I’m excited to announce that the program for the NASPP Conference is now available–view the agenda or read the full Conference brochure (PDF). The proposals we received this year were by far the best I’ve ever seen–due, in part, to our new Proposal Assistance Program for Conference Exhibitors–and this is surely our best program ever. Check out the program today and register by June 24 for the early-bird discount–this deadline will not be extended.
SEC Chair to Present Keynote
SEC Chair Mary Schapiro will headline the Conference with a keynote presentation on November 2. We believe this will be the first time ever that an SEC Chair has made public remarks about executive compensation–it will be a landmark occasion.
Plenary Featuring Institutional Investors
After Schapiro’s keynote, the plenary session on November 2 will feature institutional investors–AFL-CIO, T. Rowe Price Associates, Cap Re, BlackRock, CalSTRS. These are the folks that are voting on your (or your clients’) Say-on-Pay and stock plan proposals. You’re going to want to hear what they have to say.
“Must-See” Sessions
We have over 50 sessions planned for this year’s event, and, frankly, I think they are all “must-see” sessions, but, since blog entries are supposed to be brief, I’ll limit myself to highlighting just a few of the sessions I’m most excited about:
Extreme Makeover: Equity Plan Edition:Take your stock plans from drab and outdated to simpler, sleeker, and easier to administrator, not to mention more share-holder friendly.
Taking the Difficulty Out of Setting Performance Goals: Performance awards are one of the hottest trends we’re seeing in stock compensation and we expect market-based awards to be even hotter. Find out if they can work for your company with this session.
So You Think You Can RSU? Prove it: Based on the number of questions we received for our recent Ask the Experts Webcast on Restricted Stock and Units, this is going to be a very popular session.
Did It Pass? Understanding Shareholder Voting Issues:This is a topic I’ve long been mystified about and I’m excited to finally have a chance to learn the difference between a no vote and an abstention and what cumulative voting is all about.
Another Chance to Qualify for Survey Results Due to overwhelming demand, we have extended the deadline to participate in NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) to June 10. Issuers must complete the survey to qualify to receive the full survey results. Register to complete the survey today–there won’t be any more extensions!
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
Check out the NASPP’s Facebook and Twitter pages. Come on; just do it already so I don’t have to keep bugging you about this!
The details surrounding exactly when tax deposits are due on stock compensation come up regularly in the NASPP Discussion Forum. In honor of our NASPP Ask the Expert’s webcast today on Restricted Stock and Unit Awards, I’d like to summarize the issue.
IRS $100,000 Deposit Rule
Most public companies that offer stock compensation are semi-weekly filers, meaning they must make tax deposits with the IRS two times each week. These deposits are due within three business days after the deposit period. For example, if your period includes Tuesday, Wednesday, and Thursday, then the tax deposit for those three days would be due the following Wednesday. This is the company’s normal deposit schedule.
However, once the total tax liability reaches $100,000 for any corporate entity the deposit is due the next business day. (See IRS Publication 15.) For example, if the entity’s total tax liability reaches $100,000 on a Tuesday, the IRS would expect that deposit to be made on Wednesday of the same week. For those of you keeping score, the total tax liability to the IRS includes all taxes that get reported on the company’s quarterly tax return–Form 941. That is the total of income tax and both employee and employer Social Security and Medicare after adjustments, although that is more of a detail for the payroll team than for stock plan managers. Also, the liability only accumulates beginning after a deposit period. For example, if your deposit period includes Tuesday, Wednesday, and Thursday, then you do not need to combine Thursday’s liability with Friday’s liability.
T+4
The IRS issued a Field Directive in 2003 instructing IRS auditors not to challenge tax deposits from “broker-dealer trades” (i.e., broker-assisted cashless exercises) made the business day after the settlement of the exercise, provided the settlement is no longer than three days. This doesn’t change companies’ tax deposit timeframe; it simply instructs auditors not to challenge these deposits. In spite of this technicality, most companies rely on this Field Directive for remitting taxes to the IRS on all same-day sale NQSO exercises.
