The New Long-Term Incentive Paradigm–Conserving Share Usage Through Innovative Incentive Design by Myrna Hellerman, Sibson Consulting
The Dodd-Frank Act “Say-on-Pay” provision…something totally new? Not really. For years shareholders have had a voice in compensation decision making, especially through the power to approve incentive and equity compensation plans. They just haven’t used their power to its full potential. Dodd-Frank provides a clearer platform and framework to exercise this power.
Next year we will celebrate the “coming of age,” 18th anniversary of Section 162(m), the infamous “Million Dollar Cap” for non-performance-based compensation. Like Dodd-Frank, there was an expectation that Section 162(m) would “reel in” executive pay, create a greater alignment between pay and performance, and give the shareholder a “say on pay.” The logic was simple: “You lose deductibility of top executive pay if it exceeds $1 million unless the pay is earned under a shareholder approved performance-based incentive compensation plan.” In 2003 the SEC further strengthened shareholder’s “say on pay” by affirming the new NYSE and Nasdaq rules that expanded the shareholder approval requirement to equity compensation plans and amendments thereto.
So, does the existence of the formal Dodd-Frank Say-on-Pay Vote imply that earlier attempts to give shareholders a say on pay have been complete failures. Headline news over the years would suggest this to be so. However, we think not. Successful outcomes just don’t make the headlines. One of these formerly untold success stories will be presented at the 18th Annual NASPP Conference in September. The presentation, “The New Long-Term Incentive Paradigm–Conserving Share Usage Through Innovative Incentive Design,” provides an exemplar outcome in response to a pre-Dodd-Frank “say-on-pay” vote. The takeaways from this presentation will be valuable as organizations prepare for the more formal Say-on-Pay vote required under Dodd-Frank.
In 2005 stockholders rejected an additional share authorization at the 9,000+ employee Arthur J. Gallagher & Co due to burn-rate and dilution concerns. This “No” vote was unexpected at a company with generally shareholder-friendly, conservative pay practices. In response, the organization began a lengthy transformational journey that resulted in a new long-term incentive paradigm. The paradigm recognizes several key realities:
The voice of the shareholder is very powerful. Shareholders need to be continually educated about the company’s pay practices and deserve a reasoned response to their objections.
A purge of poor pay practices and a “diet” to get value transfer and burn-rates into line are not just part of a short-term solution. They are a way of life.
A culture of “ownership” in the long-term success of the organization can be preserved even when there is a paucity of equity. At Gallagher this was accomplished through the use of a uniquely designed, 162(m) compliant long-term cash incentive approach, which mirrors the risks and rewards of equity (this design will be detailed in the presentation).
Management must get comfortable with the difficult, prioritized decisions that are required to effectively manage long-term incentives.
The board, and especially the compensation committee, need to embrace a more intimate role in executive compensation decision making, especially with respect to long-term incentives. Management and the outside independent advisor must provide the education, transparency of information, and the analytics that allow the directors to be successful in this role.
The NASPP Conference presentation and the accompanying discussion will be lead by Myrna Hellerman (SVP, Sibson Consulting), Jon Minor (Sr. Consultant, Sibson Consulting) and Tom Paleka (VP Global Rewards, Arthur J. Gallagher)., three catalysts to Arthur J. Gallagher’s transformational journey that began because of a “say on pay” vote.
Last Wednesday, July 21, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, making Say-on-Pay votes mandatory for all public companies in the United States.
The New Say-on-Pay Vote When I first heard the phrase “Say-on-Pay,” I naively thought to myself, “What’s so new about that; haven’t we had “Say-on-“Pay” for stock compensation since 2003, when the NYSE and NASDAQ implemented rules requiring listed companies to submit virtually all stock plans to a shareholder vote?” Well, on Thursday of last week, I had the good fortune to attend the Silicon Valley NASPP chapter meeting, where Mike Andresino of Posternak Blankstein & Lund presented a summary of the new rules, along with David Wise and Sara Wells of Hay Group. In today’s blog, I present some of Mike’s comments regarding how these new rules differ from current law and practices.
