Here are the results to my random questions in last week’s blog entry.
Terminated Employees & Black-out Periods
Two-thirds of respondents (37 out of 54) do not subject terminated employees to black-out periods.
For those respondents that do subject employees to black-out periods, the majority (11 out 16 respondents), don’t make any accommodation for them. The terminated employees are simply expected to finance their exercises in a way that doesn’t involve an open market sale.
Two respondents noted in the comments that they would automatically exercise the options if they aren’t exercised by the end of the exercise period. One person noted that their black-out period is shorter than their post-termination exercise period, so this hasn’t been a concern for them.
Evaluating Stock Plan Administration
The majority of respondents don’t have any specific metrics that they use to evaluate the performance of the stock plan administration team (which probably explains why no one has responded to this question in the NASPP Discussion Forum).
Of the metrics suggested in the question, the most popular choices were:
Accuracy of reports produced for tax/financial purposes (7 respondents)
Total time spend on various tasks (e.g., employee inquiries, processing transactions, reporting) (4 respondents)
One respondent indicated that they are evaluated on their average time to resolve employee inquires/escalations and one respondent indicated that they are evaluated on the processing and direct costs per participant.
Some of the metrics suggested in the other comments were:
Timeliness and accuracy of all transactions, participant communications, and tax/financial reporting
Demonstration of increasing knowledge and ability to take on more complex tasks
Quality of response to employee inquiries/escalations
ESPP participation
Responsiveness to plan managers and various company contacts in addition to participants
Personally, I think that having at least a rough idea of how much time you spend on various tasks is an important and valuable metric to be aware of. It can be very helpful when trying to prioritize various initiatives and projects. For example, if tax reporting takes a huge amount of time compared to everything else you are doing at year-end, that might be an indication that you need to invest in improving your tax reporting processes.
I’m also a big fan of the ESPP participation metric, but only if you have the proper tools and resources to impact this (e.g., education budget, attractive plan, etc.)
Grant Conversion
Close to 90% (38 out of 43 respondents) don’t convert grant values into foreign currency before determining grant sizes for non-US participants.
I needed a quick blog entry for today (Jenn is on vacation), so I decided to do another poll with questions that have been posted recently to the NASPP’s discussion forum. If they apply to you, please take a moment to indicate your answers so we can help these folks out. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll). Thanks for indulging me!
Delaware recently amended its general corporation law to allow boards to delegate authority to approve restricted stock grants to officers (or other people) who aren’t directors. Just to clarify: it isn’t that the restricted stock is being granted to people who aren’t directors, it’s that non-directors can now approve restricted stock grants.
Background
For well over a decade (ten points if you remember when this law changed), Delaware has permitted boards to delegate authority for approving stock option grants and other rights (generally interpreted to include RSUs) to officers, even if those officers are not board members. Now the law has been amended to also allow this for restricted stock.
Hold On—Don’t Go Crazy Now
The resolution delegating approval authority must include the following restrictions:
The maximum number of shares that can be issued
The time period over which the shares can be issued
The minimum consideration that must be received for the shares (if the shares are subject to par value, this minimum cannot be less than that amount)
Just as for stock options and other rights, the delegation of authority is solely for determining who receives the awards and the number of shares issued to each person. Vesting requirements and other terms and provisions still must be determined by the board.
Plan Must Allow Delegation
Also, before your board delegates authority to approve restricted stock grants to anyone other than a board member (or committee thereof), the plan must allow this. Maybe your plan anticipated Delaware eventually changing their laws and already allows this, but there’s probably a pretty good chance it doesn’t. Luckily, plans can always be amended, oftentimes without shareholder approval. Amending the plan to allow this delegation of authority should be something that can be accomplished by board action alone. Thus the board could amend the plan to allow this delegation of authority and then delegate authority under the amended plan at the same meeting; but to safe, make sure they do it in that order.
I’m sure all of my readers know that Form S-8 is used by public companies to register shares that will be issued under an employee stock plan with the SEC. In it’s January-February 2015 issue, The Corporate Counsel took a closer a look at some of the technical requirements of Form S-8. Here are a few things I learned from the article.
