I was fortunate to be the moderator for one of the Conference sessions, “QUALCOMM and Microsoft: Gold Standards in Employee Communication.” It was very exciting to see all the top-notch communications policies and practices in place at these two companies! I can’t share them all with you in just one blog entry, but today I share my absolute favorites.
Custom Alerts
Custom communications are a fantastic tool for alerting employees to important events or necessary actions. What impressed me the most about the alert systems that used by both of these companies is that they are able to send out alerts for upcoming events from an internal email address. Your broker may be able to help with some or all of these alerts. However, the cool thing about taking it in-house is that when essential messages come directly from the stock plan services team, employees are trained to pay attention to both their equity compensation and other communications from the team.
There are a number of alerts and notifications that may be useful to employees. These three really stood out:
Countdown to Grant Acceptance Deadline
If you have a grant acceptance policy with teeth (e.g.; recipients forfeit the grant if not accepted within a specific timeframe), this particular alert is particularly important. Even if there are no defined consequences for failure to accept a grant, reminding an employee periodically that there is a grant that requires acceptance is a best practice. Targeting employees who have this on their “to do list” greatly increases the odds that they will complete the grant acceptance process.
Upcoming RSU Vest
An upcoming RSU vest is a time for planning, both for the stock plan services team and the employee. Including action items in an alert to employees helps them prepare. If there are any choices or actions that have a deadline (like broker selection, tax payment method, or grant acceptance), this type of alert may be your last chance to get their attention.
Unexercised Option Expiration
An automated alert sent directly to employees notifying them of an in-the-money option that is about to expire is great for them and can reduce risk for the company. Notifying them of a deeply underwater option that is about to expire, on the other hand, is just rubbing salt in the wound. Create parameters that weed out the options that have no hope of being in the money before expiration and you’ve got yourself a stellar communications practice!
Rolling out a new plan
Many companies are changing the way they look at equity compensation. This presentation offers many unique practices for rolling out a new plan or compensation philosophy to employees. If your company is considering changing the compensation mix, introducing a new equity compensation vehicle, or expanding performance grants to a larger population, this presentation has some essential tips for you. These three ideas were my favorites:
Blog
This one really is timeless. Having information available on the intranet is great. Actually, it’s essential in my book. A blog that employees can either subscribe to or go for the latest updates and archived of information and FAQs gives you a forum that is dynamic and current. Implement it when rolling out something new, and keep it up to feed employees information in bite-sized pieces later on!
Webcasts by Location
Again, this is another idea that is fantastic for communicating a new plan, but doubles as an ongoing tool that is especially helpful for new hires. Webcasts can be saved for download on the intranet or aired at special meetings or new hire orientations. Customizing the information to fit each country or location, including translation if necessary, really personalizes equity compensation in a way that one generic presentation simply can’t. This way, employees will see grant sizes, tax implications, and brokerage information that is applicable to them.
Practice Communications
I was totally tickled by this idea! You start by creating focus groups to find out what verbiage and format gets the best results. Then, test out your dissemination process on another group. The example from the presentation is a “cascading” communications strategy, an advanced version of “train the trainer”. The information starts with the VPs and moves on down the organizational chart with each level speaking to the employees directly under them. This can be a highly effective communications strategy, but it could turn out like a bad game of “telephone.” Taking a dry run lets you see what your end result is with your test group and gives you time to make necessary adjustments before implementing the communication process for the entire company.
With the NASPP Conference just barely behind us, today I highlight some tips I picked up on working with your lawyers from one of the sessions at the Conference. While most of us dread having to run projects past legal, the fact is that your lawyers (both in-house and outside counsel) can be an important and helpful member of your team, as demonstrated by the session “Face Your Demons: How You and Your Stock Plan Lawyer Can Work Together More Effectively” (a complete production with skits, props, and even audience participation, the session also demonstrated that even lawyers can have a sense of humor).