What Exactly Are Shareholders Voting On?
Despite my initial oversimplification, this is actually a sea change for executive compensation in the United States. Shareholders will be voting on all compensation paid to NEOs, as disclosed in the proxy–cash bonuses, individual awards, exercise and award transactions, perks (including use of corporate aircraft)–the whole shebang. And it’s an all or nothing vote–a little scary when you think about it. If shareholders are really irritated about that huge award payout the former CEO received under his severance agreement when he left last year, they might express their displeasure by voting against all of this year’s executive pay. One grant or award transaction by an exec (or one perk) that is particularly irksome to shareholders and there goes the whole Say-on-Pay vote. There is some concern that shareholders may even use the Say-on-Pay vote to express displeasure over company practices or policies that have nothing to do with executive compensation.
Advisory Vote
Of course, it is just an advisory vote, so if shareholders do vote against executive pay, the company isn’t left unable to pay executives over the coming year. (Unlike votes on stock plans, which are NOT advisory–if shareholders vote down your stock plan, that means no more stock plan.) But I expect that most companies that receive a majority (or even a large percentage) of votes against their executive pay will be forced into a dialogue with shareholders to address their concerns (especially since the Dodd-Frank Act also gives shareholders the right to add their own director candidates to the proxy).
Frequency of Vote
And with shareholder approval of stock plans, the company has control over how often it puts a plan to a shareholder vote. With a large share reserve, an evergreen plan, share replenishment, and conservative share usage, companies may be able to put off seeking approval for new plans/shares. With Say-on-Pay, shareholders vote on how often they get to vote on executive pay; this could be an annual vote (and, in no event, can it be less than every three years).
Golden Parachute Arrangements
Shareholders will have to be permitted to vote on any pay related to a change-in-control that they haven’t already voted on under a prior Say-on-Pay vote. This was likely included in the bill in respond to recent media criticisms of awards made in anticipation of mergers–see my October 20, 2009 blog entry “The Next Big Options Scandal…or Not.” The proxy related to the merger will include a vote on the merger and a separate vote on any previously undisclosed golden parachute arrangements. It isn’t completely clear what this vote accomplishes since it is advisory only and, in some cases, the shareholders of the target may not even end up being shareholders in the new company.
More Information
We’re posting new memos on the Dodd-Frank Act every day in the NASPP’s Say-on-Pay Portal.
Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
The New Pay Legislation: Action Items With the new legislative pay reforms–particularly mandatory “Say-on-Pay” and the new “sleeper” internal pay equity disclosure–all eyes will be focused like never before on executive compensation practices (and the resulting proxy disclosures). You will need answers even before the SEC issues new rules and it is critical to have the best possible guidance. Free to registrants of the “18th Annual NASPP Conference,” “7th Annual Executive Compensation Conference,” and “5th Annual Proxy Disclosure Conference,” this pre-conference webcast on July 29 is the first step as part of the full Conferences that will provide the latest essential–and practical–implementation guidance that you need.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
I know that many of you are eagerly anticipating the 18th Annual NASPP Conference (I certainly am). To give you a taste of the topics that will be presented at the Conference, this week we begin a series of guest blog entries by Conference speakers. For our inaugural entry in this series, we feature Jennifer Namazi of Stock & Option Solutions on Finding and Foiling Fraud in Equity Compensation Plans.
Finding and Foiling Fraud in Equity Compensation Plans By Jennifer Namazi, Stock & Option Solutions
I’m really excited about our “Foiling Fraud” panel at the NASPP Conference because the issue of potential fraud is an interesting complexity, and let’s admit it, a mysteriously scandalous topic in the world of administering equity plans. While I’m sure we’d all like to believe the best about everyone, let’s be realistic–fraud does exist.
