Hybrid Awards: The Next Generation of Performance-Based Equity

Performance-based equity is at a crossroads. Investors are pushing for tighter alignment between pay and shareholder value creation. At the same time, executives are demanding better line of sight into their awards. This creates potential problems for both standalone total shareholder return (TSR) awards (which offer weak line of sight) and standalone financial metrics (which may inadvertently yield pay-for-performance disconnects).

An elegant solution? Hybrid awards. These awards combine a financial (or operational) metric with a TSR provision, in which TSR can be either an independent metric or a modifier. The versatility of hybrid award designs is one of their most compelling advantages.

In this issue brief, updated for 2019, we explain what hybrid awards are and where they might make sense. Since hybrids have many variants, we also delve into ways to structure them so they fit within your compensation and broader business strategy. Finally, we explain the ASC 718 accounting model for different hybrid award designs, emphasizing that flexibility brings accounting complexity.