Restricted Stock
RSUs and RSAs are where stock compensation and tax deposit liability get really tricky. There isn’t any specific rule, regulation, or even Field Directive or instruction that specifically addresses how to handle the timing of the tax deposit due on restricted stock. Rather, it’s the fact that it isn’t addressed as an exception that is most important. Until or unless it is addressed, it’s safest for companies to assume that the income for deposit timing purposes is paid out on the vest date. If the vest date falls on a day when the total tax deposit liability reaches $100,000 or more, the taxes from that vesting event are due to the IRS no later than the following business day.
Penalties
Yes, there are penalties for late deposits. Yes, the IRS does audit this. It is true that there are companies who still do not make timely deposits intentionally because they either can’t figure out how or have determined that the cost of compliance is higher than the potential fines. However, the penalties range from 2% to 15% of the late or unpaid tax amount, which could be very expensive if late deposits are a regular occurrence. Remember that the late deposit is the entire amount due, not just the amount in excess of $100,000. Of course, there are a litany of approaches to try and get the penalties reduces or recalculated. However, even if your company is successful at reducing the amount due it still has to pay someone to negotiate with the IRS and that does not come cheaply, either.
Time Crunch
The reality is that your payroll department needs processing time and your payroll service provider requires processing time. There is pretty much no way for you to send tax amounts to your payroll team after the close of market on the day that restricted stock vesting events have created a next-day deposit liability for your company and actually have that deposit made to the IRS before the close of business the next day.
So, aside from defining the FMV for restricted stock vests as some component of trading value three days prior to the vest, how do you make a timely tax deposit and avoid the penalties? Although it isn’t the only possible approach, the most common method for compliance according to the NASPP’s most recent Quick Survey on Restricted Stock is to estimate the tax liability in advance of the vesting event and then make corrections after the actual tax liability is known.
I’m sure many of you are familiar with the limitations of the Black-Scholes model when it comes to valuing stock options for accounting purposes. Today I write about the problems of using the Black-Scholes model to determine grant sizes.
How Much Did Your CEO Make Off the Financial Crisis? A recent article in the Wall Street Journal (“Options Given During Crisis Spell Large Gains for CEOs” by Scott Thurm, April 26) discusses windfalls CEOs have seen in their stock options that were granted during the financial crisis. Many companies granted options to their CEOs when their stock price was at a low point. Because options are virtually always granted with a price equal to FMV (only 1% of respondents to the NASPP’s 2010 Stock Plan Design Survey, co-sponsored by Deloitte, granted premium-priced options), this results in a low exercise price.
Further compounding the problem is the method most companies use to determine how many shares to grant. 70% of respondents to the NASPP survey determine grant sizes based on, at least in part, the value of the grant. And for 85% of those respondents, for stock options, that value is determined using an option pricing model, such as the Black-Scholes model. What happens to the option value computed under one of these models when the stock price is low? The option value will be low as well. The end result is a larger grant, assuming companies are trying to grant a specified value. In addition to having a nice low exercise price, options granted during the financial crisis were for many more shares that would normally have been granted.
The upshot is that when the stock price recovers, the options are worth a lot of money. A lot more money than options granted during times of economic abundance, which seems counter-intuitive. Generally, options with low exercise prices are coveted by employees and executives; it hardly seems necessary to make these options larger than comparatively higher-priced grants.
What Can You Do About It
Well, at this point, there may not be much that you can do about options that have already been granted–although see my May 13 blog (“Eleven and Counting“) about GE and Lockheed Martin modifying options granted to their respective CEOs to vest based on performance. But you may be able to adjust your grant guidelines to address this sort of problem in the future. Here are some practices to consider:
Base grant guidelines on a set number of shares, rather than grant value. This number might be determined by the run rate or overhang the company desires to maintain.
Set a cap on the number of shares that can be granted to any one person, regardless of award value.
Base grant value on an average, rather than a spot value.
Cap the amount of gain that can be realized from option grants. Not only does this help address this problem but it can also reduce plan expense.