In recent years, we’ve been privy to several high profile fraud cases around equity plans as they played out in the media, some of which will be presented as case studies in our panel presentation. The great part is that we’re going to talk not only about what went wrong in these cases and how to detect and foil fraud, but we’ll also discuss how to prevent ever getting there in the first place.
When I first explored the various fraud cases, I was surprised to find out that most fraud is NOT planned carefully in advance, but rather the seizing of an opportunity at hand. I guess I envisioned fraud as something committed by shady characters that somehow slip through the hiring screening process. I changed my perspective when I read or watched several interviews from various people who got caught in the act–the vast majority appeared to be solid citizens living everyday lives and said they didn’t set out with the intention to commit fraud–it was that the situation presented a set of circumstances and they either eased themselves or jumped in. Hmmm, something to think about–note to self: “not all fraud starts out as a single blatant act.”
After digging into the case studies, I made my own conclusion that fraud occurs most often in cases where (let’s use the cliché here) you’d least expect it. When I say least expect it, I mean the type of fraud AND the characteristics of the person committing the fraud. As far as I can tell, there is no single “profile” that one could use to proactively screen and identify potential fraud artists. Even really benign and seemingly routine process areas, such as issuing control numbers at the time of a DWAC (as you’ll learn from one of our case studies), can present opportunity for fraud. I was amazed to learn how many times the immediate supervisor of the person who committed the fraud was simply astounded. It was implausible, right?
This is a point I think will apply to many of us–we have decent controls and checks and balances. The question is do we have enough of the right ones? Are we monitoring them at the right frequency and with the appropriate level of oversight? Do we have loopholes in areas we’ve never thought about? Is the segregation of duties structure conducive to fraud?
Make sure you join us at the NASPP Conference as we talk about types of fraud, case studies (mistakes leading to fraud and lessons learned), how to detect and unravel fraud, and–perhaps most importantly–how to shore up your practices to ensure that circumstances don’t present an opportunity for temptation. I’m looking forward to seeing everyone at the Conference! Enjoy a safe and relaxing summer (while keeping up with the NASPP blog, of course!).
Who doesn’t love a good mystery? Filled with intrigue and suspicious characters, Jennifer’s session, “Finding and Foiling Fraud in Equity Compensation Plans,” promises to be one of the most suspenseful panels at the 18th Annual NASPP Conference–don’t miss it! The Conference will be held from September 20-23 in Chicago. Register today!
Back in February, I blogged about tax rate increases in the UK. Now that we’ve gotten past the end of the UK tax year, it’s time to focus on the United States. Although not quite as dramatic, tax rates are expected to increase here beginning next year–yep, just six months from now.
What Did You Expect With a Democratic Administration?
The tax rates that are in effect now are a legacy of the Bush administration and are due to expire at the end of this year. As it stands now, all individual tax rates are expected to increase beginning in 2011. Ordinary income tax rates and short-term capital gains rates currently range from 10% to 35% and will increase to 15% to 39.6%. Long-term capital gains are currently taxed at 15%; this will increase to 20%.
In addition, the tax rate on qualified dividends will increase from 15% to the new ordinary income tax rates. This isn’t such a big deal for stock compensation, since dividends on unvested stock awards are usually already taxed at ordinary income tax rates, but where employees are receiving dividends on vested stock that they hold, this could be important for them to know.
Prior limitations on personal exemptions and itemized deductions will also be reinstated and the estate tax will be restored.
Will Congress Save Us From These Taxes?
Wholesale relief is not expected and an act of Congress is required to extend any of the Bush tax cuts. As daunting as that sounds, I understand that the Obama administration has indicated support for extending the current tax rates for low to middle-income taxpayers. It seems fairly certain, however, that the expected increases in tax rates that apply at higher income levels will happen. Ditto for the increase in the long-term capital gains rate, reductions in allowable personal exemptions, and limitations on itemized deductions. Short-term capital gains are taxed at the same rates as ordinary income, so whatever happens to ordinary income rates will also apply to short-term capital gains. There seems to be some question about what will happen to the qualified dividend rate.
