever onto the agenda of institutional investors. Their perspective and influence on these compensation and HR tools is therefore critical for HR leaders who need to manage this dynamic and ensure that equity programs are aligned with strategy. At the same time, they need to communicate the programs effectively to gain investor confidence," explains David Voggeser, GEIS survey lead and Partner at hkp///group.

The Results in Detail

Long Term Incentives Are Increasing Across the Globe

The use of LTIs in compensation packages is growing significantly, in particular for executives and middle management. Restricted Stock Units (RSUs) and Performance Share Units (PSUs) are prevalent globally, with PSUs more commonly applied in senior management roles and RSUs in lower management tiers. Stock options, which had declined after the 2007 financial crisis, are now regaining popularity. Other plan types, such as performance cash and deferrals, remain common, particularly in European companies.

Approximately one-third of companies do not regularly adjust their plan designs to account for risk profiles, indicating no clear trend towards a systematic approach. However, over one-fifth review their risk profiles annually, while a similar proportion do so on an ad-hoc basis. This reflects a diverse approach to managing the risk associated with LTI plans.

Notably, North American companies tend to extend LTI eligibility to a larger portion of their workforce compared to European companies. Moreover, 57% of companies have increased their overall award value over the past five years, highlighting the growing significance of LTIs in compensation, not only in regards to talent acquisition but also for retaining employees and managers.

European Companies Drive SPP Growth

Share Purchase Plans, which enable employees to purchase company shares, show stable global adoption with regional variations. In 2024, European adaption increased, contrasting with declines in North America and the rest of the world (ROW). While North American companies favor share discount plans, European companies prefer both share discount and matching plans. In the ROW matching plans are predominantly utilized.

Implementation pressures of SPP include share prices as the strongest pressure source across all regions, as well as recruitment strategies, talent identification strategies, along with pressure from top management. Objectives include promoting employee share ownership, enhancing motivation and retention, as well as fostering company identity.

 Application of ESG Targets Varies Widely Across Regions

Despite increasing pressure from institutional investors, a significant 62% of North American companies lack ESG targets in their compensation structures, contrasting sharply with European counterparts where only 15% do not incorporate ESG goals. European companies predominantly apply ESG targets to both LTIs and STIs or exclusively to LTIs, while those in the ROW tend to focus exclusively on STIs.

Notably, while CO2 reduction, diversity and corporate governance are widely adopted ESG metrics, their direct impact on LTI target achievement remains modest, particularly in North America where they primarily act as modifiers rather than integral assessment criteria.

 Institutional Investor Influence Increasing

Institutional investors and proxy advisors exert substantial influence over equity-based compensation programs globally, with 45% of companies perceiving their impact as at least moderate and 38% rating it as high or very high.

Communication about equity programs and ESG activities primarily occurs through annual reports, engaging approximately 78% of companies. However, only 43% of companies report on equal pay initiatives in their annual reports, with a notable 57% of the ROW companies omitting this topic.

 Tailored Equity Solutions Enhance Critical Talent Retention

Nearly to three-quarters of companies worldwide have formal processes for identifying internal business-critical talents. Despite this, about a third of companies across all regions lack specific retention instruments for business-critical talents. Among those employing retention strategies, 41% use larger equity grants, while 30% rely on higher salaries. Notably, the popularity of higher salaries has decreased compared to 2023. Vacation days, on the other hand, are seldom used (1%).

Overall, talent identification processes are well-established, yet specific equity plans tailored for business-critical talents are uncommon, highlighting a preference for broader retention strategies among global firms.

AI Adoption in Equity Programs: Limited but Growing

The vast majority of companies are currently not using AI for equity programs, with 79% not utilizing it for any program. However, nearly a quarter of North American companies are leading the way.

AI applications, such as chatbots, are being explored. Chatbots are viewed positively by nearly half for handling equity-related inquiries. But overall, AI is not seen as increasing efficiency in equity programs at this stage. While close to half of the companies are unsure of AI’s future impact on compensation processes, about a third see potential for improvements in reporting and analytics. However, companies are especially concerned about reliability and accuracy. They therefore need to  emphasize the need for a balance between AI and human oversight and proper training.

"Study participants are particularly concerned about the reliability and accuracy of AI applications in the context of equity-based compensation and share purchase programs. Therefore, a balance between AI and human oversight and appropriate training seems necessary. It is important to recognize and exploit opportunities, but at the same time to reduce reservations and fears," says David Voggeser.

High Global Variation in Definition of Mobility

Across all economic regions, most companies have incorporated and explicitly defined formal expatriate assignments (1-2 years), permanent transfers, and short-term assignments within the scope of mobility. Commuters and business travelers are occasionally included, but by fewer companies.

European companies typically apply policies for the full term of the award, while companies from North America and ROW show a more balanced approach, either applying policies for the full term of the award or only through the year in which the assignee repatriates. The majority of companies (55%) engage third-party consultants for tax compliance, while the rest rely on local payroll teams or the parent company, with internal legal counsel playing a minor role.

Reference of the Survey Results

A summary of the key highlights and findings of the Global Equity Insights Survey is available at: hkp/// group - Global Equity Insights Survey 2024

Contact: Thomas Müller, Thomas.mueller@hkp.com, +49 (0)176 100 88 237