Grant premium-priced options, particularly when the FMV is unusually low.
Base grant sizes on projections of future gain for various possible growth scenarios.
Impose performance conditions on options granted to executives–this at least ensures that executives are performing, rather than merely benefiting from the general market recovery.
Be sure to tune into the NASPP’s upcoming webcast, “Equity Values of a Different Flavor,” which will discuss some of the problems with using option pricing models for compensation planning purposes and possible solutions.
Another Chance to Qualify for Survey Results Due to overwhelming demand, we have extended the deadline to participate in NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) to June 10. Issuers must complete the survey to qualify to receive the full survey results. Register to complete the survey today–there won’t be any more extensions!
New “Early-Bird” Rate for the NASPP Conference If you missed the first early-bird deadline for the 19th Annual NASPP Conference, you can still save $200 on the Conference if you register by June 24. This deadline will not be extended–register for the Conference today, so you don’t miss out.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
The NASPP’s virtual Vendor Exhibition Hall holds a fantastic list of service providers. Our Vendor Hall also hosts the Press Box, where you can see the latest news and events from our service provider members. Yesterday, this press release from UBS caught my eye–it highlights a survey they conducted showed that over 94% of surveyed participants “felt it was critical for them to fully understand how stock plan assets fit into their overall financial situation.”
I think that a lot of companies don’t take this aspect of employee education into consideration, but it can be important to how your employees perceive the value of their equity compensation. This isn’t true just for your executives or higher level employees, but all employees receiving equity compensation. The fact is that the more tools employees have to leverage the value of their equity compensation, the more they will actually value it. Most employees don’t even have a financial plan, let alone understand how to incorporate something like the timing of option exercises or disposition of ESPP shares into that plan. They often don’t know when or how to diversify, how to navigate the impact of taxes due on transactions, or how to use their equity compensation to build personal wealth. An employee who has a plan for his or her future that emphasizes the company’s equity compensation is more likely to feel personally invested in the future success of the company.
However, there are two major difficulties with providing the best tools. First, too much information can be overwhelming and, therefore, counter to the goal of empowering employees. Second, companies don’t generally want to get in the business of advising employees because they can’t afford to be held responsible for poor investment decisions or unexpected market fluctuations. So, how do you go about providing employees with the financial planning guidance they need without just confusing them or opening your company up to unnecessary risk?
Some companies are comfortable with directing employees to one or more service providers to help guide employees. Brokerage firms all offer some kind of financial planning service. It may make the most sense for employees to build on an existing relationship rather than start an entirely separate one. You may even be able to get a representative or two from your broker’s financial planning providers to participate in new hire orientations, employee benefits fairs or educational seminars at your company.
There are a good number of companies, however, that feel this type of promotion is too much like an endorsement of any personal guidance employees receive and not much less risky than providing advice directly. If that’s the case at your company, here are some ideas for you:
Include it in your disclaimers – You should have disclaimers in your educational material that alert employees to consult a financial advisor. They may appear along with FAQs on exercises or tax implications–or may even be a part of your verbal responses to employee questions. If you remind employees that the broker they use to transact also offers financial planning and include a link or phone number, employees will at least know where they can go for advice.
Create an impartial list – Employees need help with financial planning for their retirement plans as well as their equity compensation. If you put together a list of firms that offer this type of planning advice and include your retirement plan provider, brokers, and even firms that are not also your service providers, your company may be more comfortable with assisting employees in this way.
Provide a space for peer recommendations – If your company intranet has any sort of discussion forum or listing service, you can create a space for employees to tell each other where they go for financial planning advice. With the right disclaimers, this removes the company from the process while still providing valuable resources to employees.
Whatever approach you take, I think it’s important to understand that employees really are hoping to find someone to help them leverage the value of their equity compensation. The actions that employees take with their company stock are investment decisions; if employees feel they are making good decisions and creating wealth, they are far more likely to view their equity compensation as a benefit.
This week I write about how stock compensation can introduce volatility into the P&L and why this is a problem.