Face Your Demons: How You and Your Stock Plan Lawyer Can Work Together More Effectively
Negotiating Vendor Service Agreements / Business Contracts
Your lawyers provide valuable assistance in reviewing vendor service contracts. For one thing, they are probably better at reading fine print than you are (and you don’t really want to read those contracts yourself anyway, do you)?
The salesperson may present the contract as a form agreement, but this is rarely the case. Your lawyers can spot important service limitations that might impact your business–such as limited customer support hours–or gaps in the services that are provided that might later prove critical and can help you modify the contract to better meet your needs.
Lawyers also make excellent partners in negotiations. While many of us are uncomfortable with negotiating, lawyers are typically good at it. Let them play the bad cop to your good cop and take some of the pressure off yourself.
Reduce Exposure of Audits and Litigation / Secure Better Value from Outside Counsel
Of course, one of the tasks lawyers do best is compliance–look to your lawyers for assistance with understanding the potential risk of an audit or litigation–including the likelihood of such an event occurring, possible penalties, and even “softer” impacts, such as public perception and employee morale. This allows you to make informed decisions when evaluating procedures and plan designs. Should you become aware of a compliance failure, your lawyers should be one of your first phone calls (after your manager, of course); they can help you assess the gravity of the situation and strategize an appropriate response.
And, because your lawyers are working with many different clients (and also know other lawyers that have lots of clients), they can be a valuable source of information on industry trends and best practices. Before deciding on a process or design, check with outside counsel to find out if there is a better way.
Solicit More Proactive Legal Advice
When implementing new plans or programs, don’t wait until it’s too late to talk to your lawyers. Get their input early in the process, while you can use their input to shape the program (e.g., making sure there aren’t any unexpected compliance pitfalls or better approaches). And don’t be afraid to push back–working with your lawyers should be a back and forth process.
Navigate Evolving International Issues
I’ve said it before, but it bears repeating–a global stock plan is not a do-it-yourself project. No matter how few employees or countries are involved, never offer stock compensation to non-U.S. employees without consulting outside counsel. (Think about it, you would never implement a plan in the United States, even for just a handful of employees, without legal assistance. The laws aren’t any less complex outside the United States.)
In addition to seeking their advice when new programs are implemented, consider meeting with your outside counsel on a regular basis (e.g., quarterly) to review developments outside the United States that might impact your plans so you can determine if further research is needed.
It’s Renewal Time All NASPP memberships expire on a calendar-year basis. Renew your membership today and avoid the last minute rush on December 31.
Join Now and Get Three Months Free! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. Tell all your friends!
Don’t Miss Out–Conference Audio Available If you weren’t able to attend the Conference or did attend but couldn’t get to all the sessions you wanted to (and with over 40 sessions, who could?), you can download the audio from any and all sessions in MP3 format. Purchase just the sessions you want or save by purchasing a package of sessions.
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.
First, let me just say that this city is fabulous; there is really only one acceptable reason to not be out in it, and that is the amazing array of powerhouse presenters at our Conference. Today is the final day of sessions and we’re packing it in with the hottest topics right up until the last minute. Whether you’re looking for stock plan administrative tips, the basics of tax accounting or proxy statements, ideas for navigating global hot spots, or a better understating of risk mitigation; today will have what you need.
Conference Session Audio
I am already looking forward to the Conference audio. Downloadable in MP3 format, the audio is an invaluable resource as both a review for the sessions I did attend and as a way to catch up on the sessions that I couldn’t view live. If you weren’t able to be with us here in Chicago, or you missed an important session, you don’t have to miss out completely. Purchase the audio accompaniment to the materials–you can access just one session, or take advantage of our package deals!
More Scenes from the Conference
The NASPP Conference is a one-of-a-kind opportunity to keep current on the most important issues, research service solutions, and network. Here are some highlights from the past couple days. (Click each thumbnail to see a full-size version of the picture.)
There are always exciting evening events hosted by industry leaders. Tuesday, the Cubs played the Giants in spite of a very impressive thunderstorm that almost rained out the game. Several events offered guests a view of Wrigley field–this particular view was from Fidelity’s booth.
