The NASPP Blog

Back in July, I blogged about Barnes & Noble’s grant to their CEO that was in excess of the per-person limit in their plan (“What’s Your Limit?,” July 31, 2012). I thought that was an isolated incident, but now another company has done the same thing, three years in a row! If one more company does it, I think we’ll have to call it a “trend.”

Devry Makes Repeated Grants in Excess of Plan Limit
A recent lawsuit against Devry alleges that the company granted options to its CEO in excess of the per-person limit included in its stock plan for Section 162(m) purposes for three years in a row. The total number of excess shares granted to the CEO is almost 160,000 (34,100 shares in excess of the limit in 2010; 20,200 in 2011; and 105,425 in 2012).

Devry has several stock plans and it’s a little hard to tell which plan the options were granted out of. Ultimately, though, it doesn’t matter because, with the exception of their 1994 plan, which, according to their June 30 2012 Form 10-K, is no longer in use, all of the plans limit the number of option shares that can be granted to an individual to 150,000 per year.

Unlike Barnes & Noble’s limit, which was over a three-year period, this is a nice, clean annual limit, so it seems a little surprising that no one at Devry noticed the error. Even more surprising that they managed to make the same error three years in a row.

According to their 10-K, Devry currently has two plans that they grant options out of (a 2003 plan and a 2005 plan). As far as I can tell, based on the Form 4 reporting the grants, the options granted to the CEO were granted out of just one plan (although I can’t ascertain this for certain). I believe that the limit applies only to options granted under the plan in which it is stated. Thus, if a portion (no more than 150,000 shares worth) of each year’s options were granted under one plan with the remaining portion granted under the other plan, it seems to be that neither plan limit would have been exceeded and there’d be no problem under Section 162(m).

Don’t Be My Next Blog Entry!

This is such an easy mistake for shareholders and the IRS to find. The per-person limit is clearly stated in your plan, which is filed with the SEC–there’s list of exhibits in your 10-K telling readers which filing it is included in. And all of your executives’ grants are reported on Form 4 filings. At “The IRS Speaks” panel at this year’s NASPP Conference, Deb Walker of Deloitte pointed out that Section 162(m) is one of the first areas IRS auditors target, because it is an area where there are a lot of compliance failures that are relatively easy to uncover. Make sure your company doesn’t make this mistake; compare all grants to your executives against the per-person limit in your plan. Do this every time an executive is granted an option.