Understanding Non-Equity Incentive Plan Compensation: A Comprehensive Guide

Non-Equity Incentive Plan Compensation refers to a form of performance-based compensation that is not tied to the company's stock performance but rather to specific performance metrics or goals set by the company. This type of compensation is often used to reward key executives, such as CEOs, for achieving certain operational or financial objectives, including revenue targets, earnings before interest and taxes (EBIT), or other key performance indicators (KPIs).

Key Points About Non-Equity Incentive Plan Compensation

Performance-Based: Typically linked to the achievement of specific performance goals over a defined period, often annually. If the goals are met or exceeded, the executive receives a cash bonus or other forms of compensation. Structure: The structure can vary widely. Some plans may have thresholds, target levels, and maximum payouts, allowing for varying degrees of rewards based on performance. Comparison to Equity Compensation: Unlike equity compensation, which rewards executives based on the company's stock price performance (like stock options or restricted stock), non-equity incentives focus solely on operational or financial achievements. Regulatory Disclosure: Companies are required to disclose these compensation plans in their proxy statements, providing transparency to shareholders about how executives are rewarded for their performance. Alignment with Company Goals: These plans are designed to align the interests of executives with those of the company and its shareholders by incentivizing behaviors that lead to improved company performance.

What is Non-Equity Incentive Plan Compensation?

Non-Equity means that compensation is not in the form of company stock or debt, and Incentive Plan Compensation means that compensation is paid according to a plan approved by the Board of Directors.

The term can be seen as an oblique way of saying Cash Performance Bonus. The average CEO makes almost 1/5th of their annual compensation this way or more than twice the 8% of their comp package that comes in the form of salary. Since a straight bonus averages just 3% of CEO overall compensation, this allows the board to offer a lot more bonus money using an eye-glazing bit of financial jargon.

Examples of Non-Equity Incentive Plan Compensation

There are more complex NEIC structures that are essentially equity—such as phantom stock, stock appreciation rights (SARs), and management carve-outs—but these are structured in such a way that allows the company to pay out additional stock and stock options beyond the publicly-reported equity stake for the executive.

Non-Equity Incentive Plan Cash… Not Common Stock, Stock Options, or Other Form of Ownership Stake

Incentive Plan Preset specific quarterly and annual performance targets that pay the CEO more as the company meets and exceeds the board’s goals. Examples can include revenue growth, increased profitability, expanded market share, growth in market capitalization, and whatever side of a merger or acquisition the board expects the company to reach. The incentive could be 0 if profits are flat or the company posts a loss. The upside could be measured in tiers: 10% of CEO base comp if profits grow 1-10% over the previous period, 25% of base comp with profit growth between 11-19%, and so on.

Objectives of Non-Equity Performance Bonuses

The overall objective in equity and non-equity performance bonuses is the same: incentivize the CEO to ensure the company performs well financially, and for the CEO to get a bigger bonus when the corporation enjoys better results. Conversely, the CEO would receive less or nothing if the results are unsatisfactory.

Further Reading

Non-Equity Incentive Plans | JD Supra SEC Definition: Management Non-Equity Incentive Plan Equity Compensation | Investopedia