The Exhibit Hall brings all the top service providers together in one place. I spent a lot of time grilling everyone on their 6039 solutions! Of course, there are always cool tchotchkes, too. These are laughing pens from ICM Corporate Plan Services.
I’m blogging live from the “18th Annual NASPP Conference” in Chicago, which is a phenomenal success, with a full line-up of the best and the brightest speakers in the industry and close to 2,000 attendees. Today is the first day of the Conference, so I thought I would share some scenes from the pre-Conference programs and last night’s opening reception with my readers.
The Conference started off this morning with a keynote presentation featuring a lively panel on executive compensation. The panelists included well-respected directors Brad Anderson, Vice Chair and Former CEO of Best Buy and Bob Denham, Former CEO of Salomon, Director of Chevron Corp. and Partner of Munger, Tolles & Olson LLP, along with John Olson of Gibson, Dunn & Crutcher and Jesse Brill, Chair of the NASPP and CompensationStandards.com. One theme that emerged from the panel is the idea of CEOs forgoing compensation that is excessive or inappropriate or so that additional compensation, such as stock, can be delivered to employees.
Scenes from the 18th Annual NASPP Conference With over 40 sessions, the Conference will be chock full of practical guidance, best practices, and critical updates. Here are a few pictures so you can see all the excitement. (Click each thumbnail to see a full-size version of the picture.)
There are a lot of people here this year–as you can see by the packed exhibit hall during the opening reception.
Feats of acrobatic prowess were performed in Computershare’s booth in the exhibit hall–I’m referring to actual acrobatics, in addition, of course, to their flexible and innovative solutions for stock plan management that were also on display.
The Morgan Stanley Smith Barney booth is in the center of all the excitement and a popular stop for reception attendees.
Baker & McKenzie featured an unique giveaway in their Conference booth–sure to be of assistance in managing global stock compensation.
Don’t Miss Out–Audio Available If you aren’t able to attend the Conference or are here in Chicago but can’t get to all the sessions you’d like (with over 40, who could?), you can download the audio from any and all sessions in MP3 format. Purchase just the sessions you want or save by purchasing a package of sessions.
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.
Ownership guidelines (i.e., policies that place requirements on how many or how long shares of company stock are held by executives) are a way of ensuring that executives have an adequate amount of “skin in the game” when it comes to the long-term success of the company. Equity compensation for executives inherently boosts a personal interest in the company’s growth–the higher the stock price, the higher the reward. However, it can also come with the risk that executives may be prone to more high-stakes behavior that results in short-term returns instead of long-term growth.
Much of the legislation and regulations that has been introduced or finalized over the past year has incorporated some component of risk management and/or “Say-on-Pay.” I suspect that this will result in not only more companies that initiate some form of stock ownership guidelines, but also change the type of policies that we see. Companies must disclose any existing stock ownership policies–shareholders are likely to be on the look for them as they prepare to vote for or against executive compensation.
Types of Ownership Policies
There are basically two ways in which a company can regulate share ownership: how much and how long. This study, published on the 13th by Frederic W. Cook & Co, shows that the most popular policy to be a straight-forward “how much” approach: requiring the executive to hold a minimum amount of shares based a value equal to a multiple of cash salary, a specific number of shares, or a percentage of net profit shares. Unfortunately, this “traditional” ownership policy alone doesn’t necessarily provide the long-term focus that shareholders are looking for, especially if executives may simply leave the company and cash out.
Imposing a holding period on exercised/vested shares extends the amount of time executives are impacted by strategic decisions they make today. Holding periods are typically placed on a percentage of the net shares from transactions. They may range from one year from the transaction date to a period after retirement/termination. (The most popular holding period found in the Frederic W. Cook & Co. study was one year–I’m curious to see what next year’s study will show.)
RiskMetrics Group
The RiskMetrics Group launched its Governance Risk Indicators TM (GRId) in March of this year. The rating system in the GRId supports both types of ownership policy, with the highest score going to policies that require a value of shares at 6x salary to be held and a holding period on at least 50% of net profit shares that goes to or beyond retirement/termination.