The Problem with Liability Treatment
The recent article “Higher Stock Price Triggers First-Quarter Loss for Barnwell” (Honolulu Star Advertiser, May 12, 2011, Andrew Gomes) highlighted for me the exact problem with stock compensation that is subject to liability treatment. The article explains that Honolulu-based Barnwell Industries experienced a $1.5 million loss this quarter–a reversal of a $1.5 million profit for the same quarter last year. The reason for the loss is that their stock price doubled during the quarter.
How can a stock price increase cause the company to recognize a loss? The answer is that Barnwell has granted options that can be paid out in cash (the options include a cash SAR component) and are therefore subject to liability treatment. Thus, the increase in their stock price had a very significant impact on their stock compensation expense. Although they haven’t granted options since 2009, Barnwell’s stock option expense went from $46,000 for the comparable quarter last year to $1,677,000 for the current quarter. That’s an increase of 3,546%–kind of hard to explain to shareholders, who, for the most part, probably don’t have the foggiest understanding of liability vs. equity treatment.
Performance Awards Too
While performance awards receive equity treatment under ASC 718, they can also introduce the potential for similar volatility to the P&L. When performance awards are contingent on non-market based goals (e.g., revenue, earnings, and other internal metrics), the likelihood of forfeiture is estimated and expense is recorded based on this estimate. If the company does well, the likelihood of forfeiture will be lower and the expense for the awards will increase.
It’s important to keep this in mind when designing performance award programs and to set appropriate caps on payouts as a means of controlling stock plan expense (not to mention, how do you handle a situation where awards vest based on earnings, the earnings target is hit, and this decreases the forfeiture estimate to the point where the additional expense for the awards reduces earnings below the target). This is also a reason to consider market-based awards–i.e., awards that vest based on stock price targets or total shareholder return. For these awards, the likelihood of meeting the targets is baked into the initial fair value estimate and there are no further adjustments if the likelihood that the targets will be achieved changes.
Need to know more about the accounting treatment and design considerations for performance awards? Don’t miss the NASPP’s pre-conference program, “Practical Guide to Performance-Based Awards” at this year’s NASPP Conference.
IFRS 2
If ever required for US companies (see last week’s blog entry, “IFRS 2: The Saga Drags On“), there are three requirements under IFRS 2 that could introduce significant volatility to the P&L:
Tax Accounting: IFRS 2 requires all tax shortfalls to run through the P&L and, moreover, requires companies to estimate their tax benefit/shortfall each accounting period and adjust tax expense accordingly. This is the opposite of Barnwell’s problem. Here, an increase in stock price wouldn’t be a problem, but a decrease that causes options and awards to be underwater (i.e., the current intrinsic value of the award is less than the expense) could result in significant increases in tax expense, which would reduce earnings for the period. Sort of rubbing salt into the wound–reduced earnings is not going to help get the stock price back up.
Share Withholding: Share withholding on either options or awards triggers liability treatment (for the portion of the award that will be withheld to cover taxes) under IFRS 2. As the company’s stock price increases, this liablity–and associated P&L expense–will increase.
Payroll Taxes: The company’s matching tax liability for payroll taxes (Social Security and Medicare in the US) is also treated as a liability that must be estimated and expensed each accounting period. Again, as the company’s stock price increases, this liability and expense will also increase.
See the NASPP’s IFRS 2 Portal for articles on these IFRS 2 requirements.
Last Chance to Qualify for Survey Results This is the last week to participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). Issuers must complete the survey by this Friday, May 20, to qualify to receive the full survey results. Register to complete the survey today.
New “Early-Bird” Rate for the NASPP Conference If you missed last Friday’s early-bird deadline for the 19th Annual NASPP Conference, you can still save $200 on the Conference if you register by June 24.This deadline will not be extended–register for the Conference today, so you don’t miss out.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). Don’t wait–this week is your last chance to participate.
