Posted on 11 Dec 2009
The alternative energy industry is considered one of the fastest growing segments in business, yet its equity compensation practices are behind those of historically high-growth technology and life sciences industries, according to a new analysis by Radford, an Aon Consulting company. Although investors believe that parallels can be drawn between the alternative energy industry to the early-stage Internet companies in the 1990s, equity granting practices of alternative energy companies measurably lag those firms in historical analysis. While Internet companies widely utilized stock options to motivate employees, equity is potentially underutilized in alternative energy companies, despite their similarities in growth potential and the human capital of knowledge workers required to realize that growth.
Radford, the leading provider of compensation market intelligence to technology and life sciences companies, examined current equity grant practices at 60 alternative energy companies, compared to those practices at 48 Internet companies from the 1990s, as well as current company practices at 463 technology, 28 contemporary Internet and 221 life sciences companies. According to the findings, employees in the alternative energy sector received about $3,870 each in equity value, which is about one-quarter that of contemporary Internet company employees, who received $14,860 in equity value. Employees at life sciences companies, meanwhile, received about $13,500 and those at technology companies received about $5,900.
"Stock options were a significant motivating factor for the employees during the Internet run-up, and the use of equity was an effective way of driving the growth that occurred in that industry at the time. The alternative energy companies represent not just the next possible Internet-like growth industry, but perhaps the solution to a larger problem - fossil fuel dependence - as well. Given all that's at stake, we would expect to see greater use of equity at these companies," said Matt Ward, senior vice president and study leader, Radford.
Radford's analysis also showed the differences in equity value delivered to employees were not in concert with the productivity levels they delivered to the company. When looking at productivity, as measured by revenue per employee, alternative energy industry employees delivered roughly the same revenue per employee ($255,250) as employees at life sciences companies ($256,100) and technology companies ($295,200). Meanwhile, Internet company employees account for about $526,800 each in revenue.
"Taking into consideration the tremendous amount of capital entering this sector, one would expect investors would want to see greater incentive alignment with performance than is currently shown in our research. Equally as important, those organizations with a greater focus on long-term incentives may earn a significant competitive advantage, as highly sought after employees will view those companies as destinations of choice. The success or failure of an organization in this industry is based heavily on its intellectual capital. Therefore, creating the right compensation mix may be a 'make or break' decision," said Ward.
To receive a copy of the Radford White Paper based on this analysis, "Equity Compensation Practices in the Alternative Energy Industry: Are We Under-Incenting This Critical Emerging Industry?" please e-mail firstname.lastname@example.org.
For more than 30 years, Radford has provided compensation market intelligence to the technology and life sciences industries. Global survey databases, which include 3.5 million incumbents, offer current, reliable data to 2,000+ clients. Leveraging Radford survey data, our thought-leading global Radford Consulting team creates tailored solutions for the toughest global business and compensation challenges facing companies at all stages of development. In addition to our consulting team, we also offer equity valuation assistance via Radford Valuation Services, and leading-edge market analyses and survey.