What Isn’t Changing?
The two tax rates that aren’t changing are the rates that apply under the Alternative Minimum Tax–this may be the first good news we’ve heard for ISOs in a long time. If ordinary income tax rates increase but AMT rates stay the same, then ISO exercises will be less likely to trigger AMT liability. And with ordinary income tax rates increasing, holding ISO shares long enough to convert the spread at exercise to a long-term capital gain may be more tempting for employees.
Tax Withholding Rates
Tax withholding rates for federal income tax purposes are based on the marginal income tax rates so when those rates increase, so do the withholding rates that apply to compensation.
There are two rates that apply to supplemental payments (which include NQSO exercises and vesting/payout events for awards):
If all the current tax rates are allowed to expire, the optional flat rate that can be applied to supplemental payments will increase from 25% to 28% (some of you may remember that this is what the rate used to be, nine years or so ago).
The mandatory rate that applies to supplemental payments to individuals that have already received more than $1,000,000 in supplemental payments during the year is the maximum individual tax rate–which is expected to increase to 39.6%.
For companies that allow share withholding on restricted stock and unit awards (most of you that grant these awards), these expected changes could have implications at the corporate level, not just the individual level, since the amount of cash the company will need to make available to cover the tax payments will increase.
More to Come?
And this is just the beginning. Additional tax rate increases will go into effect in 2013 to fund President Obama’s health care reform package.
Planning for the Tax Increases
Just as with the UK increases I blogged about in February, advance planning and employee communication is key. Employees that have accrued considerable appreciation in NQSOs may want to exercise this year, while tax rates are lower. Employees that hold stock that has appreciated significantly in value may want to consider selling–although here the decision is complicated by the different tax rates that may apply depending on how long the shares have been held (i.e., short-term vs. long-term capital gains rates).
The good news is that the NASPP has scheduled a webcast to review the impending tax rate changes and planning considerations–be sure to tune in next Tuesday, July 27, for “How Upcoming Tax Rate Changes Impact Your Stock Plans” with Bill Dunn and Sheryl Eighner from PricewaterhouseCoopers.
18th Annual NASPP Conference Hear about all the latest tax developments impacting stock and executive compensation–straight from the IRS and Treasury–at the 18th Annual NASPP Conference. The Conference will be held from September 20-23 in Chicago; register today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Stock plan professionals are often tasked with far more than managing equity compensation programs. In many companies, one responsibility that the stock plan team is responsible for is the design or content of the equity compensation portion of the company’s intranet. You don’t necessarily need to be tech savvy or a web design guru to put together a set of stellar intranet pages.
Navigation System
Regardless of where on your intranet the links to your stock plan information is housed, navigation is the key to success. Try to think like a first-time visitor to your intranet and make the stock plan information accessible from any location that participants might navigate to when attempting to locate your stock plans pages. It’s a great idea for links to be in multiple locations such as where HR, compensation, and benefits information is available.
When designing a navigation system for your stock plan services information, consider how many “clicks” an employee will need to make to reach the most important information. If it’s more than three clicks away, you are likely to lose your audience. When employees can’t find the information they are looking for easily on their own, they’ll resort to asking for answers from their peers, HR, their managers, or you.
Location, Location, Location!
Real estate on your intranet home page is precious and priority must be given to the features and topics that should be most important to your employees. If your company has a broad-based equity offering, then stock plan services should be accessible from the intranet landing page. On the other hand, if you only offer equity compensation to only a segment of your employee population, it may not be appropriate.