7th Annual Executive Compensation Conference
If you’ll be in Chicago next week for our 18th Annual NASPP Conference, you’ll have plenty of opportunities to take in great sessions on risk management & “Say-on-Pay”. Also, don’t forget that your registration to the NASPP Conference includes access to the 7th Annual Executive Compensation Conference, which boasts a special “Say-on-Pay” track of panels and sessions addressing executive and director share ownership policies.
If you can’t make the Conferences in person, or you find that you are torn between multiple sessions, don’t forget that we will be recording all the sessions. You will be able to purchase the recorded webcasts individually, as a custom package of five sessions, or get access to the entire set. Even better, it’s not too late to take advantage of the 10% discount!
Today I discuss two completely unrelated, but blog-worthy, developments: 1) A recent development in the accounting treatment of share withholding under IFRS 2 and 2) Updated electronic filing specifications for Section 6039 returns.
Share Withholding: The More Things Change, the More They Stay the Same We received an alert from PricewaterhouseCoopers reporting that the interpretations committee of the IASB, or IFRIC, recently met to consider the accounting treatment of share withholding transactions.
As I’m sure our readers are aware from the numerous memos posted in our IFRS 2 Portal, share withholding is subject to liability (mark-to-fair value) treatment under IFRS 2. This is a significant divergence from U.S. GAAP, where liability treatment is not required. According to the NASPP’s 2010 Domestic Stock Plan Design Survey, over three-fourths of respondents indicate that share withholding is used to cover the taxes due on more than 75% of RS/RSU transactions. That’s a lot of companies that are going to be subject to share withholding once IFRS 2 is required in the United States (and that may already be subject to it for their foreign subsidiaries).
The good news is that this issue is on the IFRIC’s radar, but the bad news is that they decided they couldn’t do anything about it. They’ve referred the matter up to the IASB for consideration. Stay tuned…
Electronic Filing Specs for 6039 Returns The IRS has finally updated Publication 1220 with the specifications for electronic filing of Forms 3921 and 3922, which will be used to file the returns required for ISOs and ESPPs under Section 6039. (I know the cover says it was updated in July, but the update wasn’t posted to the IRS website until August 26, so I’m not as late with this announcement as it looks).
If you are planning on creating your own files for electronic filing (rather than outsourcing this) or if you are a service provider that will be creating these files for your clients, you’ll want to get cracking on the files right away. Test filings can only be submitted in the fourth quarter of the calendar year–if you wait until the last minute, i.e., the March 31 deadline, you won’t be able to submit a test filing.
It’s Here (Almost)! It’s hard to believe, but the 18th Annual NASPP Conference is just a week out. With Conference registrations going strong–on track to reach nearly 2,000 attendees–and Say-on-Pay looming, you don’t want to be caught unprepared as we head into 2011. There’s still time to register but don’t wait any longer.
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.
The Dodd-Frank Act that requires companies to disclose the ratio between the CEO’s pay and the median employee pay. As Barb pointed out in her August 5, 2010 blog entry, this could potentially include all employees. The problem with that is that pay, including equity compensation, is adjusted for different economic situations between locations. Even within the same country, the same position in different locations may not garner the same amount of pay–between countries the differences can be even more significant.
This got me thinking about equitable grant size–it’s an issue that companies offering broad-based equity compensation in multiple countries have to address. Generally, the process for localizing salary and benefits is built into both company structure (i.e., a compensation team) and budgeting concerns. But, not all companies allocate the same level of resources to determining the appropriate grant size for those same locations.
On a basic level, it is clear that compensation levels must be relevant to the cost of living in a particular location. It’s part of the reason that companies choose to relocate or outsource certain pieces of their operations. If equity is a component of compensation, then grant sizes should be adjusted as well. But, what are companies doing to address equitable grant size? I talked to several stock plan managers about the approaches their companies have taken and found that, for the most part, companies fall into three basic categories: those that set a ratio close to the salary ratios, those that outsource the recommendation to a consultant or consulting firm, and those that do deeper digging and complete their own analysis. For companies doing internal analysis, here are some key considerations:
Total Rewards
Most companies I spoke with use some version of a total compensation/benefits approach to determining grant size. Considering the total value received by employees helps account for factors such as the mix of grant types, different equity to salary ratios, indirect compensation (e.g., extended vacations, a company car, or housing allowances), and tax burdens or exemptions in specific locations.
