Total Reward Statements and Equity Awards

The Rise of Total Reward Statements

Starting a few years ago, many companies embraced the use of Total Reward Statements (TRS) in which they tried to summarize all of the different compensation items paid to an employee in one statement, ostensibly to make it easier for an employee to see, at a glance, how much money they were actually making.  A TRS usually includes base salary, bonus payments, commission payments and, of course, equity awards.

Because only the parent company has all of the information regarding the various compensation items, it is the parent company that prepares and issues the TRS (typically by posting it on an intranet site), even for employees employed by (foreign) subsidiaries.

Equity Award and Local Employer Compensation Information Do Not Mix

For these employees, however, mixing information related to equity awards with information on compensation paid by the local employer is a bad idea.  As you may have heard me or one of my colleagues say repeatedly: the equity awards always should be communicated, administered and generally be kept as separate as possible from the employment relationship.  This is to mitigate the risk of various claims the employee otherwise might raise, such as joint employer liability (i.e., that the foreign parent is another de-facto employer that can be sued over grievances related to the employment relationship), vested rights and entitlement claims or increased severance claims (i.e., that the equity award income has to be factored in when calculating severance or other termination benefits).  If the equity awards are considered part of the employment relationship, it can also lead to a requirement to translate award documents into local language or to consult local works council before equity award programs can be implemented, modified or terminated.

Consequently, even though equity awards are undeniably part of the total incentive package, ideally, they should not be mentioned in a TRS which also covers compensation paid by the local employer.  Instead, they should be communicated separately by the parent company (i.e., the grantor of the equity awards).

Of course, communicating the equity awards separately somewhat defeats the purpose of the TRS, so invariably, HR will not go for this advice and push to keep all of the compensation items in one statement.

In this case, consider making certain changes to the TRS to make it clear that the equity awards are provided by the parent company and are separate from the compensation paid by the local employer.  This usually can be done by including disclaimer language in footnotes or elsewhere.

In addition, pay attention to how the value of the equity awards is communicated.  I have seen several TRS which set forth a dollar amount for equity awards which is based on the current share price of the underlying shares, without further explanation.  This is misleading and can create unrealistic expectations for the employees in case the awards are unvested.  It is important to be clear that the awards will be of value only if they vest (and, in the case of options, the employee exercises the options) and that the income that may eventually be realized can differ greatly from the current (estimated) value, due to share price fluctuation.

With these additional disclaimers and clarifications, the risks described above of mentioning equity awards and “local” compensation in one TRS can be mitigated.

Not All It’s Cracked Up To Be

As a side note, I have heard from several companies that TRS are not all what they hoped them to be.  First, many companies find it very challenging and labor intensive to keep the statements up-to-date (unless an automatic feed is implemented, which is also challenging).  Second, it seems employee engagement quickly fades, most likely because even with a TRS, it is difficult to assess total compensation at a glance (especially if it is comprised to a large extent by incentive compensation subject to performance conditions).

So, maybe you will be able to talk HR out of using a TRS altogether!

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