The NASPP Blog

I recently read that Kohl’s is granting a make-up stock option to the Chairman of the Board because the company “failed to notify him” that his options were expiring–back in 2004! See the story here. Now, instead of $5 million in options that expired in 2004, he is being given around 130% of value of stock options (which is more than twice as many shares) that expire in 2015. Sounds to me like in this case ignorance is not only bliss, it is highly profitable!

It got me to thinking, as a stock plan administrator how much communication do you need to provide, and what will you do if you haven’t provided it or the participant didn’t act on the information provided? I’ve certainly answered the phone on situations like this; where someone has let a large amount of money (admittedly, not the $5 million that the Kohl’s chairman apparently lost out on in 2004) slip away because they had not read their grant agreement and did not understand that the option to purchase stock didn’t last forever, or that it was cancelled when they left the company. They aren’t fun calls, either for the person who is realizing that they missed out or for the administrator who most likely can’t do anything for them. Also, there is a definite difference in how management feels about the situation if the person is still an active, valued contributor to the company vs. an employee who terminated years ago.

The fact is that most grant recipients do not read their grant document or will not understand what they are reading without additional education. To be fair, I can’t confirm that the grant document correctly showed the expiration date in the Kohl’s case or that there wasn’t some other communication that indicated the grant would still be exercisable in 2008. However, the situation does highlight how important it is to maintain consistency through all participant communications as well as implement a solid education program to keep participants informed. Remind the participants as often as you can that they absolutely need to read their grant agreement and that they will be responsible for understanding the terms and conditions! In addition, companies should be sure to have a policy in place on how it will handle situations where the grant recipient has, through their own inaction, gotten into a situation where they have lost the opportunity to exercise or vest in their shares.

Stock plan administrators should be in the loop on all employee communications policies that have anything to do with equity compensation. It’s a good idea to have a sit-down meeting or conference call with your recruiting, HR, compensation, and legal teams to make sure that everyone understands the importance of consistent communications. If offer letters in the U.S. include an equity compensation piece, they should always also include a disclaimer that the grant is subject to approval and that the terms and conditions of the grant will be included in the grant agreement, which will supersede anything on the offer letter. In other countries, you will most likely not want to include the equity piece at all in an offer letter to avoid entitlement issues (a simple disclaimer may not be enough). Make sure that recruiters are being educated not to say anything that may be considered a verbal contract regarding equity compensation and that your HR team has good talking points to answer employee questions and actively participate in employee education. Also, many brokers now notify account-holders when an option is set to expire. Take time to understand your broker(s) policy, but be careful when educating participants to avoid making any guarantees that the broker will notify them of expiring options.

For more tips and tricks on employee communications, read the “Communicating Stock Compensation: Approaching the Process Strategically” article in our Document Library. If you are looking to see how other companies are handling this sticky situation, check out our Option Expiration Quick Survey or the 2007 Stock Plan Design and Administration Survey.