Companies impose trading blackouts prior to the public release of information that could influence trading decisions on company stock as a safeguard to avoid questionable trading in advance of significant corporate developments. Typically, these trading blackouts will regularly occur in advance of quarterly financial disclosures, but may also be imposed in advance of potential corporate transactions.
There are several situations where the blackout period could be problematic for both the company and employees–other than the obvious inconvenience of having to wait for an open trading window. One of these issues is what to do about restricted stock vests. When a restricted stock unit or award vests, taxes are due on the income from that vest. If trading is absolutely prohibited during the blackout, the issue of how to cover the taxes due becomes a problem. There are, however, a few solutions to consider.
First, you can try to ensure that no vesting ever takes place in a blackout. This means not only timing your vesting, but ensuring the vesting is never modified by a leave of absence or change in status. This also doesn’t help if you have an unscheduled trading blackout. However, this strategy is still a good idea in general even if your company is employing other approaches because it will reduce the number of instances where restricted stock is vesting in a blackout period.
Second, you can require employees to remit shares back to the company to cover the tax obligation, either for every vest or only for vests that take place in a blackout period. It is easier to get your legal counsel and auditors to be comfortable with a required share withholding because there is no market transaction. There are, of course, considerations for this tax remittance such as calculating minimum statutory tax rates and the availability of cash that may make this an undesirable choice for your company.
Third, you can disallow any choice in the tax withholding method. You may or may not want to also have Rule 10b5-1 language built into your grant agreements to help secure an affirmative defense against allegations of insider trading. If you allow a choice it is conceivable that this could be manipulated, particularly if the company permits a choice between paying cash for the taxes and another method. For example, if a person knows that the company stock will fall as a result of an upcoming announcement and happens to have restricted stock vesting, she could choose to sell or trade shares for taxes instead of pay cash knowing that this would be the best price she’ll get for the shares for a while. More likely, however, is that an employee would make that decision based on personal circumstances like an unexpected expense. If an employee changed from paying cash to selling shares and then the stock happened to fall drastically after financial disclosures, there would be a risk of the appearance of making that decision based on inside information. By removing the choice, you help to eliminate the appearance of insider trading.
You may also have a combination of these methods, such as having a default tax payment method, but not permit any change inside a blackout period. This may work for your non-insiders, but may require special attention for your Section 16 insiders. If this isn’t enough for your legal team or auditor, consider requiring Section 16 insiders to include the restricted stock vests as part of a Rule 10b5-1 trading plan.
Also, whatever your approach is, don’t forget to check the verbiage in your insider trading policy. If you will be permitting remitting selling shares to cover taxes in a blackout period, it’s best if your insider trading policy clearly indicates this exception.
Don’t miss our Ask the Experts: Restricted Stock and Unit Awards webcast on May 26th for all your restricted stock questions. In fact, it’s not too late to submit a question for our experts to address!
I’m sure many of my readers have been disappointed that I haven’t been writing much about accounting lately, so today I take a look at the status of IFRS here in the United States.
IFRS: No News is Good News? The fact is that there hasn’t really been much to report on IFRS lately. As my readers know, back in 2008, the SEC proposed a roadmap that would have required adoption of IFRS in the United States, phased in from 2014 to 2016. Then the economy collapsed and rushing headlong into IFRS seemed like maybe not such a good idea. More recently, there have apparently been some developments–that I do not understand in the least, so don’t ask me about them–relating to the accounting treatment of highly devalued debt securities that have also given regulators pause on the idea of wholesale adoption of IFRS here in the United States.
In February of last year, the SEC announced that it backed off on the roadmap a bit and would make a decision in 2011 as to whether or not IFRS should be adopted in the United States. I expect that it will be several more months before the SEC announces its decision.
Condorsement?
More recently, the idea of “condorsement” has been proposed. Under this approach, rather than requiring adoption of IFRS, U.S. GAAP would continue to exist, but FASB would work towards converging our standards to IFRS on a standard-by-standard basis. I admit that I am a little fuzzy on how condorsement differs from convergence. I would offer ten points to anyone that can explain it, but, to be honest, I don’t think I really want to know.