Fee Offsets Are Complicated
Companies wishing to register shares on a Form S-8 must pay a registration fee to the SEC. This fee is based on the value of the stock to be issued under the plan and the total number of shares to be issued. Where shares registered under prior S-8 filings will not be issued, companies can use the fees associated with these unissued shares to offset the fees to file a new Form S-8. But there’s a catch: the offering covered by the S-8 that the fees will be transferred from has to be completed, terminated or withdrawn and the new S-8 has to be filed within five years of when the original S-8 was filed. Because most stock plans have a term of ten years (and the offering isn’t viewed as completed until there are no further outstanding options/awards under the plan), this means that this offset often available. This is covered in the Securities Act Rules CDI Question 240.11.
No Share Offsets
Shares cannot be carried forward from one form S-8 to another. Thus, if shares from an expiring plan (and covered under the Form S-8 filed for that plan) will be transferred to a new plan, the shares have be registered again on the Form S-8 filed for the new plan (and are included in the calculation of the registration fee for the new plan).
New Form S-8 Must Be Filed to Register New Share Allocation
Where shares are newly allocated to an existing plan, a new Form S-8 must be filed to register those shares. They cannot be registered by amending the prior Form S-8 filed for the plan. But, the good news is that a abbreviated format can be used for the new Form S-8. The Corporate Counsel says:
In this scenario, General Instruction E to Form S-8 provides that, for the registration of additional securities of the same class covered by an existing Form S-8 relating to an employee benefit plan, the issuer may file an abbreviated registration statement containing only a cover page, a statement that the contents of the earlier registration statement—identified by file number—are incorporated by reference, the signature page, any required opinions and consents, and any information required in the new registration statement that is not in the earlier registration statement.
Share Counting
I was surprised to learn that it may be not permissible to count share usage for Form S-8 purposes the same way shares are counted against the share reserve. According to the article:
A recommended approach for dealing with forfeited shares is to treat the original restricted stock grant and the subsequent re-grant as two separate issuances for purposes of counting the amount of shares remaining on the Form S-8. But be aware that when counting shares this way, an issuer can deplete shares registered on Form S-8 faster than it depletes the plan capacity shares, so the issuer should keep a separate ledger for both the Form S-8 and the plan share counting. Also note that this approach might be overly conservative for some practitioners who do not believe that the issuer needs to count the forfeited shares as having been issued against the total, particularly with respect to options. There is also a concern that this approach can lead to problems in determining the real share reserve for other purposes, such as for accounting purposes.
The article further notes:
Options and stock-settled SARs should be counted when exercised for the full gross amount exercised (i.e., unreduced for any net exercise or withholding), while stock awards should be counted when granted. For performance stock awards, the conservative approach is that they should be counted at grant for the target number of shares—with any shares actually issued in excess of target counted at the time of issuance.
It’s a slow news day here at the NASPP. I don’t have anything pressing to blog about so I thought it would be a good time for a poll. Below are a few questions that were recently posted to the NASPP Q&A Discussion Forum that are largely unanswered at the moment. If they apply to you, please take a moment to indicate your answers so we can help these folks out. Thanks for indulging me!
If you can’t see the poll below, click here to participate in it. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll).
Most of us who work in and around stock compensation have figured out by now that it takes a village to pull this off. By “this”, I mean successful administration of an equity plan – including compliance with tax, securities and other regulatory reporting/disclosures/requirements, interacting with and educating participants, recordkeeping, policy adherence and at least a dozen other things that I didn’t list. While we may have figured out that we can’t shoulder the responsibility alone, there are varied amounts of leverage available to help get the job done. Add in a global element – meaning issuing equity to participants outside of the U.S., and the complexity magnifies. In today’s blog, I explore the village needed to really stay on top of your global stock plan.
Data Doesn’t Lie
In the 2012 Global Equity Incentives Survey, co-sponsored by the NASPP and PwC, 78% of survey participants said that compliance is the most challenging issue in administering a global equity plan.