Once participants do navigate to the stock plan services landing page, the focal points of the page will influence the accessibility of the information. A simple design with a clear hierarchy of importance on topics will help direct your participants to the information you think should be the most crucial. For example, if you want to have a high participation rate on your ESPP, information on how to enroll should be a key focal point. You can even keep a prime location on your landing page open for featured items so that periodically relevant information is regularly available in a prominent space without modifying navigation that participants have already become accustomed to.
Branding Your Product
Internal branding works in two ways. First, it’s important for the stock plan services pages to represent the company brand. This means upholding the image and culture of your company as well as staying cohesive with the rest of the intranet site. This is true for both the general visual impact of your pages as well as the tone and manner in which information is presented.
Second, maintaining the stock plan services branding throughout the intranet boosts the clarity of your equity compensation program. This can be done by keeping consistent verbiage anywhere stock plans are discussed and repeating key phrases. Remember that stock plans may be discussed on pages that are created and maintained by other departments. To ensure your branding is on target, know where you are mentioned within the intranet site and stay in the loop on any changes that are made.
Usability Testing
One of the best ways to know how your intranet site measures up is to do usability testing. Of course, there are people and companies that you can pay to get professional quality testing on your web design, but there isn’t necessarily a need to do that. You can get real useful feedback by getting your employees involved. Get employee groups on a stock plan services scavenger hunt, navigating the intranet to find specific pieces of information. To get some great numbers on your usability, survey new employees on the ease of use and then resurvey them after one year. Last, test all the links periodically to make sure they still work.
The May-June 2010 Employee Ownership Report newsletter, published by the NCEO, features a case study of Thomson-Shore, an ESOP company that effectively uses peers to educate employees about the ESOP. Although Thomson-Shore’s education program relates to an ESOP, I think that a number of their strategies could be applied to an ESPP, stock option, or stock award program.
Communications Committee Thomson-Shore formed a committee of employees, called the “communications committee” to oversee the education program. Members of the committee must meet a minimum service requirement and be self-nominated–this is important because, by self-nominating, the members demonstrate commitment and enthusiasm for the program. Nine of the ten committee members are non-managers–also important because employees tend to trust their peers more than they trust managers, and especially more than they trust some corporate HR goon (e.g., you, the stock plan administrator).
Thomson-Shore has only 205 employees (I think at just one location). Larger companies might need a larger committee (and budget); companies with multiple locations might consider having someone from each location represented on the committee.
Educational Activities
The committee oversees a number of different programs to promote the plan, including:
Presentations about the plan at company-wide quarterly meetings.
Leading small-group discussions when plan statements are released and being available for one-on-one meetings with employees.
Leading informal “Lunch-N-Learn” sessions on various topics related to the plan.
The company also provides a number of other educational opportunities, including “ESOP-oly,” a game about the plan, and a skit describing the plan based on the Wizard of Oz (it would be fun to see that at a future NCEO Conference).
Employee Ownership Month
The company also dedicates an entire month to promoting the plan, which includes numerous learning activities and different themes every week. This could easily be done on a smaller scale–say an “ESPP Week” at the start of each ESPP enrollment period. Or, companies that offer many different stock compensation programs, might have “Stock Benefits Month,” focusing on a different plan each week.
Some of the things you might do during this period include live and online presentations, games and surveys, staffing a table in the cafeteria where employees can stop by with questions (be sure to hand out tchotchkas to encourage people drop by), highlighting a different FAQ every day via email, and featuring podcasts or printed interviews with plan participants (posted to the company intranet).
Committee Education
One of the committee’s key responsibilities is to educate itself about the plan. For the first twelve months after it was formed, the committee did nothing but learn about the plan. On a yearly basis, the committee holds a two-day retreat to plan activities for the year.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Fireworks, watermelon, and a mild case of sunburn–yes, the Independence Day celebrations are behind me for another year. Of course, I can’t think about the Declaration of Independence without thinking about John Hancock’s bold, stylish signature and all that it symbolizes.