Convergence
Speaking of convergence, the FASB and IASB have an ongoing program designed to achieve this goal for projects specified under a memorandum of understanding (issued in 2006 and updated in 2008). Last month, they announced that five of the projects had been completed and the remaining three will be completed in the second half of 2011 (a slight delay from the original schedule). None of the projects relate to stock compensation, however. Phew.
SEC Roundtable
At the same time that the FASB and IASB announced the progress on their convergence project, the SEC announced that it will sponsor a Roundtable on July 7, 2011 to discuss incorporating IFRS into the U.S. financial reporting system.
A news bulletin issued by Morrison and Foerster discusses the FASB/IASB and SEC announcements.
Share Withholding: No News is Bad News
A key difference between IFRS 2 and ASC 718 is that, under IFRS 2, liability treatment is required any time shares are withheld by the company to cover tax withholding. I think many of us harbor a secret hope that this will somehow change before IFRS is required in the United States (either that, or that IFRS is never required and this somehow is left out of convergence/condorsement). So far, however, no such luck. A PricewaterhouseCoopers alert issued in September of last year reports that the Interpretations committee of the IASB refused to carve out an exception. The committee felt it did not have the authority to do so; the matter can still be presented to the IASB for relief.
Save Big on NASPP Conference by Completing Survey NASPP members that complete the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) by this Friday, May 13, can save 10% off the early-bird rate for the 19th Annual NASPP Conference (which is already a significant savings off the regular registration rate). Register to complete the survey today–so you don’t have to explain to your boss why you missed out on this rate.
Only Ten Days Left for NASPP Conference Early-Bird Rate It’s hard to believe how time flies, but the 19th Annual NASPP Conference early-bird rate expires this Friday, May 13. This deadline will not be extended–register for the Conference today, so you don’t miss out.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
As of June 15, 2011, SAS 70 is being replaced as the U.S. auditing standard for service organizations. Today, I explore some of the background for a SAS 70 report and why it’s being superseded.
Acronym Soup and Background Information
The Auditing Standards Board (ASB), which is a part of the American Institute of Certified Public Accountants (AICPA), issues guidance for auditors including the Statements on Auditing Standards (SAS). SAS No. 70 (SAS 70) is specifically guidance for auditors to use when “auditing the financial statements of an entity that uses a service organization to process certain transactions.” (See the AICPA site for more information.)
Section 404 of the Sarbanes-Oxley Act requires public companies to report on the effectiveness of the internal controls relating to their financial statements. The Public Company Accounting Oversight Board (PCAOB) issued Auditing Standard No. 2 in 2004–superseded by Auditing Standard No. 5 in 2007–which identified how the independent auditor evaluating a public company may rely on a “service auditor report” like the SAS 70 Type 2 report. The process breaks down like this:
An independent auditor for an issuing company must evaluate the controls that are in place to ensure the accuracy of financial reporting. If that company outsources administration processes that could impact financial reporting, the independent auditor should evaluation the controls in place at the service provider as well. A SAS 70 report can provide the necessary opinion of not only that the controls are suitably designed (i.e., a Type 1 report), but also that service company has effectively maintained each of those controls over a period of time (i.e., a Type 2 report). The issuing company auditor is, therefore, able to review the information in the Type 2 SAS 70 report instead of assessing the service provider’s internal controls directly. This saves a huge amount of time, money, and energy for both the issuing company and the service provider. The SAS 70 report has become a standard request for companies evaluating or using third-party stock plan administration service providers.
