In Depth
Equity compensation encompasses all forms of pay delivered through company stock or stock-linked instruments rather than cash. For S&P 500 CEOs, equity typically constitutes 60-75% of total compensation, making it by far the largest component of the pay package. The primary forms of equity compensation are restricted stock units (RSUs), performance share units (PSUs), stock options, and restricted stock grants. Each vehicle has distinct characteristics that affect risk, alignment, and retention. RSUs provide the most certain value because they are worth the stock price at vesting regardless of performance. PSUs add a performance condition, making the ultimate value contingent on achieving specific targets. Stock options provide leverage — they are worthless if the stock price does not increase, but can be extremely valuable if the stock appreciates significantly. Restricted stock grants (distinct from RSUs) give the executive actual shares immediately, but those shares are subject to vesting restrictions and forfeiture risk. Companies design their equity mix based on their compensation philosophy, industry norms, and the specific behaviors they want to incentivize. A company focused on retention might emphasize time-vested RSUs, while a company focused on performance alignment might weight PSUs heavily. The grant-date fair value of equity awards, as reported in the Summary Compensation Table, is determined using financial models approved by the company's auditors. Share counting rules in equity incentive plans govern how many shares are available for future grants, and shareholders must approve new equity plans or amendments that increase the share pool.