A signature represents the authenticity of an agreement or statement. The idea is to find something unique to a particular individual that proves his or her identity. In the world of equity compensation, we use signatures to authenticate that our participants have agreed to terms and conditions associated with our equity compensation programs.
Electronic Signature
As online grant acceptance becomes more common, companies should be addressing the issue of electronic signature. Online grant acceptance certainly has the potential to be more time-efficient, trackable, and cost-effective than distributing paper grant agreements and collecting and archiving the original signature records. However, the governing principles for the use of electronic or digital signatures are not universal.
Understanding Jurisdiction
Many countries, including the U.S., have regulations that recognize the legitimacy of the use of an electronic signature in executing official agreements. The requirements for authenticating an electronic signature may differ between countries, states, provinces, and cantons even if there is some form of applicable federal legislation. In the U.S., all 50 states have some form of electronic signature regulations; 47 have adopted the Uniform Electronic Transactions Act (EUTA). For information on electronic signature outside the U.S., refer to the Country Guides or regulatory guide matrices available on our Global Stock Plans portal.
The Technology Battle
There aren’t many areas in equity compensation where technology availability is readily given the ability to influence policy, but electronic grant acceptance could be one. A quick internet search today yielded all sorts of results for companies that authenticate a digital signature with technological breakthroughs like special pens, unique algorithms, or thumbprint/iris/DNA scans. While you won’t necessarily need to fully understand all the technical jargon behind the technology that supports your company’s electronic grant acceptance (or be requiring a blood sample from employees any time soon), it is important to know the general process steps that are available to you.
For example, can you prove that a participant has received a statement, opened a document, or accessed his or her account? Can you require that each document posted to an electronic agreement has been opened before the entire agreement may be accepted? What about requiring the participant to scroll through the documents? Is the same process available for all forms of equity compensation (including ESPP enrollment)?
Practical Application
Once you know exactly what control you have over the electronic grant acceptance process, you can identify the jurisdictions where the technology can support the authentication requirements. You may have some countries where the requirements are more rigorous than others. Your company will need to decide if the overall company policy for grant acceptance will require all participants to accept based on the same requirements or if you will customize the process for different jurisdictions. For locations where your legal advisors have advised against the use of online grant acceptance, you may still be able to use online document delivery where participants sign and return just the grant notice. To see how other companies are addressing this issue, check out our 2008 International Stock Plan Design and Administration Survey, cosponsored by Deloitte.
With this being the week after a holiday (and, for many, the first day back after a long weekend), I thought something a little lighter might be in order for the blog. So today I feature another entry from John Hammond of AST Equity Plan Solutions and poet laureate of the NASPP blog.
The Email By John Hammond
The email hit my inbox and I wept a tiny tear The email that I knew would come had confirmed my greatest fears The age of innocence long forgot – the days were simpler then Back when I set foot in this place in 1997.