SSAE 16
The Standards on Standards for Attestation Engagements No. 16 (SSAE 16) replaces SAS 70 as of June 15, 2011. The new standard is intended to bring U.S. auditing practices more in line with the international standard, ISAE 3402. Like SAS 70, SSAE 16 consists of a Type 1 and a Type 2 evaluation, Type 2 being the necessary follow-up to determine if controls are being effectively performed over time. Companies with a current Type II SAS 70 report may transition directly to the Type 2 SSAE 16 report. You can tell the essential difference between SAS 70 and SSAE 16 in their names alone. SAS 70 is an audit standard that requires only the auditor’s assessment of controls. SSAE is an attestation standard that requires the company to also demonstrate the effectiveness of controls. SSAE 16 requires management at a service organization to provide not just a description of the controls in place, but of the system as a whole. (SAS 70 only requires a description of controls.) In addition, management must attest to the suitability of the system in a written statement that includes a description of the criteria used to make this assertion and the risks that could threaten the company’s ability to effectively maintain the system.
A Little Appreciation, Please
If you’re at an issuing company and the SAS 70 report is something you ask for–or better yet, something you automatically receive–from your stock plan administration service providers, I think it’s time to take a moment to appreciate the effort that’s going to go into the new standard. When you do get your hands on that SSAE 16 report, give it a good look before you pass it on to your auditors. It will give you some serious insight into what controls your service provider feels are essential, which can help you design some of your own internal controls. It can also shed light on what procedures you may need to update in order to help your service provider achieve the control objectives in the report, which in turn helps your company get through that portion of your audit.
Say-on-Pay vote failures have picked up, with more failures last week than any other week so far this proxy season. Today I provide an update on the latest Say-on-Pay stats and comment on a couple of companies that recently modified options granted to their CEOs in response to shareholder feedback related to their Say-on-Pay votes.
Say-on-Pay: The Latest Data Broc Romanek and Mark Borges have been keeping track of Say-on-Pay votes in their respective blogs on TheCorporateCounsel.net and CompensationStandards.com. Last week, Navigant Consulting, Cogent Communications, MDC Holdings, and Janus Capital were the eighth, ninth, tenth, and eleventh companies to report that their Say-on-Pay proposals failed.
Say-on-Pay Frequency
Say-on-Pay Frequency votes seem to be primarily ending up in the annual camp; if my math is correct, of the companies that have held and reported votes thus far, 72% have reported that shareholders prefer annual votes. Many companies have put forth a recommendation for an annual vote, rather than risk the embarrassment of shareholders voting against managements’ recommendation.
Even so, a triennial vote is a possible outcome–Mark Borges reports that, of the 235 companies where the board has recommended a triennial vote (and the companies have reported vote results), only 43% have reported that shareholders indicated a preference for annual votes. Fascinatingly, at one company (Qualstar), management recommended an annual vote but shareholders preferred a triennial vote.
Options Modified in Response to Shareholder Feedback
I think it is also notable that, in the last two weeks, two companies, GE and Lockheed Martin, announced modifications to options held by their CEOs. The modifications added performance targets to options that were previously only service-based. In both cases, the modified options now vest based on two independent performance goals (50% of the options vest when one goal is met and 50% vest when the other goal is met). In Lockheed’s case, one goal is based on cash from operations and the other is based on ROIC. For GE, one goal is also based on cash-flow, but the other goal is tied to relative TSR–which adds a market condition to an option that was previously only service-based. I’m very intrigued by the accounting implications–or possible lack thereof–of these modifications and I hope to look at them at length in an upcoming issue of The Corporate Executive.
According to SEC filings submitted by both companies, the options were modified in response to conversations they had with shareholders (and ISS, we imagine). It seems likely that the modifications were necessary to ensure passage of their Say-on-Pay votes and are illustrative of the level of power Say-on-Pay has given shareholders.
Save Big on NASPP Conference by Completing Survey NASPP members that complete the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) by May 13 can save 10% off the early-bird rate for the 19th Annual NASPP Conference (which is already a significant savings off the regular registration rate). Register to complete the survey today–so you don’t have to explain to your boss why you missed out on this rate.
Only Ten Days Left for NASPP Conference Early-Bird Rate It’s hard to believe how time flies, but the 19th Annual NASPP Conference early-bird rate expires next Friday, May 13. This deadline will not be extended–register for the Conference today, so you don’t miss out.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Attend your local NASPP chapter meetings in San Diego and Wisconsin. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting–be sure to say hello!