The NASPP Blog

March 17, 2009

Bigger Than Just Underwater Options

While there’s plenty of buzz these days about underwater stock options and the inevitable option exchange programs, the NASPP’s quick survey on market volatility and stock plans clearly shows that the market decline is wreaking havoc on stock programs in other ways as well.

Burn Rates and Share Reserves

49% of respondents indicate that they are concerned about running out of shares in their plan and 41% are concerned about burn rates.  Many companies set grant guidelines based on values, rather than a flat number of shares. In fact, 63% of respondents to the NASPP’s 2007 Stock Plan Design and Administration Survey (co-sponsored by Deloitte) use this method to determing grant sizes. In a declining market, grant sizes have to grow increasing larger if the company wants to keep new awards within the established guidelines.  In a market like the one we are currently experiencing–51% of respondents to the quick survey indicated that their stock had declined by more than 50% over the past year–this can quickly eat through a company’s plan reserve and cause burn rates to spiral out of control. 

Getting Grants Under Control

Although it’s a few years old, Watson Wyatt’s article “Compensation Apples and Pricing Model Oranges,” in the NASPP Document Library, discusses solutions to this dilemma that are still relevant today.  Some alternatives for getting grant sizes under control are to:

  • Revisit your grant guidelines to determine if they are still appropriate.
  • Consider using a different valuation technique for grant guidelines vs. 123(R) expense purposes (9% of respondents to the quick survey indicate that they are using this approach).
  • Set an arbitary limit on grant sizes (12% of respondents).
  • Limit the aggregate number of shares that can be granted to all employees (27% of respondents).

The more recent Mercer alert, “Weathering the Storm: Equity Compensation Actions for 2009,” offers additional suggestions for this year’s grant strategy. 

Increasing the Share Reserve

Where companies are running out of shares in their plan, additional solutions include asking shareholders to approve more shares (35% of respondents), implementing an option exchange program at a less than one-for-one ratio (7% of respondents) or for cash, or asking executives to surrender awards for no consideration (3% of respondents). 

Take the Quick Survey

If you haven’t yet completed it, take a moment today to participate in our quick survey on market volatility and stock plans.  Literally, just a moment–the survey is only four questions, no research required; you can complete it in under ten minutes. 

Fundamentals Early-Bird Rate Ends Friday
You must register by Friday, March 20, to take advantage of the early-bird rate for the NASPP’s acclaimed online educational program, Stock Plan Fundmentals. This is a $300 savings off the regular member rate–a price we are unlikely to ever offer again on this course. If you’ve ever wanted to complete this program–or want your staff to complete it–this is the year to do it.

M&A Course Begins Next Tuesday
The NASPP’s newest online educational program, Tackling Equity Compensation Issues Related to Mergers & Acquisitions, begins next Tuesday, March 24. This course will offer a tactical approach to address the real-world, practical challenges that arise in mergers and acquisitions. Register today to make sure you don’t miss the first webcast.

Reason #17 to Renew Your NASPP Membership:  NASPP Quick Surveys
NASPP Quick Surveys are easy to complete, take only a moment of your time, and provide a real-time look at industry practices and trends.  We’ve conducted quick surveys on everything from grant practices to insider compliance, plan design in light of 123(R), option valuation, state tax withholding procedures, and everything in between.  And we take requests: if you have a topic you’d like to see covered in a quick survey, email it to naspp@naspp.com.

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 blogs. 

– Barbara