I was a stock vet of two years plus, hired on the spot Seemed like a great deal at the time with the options that I got The stock went nuts at first, but you know how it ends I stuck it out when times got tough, me and several friends
When I started, I cleaned up shop–of the basics they were remiss My stock plan shelves are sure to have a bobble-headed Elvis And next to Elvis on that shelf in a spot almost as great Is my stock plan procedure manual, a beacon strong and straight
And this manual has been wonderful, it helped through thick and thin The three splits in two years were huge–the one stock swap that I did It’s been exterminator–desk de-wobbler–I am so glad I penned it A procedure manual’s a wonderful thing, I highly recommend it
Back to the beginning of my poem–that email that made me cry Was from a woman in IA who’d like to watch me die We have a history outside of work, a few years back we dated Who knew a break up over fax would be so ill-fated
The email started innocent–“Hello John, How are you?” But the subject line had told it all: “Procedural Review” She knew I ran a loose ship, but she never seemed to catch me And she’s tried a lot since getting the “it’s not you…it’s me” facsimile
In the past, IA looked at transactions and events My captive broker dollars had been wonderfully spent I showed them a SAS-70, though I know they never read it I made that mistake a few years back and thoroughly regret it
She copied nine people on the email–of sarcasm I am a fan (That’s how many people saw that fax before it hit her hands) Of course she knew I’d get the jab–she even went one better She wrote, “I really respect what you do”–a sentence from my letter
So each procedure she’ll review controls on how we do stuff “The scandals have brought a greater need–no measure seems enough” She’s been studying for a while to find my Achilles heel She figured out procedures and I think my fate is sealed
See, that manual that I use so much…I am exaggerating It was desk de-wobbler for 18 months, if I’m not mistaken So she has me where she wants me–internal audit heaven I must confess the last time they were changed was ’97
My excuses for not updating is like it is for many We changed the way we did things just far too frequently It always seemed best to wait until projects had finished But then I’d start a bigger one and its importance would diminish
We’ve had 14 acquisitions, and sold five units in that time We’ve had two broker changes and those projects were all mine I’m making no excuses, you all know how I feel It’s just my procedures have never been a very squeaky wheel
So the chess game has begun, but she already has my queen The bishops, rooks and pawns and that little horsy thing The meeting is in two days–checkmate’s what it’s about Just trying to come up with any way… that I could ask her out.
18th Annual NASPP Conference Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Restricted stock units and awards carry a unique risk when it comes to grant acceptance. It’s easiest to understand this risk in contrast to stock options. In most countries and situations, the taxable event on a stock option is the exercise. Employees must personally take action in order to exercise a stock option, which gives companies the opportunity to have their undivided attention when it comes to grant acceptance and simply prevent exercise until the grant has been signed. Restricted stock awards and units, on the other hand, are taxed on either the vest date or even at grant (depending on the country and circumstances). For the purpose of simplification, I’m going to focus on RSUs granted in the U.S. that do not have accelerated or continued vesting after retirement.
Policy #1: Time’s Up!
Some companies take a conservative approach to this issue by actually enforcing a grant acceptance requirement with a policy under which employees forfeit their grants if acceptance isn’t completed within a specific timeframe. In this approach, the highest risk is in ensuring adequate communication regarding the timeframe and consequences of not accepting the grants. In addition to including a warning in all communications leading up to the grant, it’s a good idea to also send out reminders to employees as they approach the deadline for acceptance.
Policy #2: It’s Yours Whether You Know it or Not
Some companies default to the philosophy that grants will continue to vest regardless of the grant acceptance status, even if they have a policy that theoretically requires grant acceptance without actually enforcing it. Hopefully, this is a well thought-out policy and not just a head-in-the-sand reaction to the issue of grant acceptance. For example, it could be that the comany’s legal team concluded that allowing shares to vest before the terms and conditions have been accepted poses less risk to the company than cancelling unaccepted grants. Regardless of the reason behind adopting this policy, the best way to make it effective is to make sure that grant documents, communications, and company policy accommodate how tax withholding is executed. The smart approach is to have a default tax withholding method which does not require action by the employee such as share withholding. Another advantage of share withholding over other methods is that, in the event the employee ultimately wants to decline the grant, the odds of being able to “unravel” the vest are much higher.
Policy #3: What?!
The riskiest approach of all is to ignore the issue until it’s too late. Of course, it’s entirely tongue-in-cheek to call this a policy at all. A company might fall into this situation because of poor planning, inadequate documentation, or a sudden increase in the number of RSU recipients. This could lead to a situation where taxes are due, but the company has no way to collect them because there either isn’t a default tax withholding method, or the default isn’t possible without action from the employee. Companies that find themselves in this position must scramble to get grant acceptance and/or collect taxes, possibly delaying the tax remittance or actual delivery of shares. Because it’s likely not possible to consider a late delivery of shares as a delay in constructive receipt of the shares in, delayed tax remittance could result in penalties incurred by the company.