Cultural Expectations
General perception of equity compensation impacts how successful an employee stock plan can be. Cultural expectations may not directly influence the size of grants offered to employees of specific locations, but they most certainly will indirectly impact the size of grants if the company takes a total rewards approach to determining compensation structure.
The Competition
It’s important to know what your competition is offering. This is true whether you are trying to sell a product or attract quality employees. It’s also relevant to not just grant size, but also grant type and ratio. That doesn’t mean you should offer exactly what other companies are offering, or try to top it by offering something more attractive. But, it is a good idea to know where the competitive edge is.
Resources
Completing analysis internally doesn’t mean doing so without outside help. There are a number of consulting firms that offer studies and analysis on compensation practices, including equity compensation. Also, participating in market benchmarking surveys can help you with access to the results. A majority of the companies I spoke with took time to talk with peer companies to find out what influences their decisions on grant size.
So, no matter how you look at it, there is no Magic Eight Ball to give you the answer to determine appropriate grant size ratios between different locations. One thing is clear: whatever your company’s approach is, once is not enough. Changes in economic, cultural, and organizational conditions may result in a need to adjust grant size ratios periodically.
This week marked the annual changing of my EDGAR password. I rarely use EDGAR these days, so I have an appointment in my Outlook calendar to remind me to do this every year. Even though, in the event that my password expired, I could easily generate a new password using the EDGAR Filer Management website and my EDGAR passphrase, I prefer to be proactive about these things. Since the topic of EDGAR access codes is fresh in my mind, I thought it might be helpful to review the various codes for our blog readers.
EDGAR Access Codes Demystified Access to the EDGAR system requires five codes (the SEC takes security seriously–that’s more codes than my online bank and credit card accounts require):
Central Index Key (CIK): Anyone using EDGAR and any entity for which filings are submitted is assigned a CIK and keeps that same CIK for his/her/its entire existence. The CIK identifies filers and users in the system. Even if an insider moves to a new company or is a insider in multiple companies simultaneously, he/she only has one CIK. This allows investors to query all of an insider’s filings using one search, even if the insider has changed companies or changed names (e.g., in the case of marriage). CIKs are public–you can find out any company’s or insider’s CIK just by querying EDGAR.
CIK Confirmation Code (CCC): The CCC is similar to a password and is used to validate EDGAR filings. CCCs should be known only to the insider and those making filings on his/her behalf. CCCs don’t expire and generally don’t change, even when an insider moves from one company to another, but you can and should change a CCC if you think it has been compromised (see my Sept 15, 2009 blog entry “Fraudulent Section 16 Filings“).
Password: The EDGAR password is necessary only to log onto the EDGAR website. It isn’t included in the EDGAR filing and it isn’t necessary for an insider’s password to be current for you to submit filings on his/her behalf. EDGAR passwords have to be changed every 12 months or they expire (but, see my March 10, 2009 blog entry, “EDGAR Passwords: One Less Thing To Do,” about how you can avoid updating all your insiders’ password if you have your own EDGAR login).
Password Maintenance Authorization Code (PMAC): This code must be entered to change an EDGAR password.
Passphrase: This code is used to generate new EDGAR codes (except for the CIK). When a CIK is first assigned, the passphrase is used to generate the rest of the required EDGAR codes. On an ongoing basis, the passphrase can be used to generate new codes when necessary. For example, if I had forgotten to renew my password before it expired, I could use my passphrase to generate a new password (along with the other EDGAR access codes). Passphrases do not need to be updated, but if it necessary to generate a new one (e.g., if you’ve forgotten it or if it has been compromised), you can do so via the EDGAR Filer Management website.