In the NASPP’s 2014 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte, 74% of participants have either zero (0) or one (1) full time person dedicated to administering the company’s stock plans. Also surveyed were the quantity of part time personnel who performed stock plan duties part time, with those numbers spread across the board. There did appear to be a correlation between number of personnel and the size of the participant population with outstanding equity awards. The more participants, the more in-house personnel. That makes sense.
71% of respondents working for a public issuer reported outsourcing all or part of their equity plan administration, with 40% reporting they outsource 75% or more of their plan duties.
While the staffing and outsourcing data doesn’t dissect global versus domestic participants (though the survey is titled “domestic”), it can be largely assumed that many companies have at least some global participants (not all, but many).
The Village
We’ve figured out by now that administering a global equity plan is not a one-person job. Even if one person is tasked primarily with responsibility for the plan’s administration (such as the stock plan administrator or stock plan manager), that person likely oversees a number of other in-house and external resources that touch the company’s stock plans.
Given that the biggest issue in administering a global stock plan is compliance (no surprise there), the question then turns to how to use the “village” to succeed in compliance. When I think of a global stock plan village, I think of the following key components:
In house person overseeing equity programs
In house interested parties (like finance, accounting, treasury, payroll, human resources)
External legal and tax advisers who have specialized knowledge about tax, legal and securities regulations in places where the company has participants
First line resources (not necessarily advisers, but sources of information about new or emerging issues in the jurisdictions where the company has stock plan participants). These include things like the NASPP’s Global Stock Plan Portal.
Local contacts in foreign jurisdictions (e.g. local human resources personnel)
Service providers who offer recordkeeping, mobility, education, plan design or other services
Compensation consultants
I am sure there are others that you will write me about if I’ve missed them; the point is that it takes a lot of moving parts
Even with the village in place, the person tasked with oversight of the equity plans needs a constant and fresh supply of information on global practices and changes relevant to them. This is not in lieu of the village, this is part of the village. Some companies rely solely on local jurisdictions to let them know about regulatory changes. While local contacts are a helpful resource, they should not be the only resource. It’s important that the person tasked with oversight of the equity plans maintains just that – oversight. And that includes proactive awareness of jurisdictional changes.
Expanding the Village
I want to highlight a few resources to add to your village that are already available to you as part of your NASPP membership. Again, these are no replacement for the necessary parties to your own global village. However, they are front line sources designed to help you achieve what the majority describes as the most challenging issue – compliance.
Before I list the resources, it’s quiz time! Pop Quiz: Which 3 countries have the MOST subscribers to NASPP Alerts (updates on country specific developments)?
A. United Kingdom, Canada, Germany
B. China, United Kingdom, France
C. China, France, Japan
D. United Kingdom, France, Bermuda
The answer is at the bottom.
I threw that question in to introduce the first resource: NASPP Alerts. If you’re missing out on NASPP Alerts, you’re – well, missing out. Did you know your NASPP membership includes the ability to select which countries you’d like to receive updates about? It’s a simple as a check box. When something new is posted for a country that you’ve subscribed to, you will get an email. Right now you can get alerts for up to 69 countries. I’ll make it even simpler – to set your alerts, go here.
The second resource is the NASPP’s Country Guides, also available in the Global Stock Plans portal. If you look on the left side of the page, there are country-specific guides for 34 different countries. These are authored by local practitioners (the Canada Guide is authored by a law firm in Canada, the Japan Guide was prepared by lawyers in Japan, and so on). Several of these guides have been updated within the last 12 months. The Guides are not designed to replace your advisers, but rather to complement that relationship. They are perfect for the moment when you are sitting in a meeting and someone says “we are acquiring stock plan participants in Argentina next week” and you suddenly need to know the stock plan lay of the land in Argentina before you can have a full discussion with your advisers. Each Guide covers the basic tax, regulatory and securities considerations in the jurisdiction.
Finally, if you have a global related question, post it to our Global Stock Plans Discussion Forum (different from the general Q&A forum). The questions in the Global forum are answered by our Global Task Force members, who specialize in various aspects of global equity plans.
Some of you are already plugged into these resources, but for the rest that may not have discovered them yet – take a moment to check them out. After all, adding more to your village may help ease the compliance challenges.
