The NASPP Blog

For today’s blog, we have a special guest entry from Emily Cervino of Fidelity Stock Plan Services on a subject near and dear to my heart: defining FMV as the prior day close for purposes of determining taxable gain on award vesting events and the price of shares purchased under your ESPP.

What a Difference a Day Makes! Considering Prior Day Close

By Emily Cervino of Fidelity Stock Plan Services

At the recent NASPP Annual Conference in Houston, I had the opportunity to present “This Ain’t My First Rodeo: Lessons Learned about Equity Compensation.” I took advantage of the new format introduced at the conference: laser-focused, 20-minute sessions during breaks—as an alternative to the traditional, more in-depth breakout panels. I love this format. Short sessions appeal to conference-goers who are looking to cram in as much learning as possible, as well as those whose shorter attention spans make an hour-long, detailed session a hard sell.

I broke this micro-session into even smaller bits and used it as an opportunity to talk about four concepts that can make equity professionals’ lives easier. One concept, which I’d like to review here, is reconsidering the fair market value (FMV) definitions used for equity awards. FMV is an important concept used to set the price on stock options, calculate the taxable income on cash exercise and restricted releases, and determine the purchase price for ESPP.

Back when I started out, things were simpler. FMV was used for grant pricing, and, when it came to calculating taxable income on stock option exercises, where the vast majority of transactions were same-day sales, the actual sale price was utilized. Today, the equity landscape has changed dramatically. The majority of grants now come in the form of restricted stock, which doesn’t include an exercise. Rather, as a time-based vehicle, restricted stock releases (creating a taxable event) are based on a preset schedule.

According to the NASPP Stock Plan Design Survey, 87% of companies use close or average as the FMV to calculate taxable income on restricted stock.(1) Among clients of Fidelity Stock Plan Services, we see very similar results, with 85% of companies using close or average.(2) Which means, for most companies, taxable income can’t be calculated until the market closes on vest date. The exceptions (12% of NASPP responses, 13% of Fidelity clients) are using prior day close (or average), a better option that provides them with a full additional day for calculations! That means on the day before vest date, the FMV is determined as of market close, and the restricted release process can begin, allowing shares to be delivered to participants sooner.

And the benefits don’t end there. This is also a great strategy for ESPP. NASPP doesn’t specifically ask about FMV for ESPP, but in the Fidelity client base, while close and average still rule, we see 5% using prior day close, and a full 20% using current day open price as FMV, providing the benefit of extra hours to one-in-four companies processing their ESPP.

So why do most companies stick with close or average? This may be one of those things that falls into the “we’ve always done it this way” category. While many companies have changed the award types they grant, their FMV definition hasn’t yet evolved.

Plan Sponsors should check out their plan documents. It may be that FMV is only defined for grant pricing, where close or average is a great strategy. The plan document may provide flexibility with respect to the FMV used for tax purposes and/or ESPP. Even if the plan prescribes close or average FMV for tax and/or ESPP, a switch to prior day close (or current day open price) could be effected at the board or committee level and would not require shareholder approval.

Check it out! The gift of time is priceless.

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[1] 2016 NASPP Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)

2 Fidelity client base, as of 9/30/2016

Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.

Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, a member of NASPP, GEO, and NCEO, and a 2015 recipient of the NASPP’s Individual Achievement Award. Emily is a Certified Equity Professional (CEP) and she holds Series 7 and 63 securities registrations.

Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments.

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