Less Than Two Weeks Left Until the NASPP Conference Catch up with all the latest Section 16 and Rule 144 developments at the 18th Annual NASPP Conference. The Conference is less than two weeks away and the Conference hotel has already sold out–register today to make sure you can attend.
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.
What do you do when someone has inadvertently been omitted from the grant approval process? You really can’t just slip the grant into the approval documentation, fully disclosed or clandestinely, and write it off to an “administrative error.” The bad news is that each situation has the potential to be unique, which makes it unlikely that you can create a standard response to a missed grant. For this reason, your grant policy probably can’t (even shouldn’t) attempt to address every potential circumstance surrounding a missed grant. The good news is that you can prepare yourself to evaluate the responses available to you in the event you do find a missed grant. These are my top five considerations:
Vesting
If a grant is left out of the approval process and needs to be approved at a later date, you need to know if the delay in approval will impact vesting. If your plan or grant policy already bases the vesting off a date other than the approval date or is flexible on the issue, it is possible that the grant can maintain the intended vesting dates.
Approval
It’s important to have a solid understanding of your plan and approval process under any circumstance, but when it comes to a missed grant, there are additional considerations. If the delayed approval will result in a grant that is different from your typical grants either in size or vesting schedule, you need to know who has the authority to approve the grant. If standard grants are approved by an officer, such as the CEO, it’s likely that a modification to standard terms will cause the grant to fall outside the parameters of the officer’s approval authority and may need to be referred to the compensation committee for approval.
Stock Price
If the grant in question is an option, then the stock price has likely moved on since the original approval date. If the price has dropped, it is easy to sell your employee on a grant of equal size and vesting with a better exercise price, but it may not be advisable to provide a disproportionately advantageous position to just one employee. Provided your plan permits it, it is possible to approve the option with the intended (i.e., higher) grant price.
If the stock price has increased, you have the opposite issue to contend with–the employee really shouldn’t be penalized for an administrative error. However, approving the grant at the lower exercise price would most likely result in a discounted option, making it subject to 409A. You can, however, develop a policy on how the company may compensate for this change in FMV such as increasing the number of shares or providing a cash payment to make up the difference.
If an RSU has slipped through the cracks in your approval process, making up for lost time can be less of a burden provided you have the flexibility in your plan to keep the intended vesting schedule. But, make sure that if your grant policy doesn’t lock in grant size based on the date of approval (e.g.; a value of $1,000 based on the FVM on date of approval).
Timing
Ideally, you never have to deal with a missed grant. Hopefully, if you do encounter one, the error is discovered virtually immediately. However, it is a good idea to think about what the company can do if a significant amount of time has passed between the date the grant should have been approved and the discovery.
One possible issue is vesting; if the grant should have already vested by the time the error is discovered. Like compensating for a higher exercise price, the company could choose to increase the number of shares or provide a cash payment to compensate for a missed sale opportunity. This is risky business because you are using counterfactual history–there is no way to know at what point the employee would have sold the shares.
Another issue comes up for companies that use a “total rewards” type compensation standard and one or more annual grants have been approved before the original missed grant is discovered. In a total rewards model, annual grant size would typically be based on a target total equity value or total compensation level. If the missed grant is not included in the calculations, then an annual grant approved after the error is likely to be larger to accommodate the value “missing” from that employee’s total equity value or compensation level.
Communication
Regardless of the circumstances leading up to a missed grant, communication is going to be key. No matter how you cut it, employees don’t appreciate being left out and bristle at the idea of being penalized for an administrative error, whether that idea is well-founded or not. This might sound a little like running a customer service call center, but it’s not a bad idea to have some apology verbiage ready that can fit most administrative issues; something that can help to reassure the employee that the company will “make it right” without actually obligating the company to provide recompense it isn’t prepared or able to accommodate. Whatever your response is to a missed grant, keep the employee abreast of the process as much as possible. Also, it’s probably best to avoid detailing the circumstances of the oversight even if you are trying to reassure the employee.