-Jenn
Answer to pop quix: A – United Kingdom, Canada, Germany (in that order)
If you’ve read any of my prior blogs, it’s no secret that I’m a fan of employee education. Good employee education. Comprehensive employee education. Normally I don’t rant in the forum of the NASPP Blog, and today I will do my very best to avoid doing so, but I’m on the verge of it so be warned.
It’s Section 6039 reporting time, W-2s are on their way, cost basis reporting is on the brain (are employees going to figure this all out?) So my mind has naturally been on – education. Educating never stops, but it’s definitely at a peak this time of the year. Which then brings me to the question – did we educate enough? Did we put enough good information in our employees’ hands to help them navigate their questions without giving them the dreaded “advice” or leaving them short on facts?
Advice Gone Bad
Picture this: I’m thinking through all the questions I just posed above, when someone suggests that I check out a recent episode of a national radio broadcast. The topic of the show is financial advice. People call in, they get financial advice. Over the radio. Okay, so I’m already thinking – well, if someone calls in over a radio show to get financial advice, they probably should know that it’s really hard to know all the factors in that format, so take whatever it is with with a grain of salt, right? I listened to the show, and here’s that part that makes me want to vent. Someone calls in and asks a question about an Employee Stock Purchase Plan (ESPP). The caller wants to know if they should invest in their company’s ESPP plan. Oh yay, there’s a plug for ESPP! Except that the radio host got it all wrong. He asks if the discount is 15%, and then says something to the effect of “yeah, that’s the law – they’re all 15%.” Then he goes on to tell the person not to invest in it. He doesn’t ask about whether there is a look back, or if it’s a Section 423 plan or not, or how the company’s stock has performed. And, to those who know ESPPs, we know there is no “law” dictating a 15% discount. Then, the host went on to remind his audience about all the licenses he used to hold (I’m assuming investment licenses), which came across to this listener as an effort to boost his position on why ESPP was a no-no. I started frothing at the mouth.
I did some additional digging and found that this show has millions of listeners per week. Now, maybe not all are interested in investing in their ESPP, but I bet some have an ESPP. And then it hit me – how frustrating it would be if the caller (or listeners) were employees of my company, and my educational efforts were going up against a famous radio personality who has ESPP all wrong. And, this isn’t the first time the same show has put out incorrect information on ESPPs – I found another blog from 6 years ago highlighting the same issue from the same personality. It’s frustrating when someone in a position of influence and giving financial advice in the earshot of millions gets it wrong.
Own the Message
And then it hit me – although we can’t control what education (no matter how bad or inaccurate) comes from other sources, we can control our own messaging and we have to do a darn good job at it or someone else is going to do it for us. That’s the point of my blog today.
Let’s face it – there are great, good and bad advisers in every category. It’s safe to assume that many of our employees are going to turn outside the company (as we often encourage them to do) to seek advice. This definitely is not a knock against all the advisers out there that get it right. There are plenty of those inside this industry and outside – and they are a valuable resource to our participants. The hard part is when they get bad advice from advisers who don’t understand equity plans. My conclusion is this – we obviously can’t control if a radio host gives bad ESPP advice to millions of listeners. Or, which advisers our employees choose. What can control is what we put out there. We don’t want to leave our employees in the position of having to fill in the blanks. The advice line is a fine one, but I have to think there are ways to put out enough factual information that employees can take that and make sense (or not) of what they are being told from their advisers – even famous ones.
So where can employees go for good information? In addition to your own internal communication efforts, employees can also seek information from myStockOptions.com, your service provider web site (which may also offer them access to advisers who have equity compensation knowledge) and even sites like the IRS’s website. There are several consultants out there that would be happy to come in and educate your employees. And, don’t forget the NASPP also has an Employee Communications portal – we’re always looking for more sample communications that can be shared generically in the portal, so if you’ve got samples send them to me at jnamazi@naspp.com.
I’m hopeful that one communication effort at a time, we can equip our participants with the information needed to recognize inaccurate information and bad advice.
