Long-Term Restricted Stock Compensation
Align executives with durable relative performance through held stock
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 97%
The model gives an executive a strong cash salary plus restricted shares rather than options or a maze of annual bonuses. The executive must retain the shares until roughly five years after leaving the company, extending exposure beyond the decisions and accounting periods managed during their tenure. Because ordinary market appreciation can make almost any stock rise, vesting also depends on relative performance: if the shares fail to beat the S&P 500 or another suitable benchmark over the holding period, part of the award is forfeited. This creates genuine downside, rewards durable results, and reduces the temptation to maximize a single annual metric. Clifford pairs the design with a possible luxury tax on excessive alternative compensation, creating a financial reason for companies to adopt it.
Origin
Stephen Clifford proposed this simpler alternative after observing that options offered executives upside without equivalent downside and rewarded broad market movements. He developed it as a replacement for consultant-driven packages. Extracted from Masters in Business.
Core principles
- 01Executives are already motivated; compensation should channel that motivation
- 02Ownership requires exposure to both gains and losses
- 03Long holding periods discourage short-term extraction
- 04Relative performance separates management contribution from broad market movement
- 05Simple incentives are harder to game than sprawling scorecards
How to run it
- 1
Set a sufficient cash salary
Choose a transparent salary that compensates the executive well without making short-term targets necessary for ordinary financial security. Keep the amount bounded and defensible to shareholders.
Pro tip Explain the salary using role scope and internal equity rather than CEO peer inflation.
Watch out An unnecessarily low salary can become an excuse for oversized incentive awards.
- 2
Grant restricted shares
Use actual restricted stock so the executive participates in both appreciation and depreciation. Avoid options that can expire worthless without imposing a comparable loss.
Pro tip Express the grant as a meaningful long-term ownership position.
Watch out Do not reprice the award after poor performance.
- 3
Extend the holding period
Require the executive to retain the stock throughout employment and for approximately five years after departure. This keeps earlier decisions connected to later consequences.
Pro tip Define gradual release rules in advance for liquidity and estate-planning needs.
Watch out A holding period ending on the departure date permits short-term decisions before an exit.
- 4
Choose a relative benchmark
Select the S&P 500 or another credible index representing the returns shareholders could earn elsewhere. Measure results over the full holding period.
Pro tip Use a sector benchmark as a secondary check when broad-market comparison would be misleading.
Watch out An easily manipulated custom peer set recreates the original benchmarking problem.
- 5
Apply forfeiture symmetrically
Forfeit a defined portion of restricted shares when the company underperforms the benchmark. Preserve meaningful upside only when shareholders receive competitive long-term results.
Pro tip Specify the calculation and forfeiture percentage before performance begins.
Watch out Discretionary waivers after underperformance destroy alignment.
- 6
Count the full economic cost
Report salary, shares, benefits, and realized equity value as compensation. Evaluate dilution or repurchase costs borne by shareholders.
Pro tip Show grant-date and realized values together for transparency.
Watch out Do not treat option exercise gains as if they came from outside the company.
In the wild
A board hires a CEO for a three-year turnaround, pays a fixed salary, and grants restricted shares that remain locked for five years after departure. Instead of rewarding first-year accounting gains, the board compares the eventual shareholder return with the S&P 500. Half of the restricted award is forfeited if the company fails to outperform.
→ The CEO has reason to improve the durable business rather than manufacture an annual bonus result.
A company replaces options with held restricted stock and a relative-return test. Repurchasing shares may lift the price temporarily, but it cannot guarantee an award because the company must still outperform the benchmark over a long period and the executive cannot sell immediately after leaving.
→ The compensation design makes short-lived price support less attractive than sustained competitive performance.
Common mistakes
Calling options ownership
Options provide upside while limiting downside and may be repriced after losses. Restricted shares create a more authentic ownership exposure.
Ending restrictions at departure
Immediate liquidity lets an executive escape delayed consequences. Extend the holding requirement beyond the executive's tenure.
Rewarding absolute market gains
A rising market or sector can lift a poorly performing company. Use a relative benchmark to distinguish market movement from company performance.
Is it for you?
Best for
It is best for boards designing senior-executive compensation at established public companies.
Not ideal for
It is not ideal where an appropriate long-term benchmark cannot be defined or executives cannot legally hold company equity.
From the transcript
“My My system is you get a salary pretty good salt, you know.”
“To hold that stock until about five years after they've retired, after they've not even after they've left the company, after after they've left after…”
“That stock has to perform better than the SMP five really lose half of it.”
From the episode
Steven Clifford Says You Don't Need a Compensation Consultant
Steven Clifford