In December 2013, I blogged about a mistake that garnered public attention when daily deal website Groupon exceeded their plan’s limit for shares granted in a calendar year with an RSU award to their Chief Operating Officer (“Share Limit Lessons the Hard Way“, December 19, 2013). Just when I started to think it couldn’t happen twice, nearly a year to the day of my first blog another oops! occurred. This time it involved technology company Advanced Micro Devices (“AMD”).
In an 8-K filed with the SEC on December 29, 2014, AMD disclosed that they’d exceeded their equity plan’s limit on shares granted to an individual in a calendar year when issuing a series of awards to their new Chief Executive Officer. As a result of the technical error, the chipmaker decided to void and rescind most of the CEO’s newly issued awards. In their evaluation of the situation, AMD’s board of directors affirmed that the value of the CEO’s compensation package that included the awards was appropriate and in line with shareholder interests. Given that some of the awards were negotiated as part of an employment contract with the CEO, I wonder how the company now will deal with the fact that they can’t issue the grants that were contractually promised to the CEO. I’m no lawyer, so I’ll throw the question out there with no intention of trying to answer it myself. AMD did mention in their filing that they intend to “return Dr. Su’s equity compensation to the level it should have been prior to the action to void and rescind the equity awards described above at or near the earliest practicable opportunity available to the Company, subject to law and the terms of the 2004 Plan.”
How Does This Happen?
There’s been no information on “how” the oversight occurred, and I wouldn’t expect that we’d be privy to the specifics. The fact is that it happened. What stands out to me in this case is that, just like the Groupon case, the violation of the plan limit appeared unnoticed until AMD’s own shareholders filed a lawsuit over it. I’m thinking about all the checks and balances in a grant approval process, and wondering how it was left to shareholders in both cases to catch the mistakes.
While plan share limits seem on the surface to be a simple concept to embrace, there seems to be a trend, or at least a pattern in oversights of these limits. I’m guessing there are more situations like this that are caught before shareholder lawsuits occur. A common trigger for awards that exceed the limits outlined in the plan appears to large grants (or a series of grants) to executives or key employees.
Takeaways
We hear more and more about shareholders looking for prime litigation opportunities. As a group, they definitely have become more assertive in monitoring disclosures and finding opportunities to litigate perceived wrongs. With that in mind, I turn the focus to what we can learn from these high profile, public mistakes. I put myself in the position of asking “If I worked for this company, what would I do to avoid this in the future?” A few ideas come to mind:
Use these examples (AMD and Groupon) as the basis to have a training session or discussion with your internal Human Resources (HR) executives. Since the HR executives are typically the ones involved in discussing CEO and other executive compensation with the board, go right to those executives and educate them on any share limits (and other parameters) within the plan that may be triggers for violations of plan terms. If external compensation consultants are also in a position to have discussions with the Board on executive compensation decisions, it’s a good idea to make them aware of the plan limits as well.
Audit, audit, audit. Even if an oversight occurs at the HR/board level, the next stop should be the plan administrator. Anytime new grants come through, it’s best to have a check and balance in place that compares those grants to plan limits. Keep a running total of grants to date (whether it’s year to date or some other measurement outlined in the plan). Remember there are varied types of plan limits. Common limits include the number of shares that can be granted to an individual in a calendar year, the number of shares that can be cumulatively granted from the plan in a calendar year, and limits on the number of shares related to certain types of awards that can be made within a period of time (for example, a cap on the number of shares that can be issued as full value awards in a calendar year).
Advocate for contact with the board of directors. While it’s a good step to educate those who are in contact with the board (HR executives and compensation consultants), why not see if you can gain your own opportunity to educate the board? Whether it’s in person or via a communication that is presented to the board, this may be an opportunity to go straight to the decision makers. Even if it’s not the full board, the Compensation Committee of the board is an ideal target for these communications.
Nobody wants their mistakes made public. And, while there may not be a sole person responsible for the oversights at Groupon and AMD, these certainly were preventable mistakes. I hope this will be my last blog on this topic and companies will take to heart the importance of monitoring any and every aspect of the terms of their equity plans. Let’s not leave it to shareholders to discover the next mistake.