There’s a lot to keep track of in stock compensation, and one of the challenges in working in this industry is figuring out how to stay abreast of new developments. Today I’ll help with that by covering 3 things you should have on your radar as we get ready to close out 2014.
1. CEO Pay-Ratio Rules could (maybe, possibly) be adopted by the SEC before the end of the year. According to CompensationStandards.com’s Broc Romanek, SEC Chair White recently said that it was her “hope and expectation” that the rules would be adopted by the end of the year. Will it happen or not? We don’t know. It’s certainly something that will kick into high gear once it happens. For fun, CompensationStandards.com also has a poll where visitors can weigh in and predict the timing.
2. FASB’s Proposed Amendments to ASC 718. Yep, you read that right. Earlier this month the FASB announced several projects to explore alternatives to some of the more challenging areas of administering ASC 718. I’m going to keep you in suspense for the moment – next week’s Blog will cover this in detail, and we also plan to have additional content on our website to help you figure out the potential impact to your organization. Stay tuned, and plan some time to get up to speed next week. For a sneak peek at the issue, read our new alert on the topic.
3. Cost-basis reporting communication nightmares are near. Beginning with shares acquired on or after January 1, 2014, brokers are no longer allowed to include the compensatory income recognized in connection with shares acquired under an option or ESPP in the cost basis reported on Form 1099-B. Instead, brokers are now required to report only the purchase price as the basis and employees will have to report an adjustment on Form 8949 to correct the gain or loss they report on their tax return. This means, in many cases, that the amount recorded on the 1099-B will be wrong. Since many brokers voluntarily reported the correct cost basis prior to 2014, and since the changes to that approach became mandatory for shares acquired on/after January 1, 2014, this means we are coming up to the first tax reporting period where the likelihood of inaccurate cost-basis on the 1099-B will be widespread. Many experts I’ve spoken to on this topic seem to agree that this is adding up to a participant communication nightmare. Companies need to get ahead of the curve on this one – if you’ve got option and/or ESPP transactions related to shares acquired in 2014, then you need to contemplate a robust communication effort to explain these changes to employees – pronto.
A note to companies who collect cash par value payments on restricted stock units and awards (there are not many of you, but some state laws do require companies to collect par value, and some companies do choose to do this in cash): There is a minute detail in the wording of the cost-basis regulations that may require you to seek input from your advisers as to whether or not cost-basis reporting is required for restricted stock unit/awards for which cash is the means of payment for par value (if you are using “services” to the company to satisfy par value, this does not apply to you). In essence, the cost-basis regulations say that “covered” securities are subject to the cost basis reporting. A “covered” security has been defined as:
“A share of stock in an entity organized as, or treated for Federal tax purposes as, a corporation, either foreign or domestic acquired for cash in an account on or after January 1, 2011.”
Now, this has largely been interpreted to mean that shares not acquired using “cash” as the payment method are excluded from the cost-basis reporting requirements (thus referred to as “not covered” in most memos and educational materials I’ve seen). The “not covered” category would typically include restricted stock and restricted stock units, since, in many cases, there is no cash payment for the shares. However, since “cash” is a defining word in determining the applicability of cost-basis reporting requirements, it would seem that where a company is collecting a cash par value payment for restricted stock units/awards, then technically those awards would be considered covered securities and subject to cost basis reporting.
I have not heard anyone talking about how cash par value payments affect the “covered” vs. “non covered” status of these securities. The vast majority of respondents in the NASPP/Deloitte 2013 Stock Plan Design Survey reported using means other than cash to satisfy par value requirements. However, 5% of respondents did report collecting cash payments to satisfy par value. I don’t have answers – this is likely a tiny nuance not yet explored by many advisers, since there are only a few companies who are collecting a cash par value payment. Nevertheless, I’m putting it out there that if your company is one of those that collect cash for par value, it’s time to ask your advisers to come up with an answer on this one – well before the tax reporting process begins. We want everyone to smooth sail through this season of tax reporting!
For additional information on cost-basis reporting, see our Cost Basis portal.
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I had planned to blog about some pretty big and exciting news from the FASB, but on October 15, ISS announced their new methodogy for analysing stock plan proposals. You only have until October 29 to submit commits, so this anouncement trumps the FASB announcement.
My first thought upon reading the ISS announcement was “Seriously? People only have 14 days to read this and comment on it?” I don’t know, it kind of makes me think they don’t care about your comments.
Balanced Scorecard
Historically, ISS has employed a number of mechanisms to evaluate stock plan proposals, including 1) plan cost (e.g.’ the Shareholder Value Transfer test), 2) historical burn rates, and 3) a review of specific plan features. Each of these factors were evaluated as a series of pass/fail tests and a plan had to pass all three to receive a positive recommendation.
The proposed approach will still consider the three areas noted above (with a number of significant changes), but will look at them on a holistic basis, rather than as a series of separate tests. So plans that fail one test may still receive a favorable recommendation if the results of the other analyses are positive enough to outweigh the failure. I also suspect that means that plans that pass all three tests but with a low score on each could end up receiving a negative recommendation.
SVT Test Gets an Update
The SVT test will be performed not just on the shares requested for the plan but instead on 1) shares requested, shares currently available for grant, and shares outstanding, and 2) shares requested and shares currently available for grant.
Bad News for RSUs
Historically, allowing shares withheld for taxes to return to the plan just caused the award to be treated as a full value award in the SVT test. Which meant that it didn’t matter if you allowed this for full value awards becauuse they were already counted as full value awards in the SVT test.
Now “liberal” share counting features (e.g., returning shares withheld for taxes to the plan reserve) will no longer be part of the SVT test but will instead be considered separately as a plan feature. So it could be a problem to do this for both RSUs.
Burn Rate Commitments Are a Defunct
My understanding is that up until now, companies didn’t really worry about the burn rate test because if they failed it, they could fix the failure by simply making a burn rate commitment for the future. But the new methodology eliminates the ability to correct burn rate failures by committing to a burn rate cap.
Now, if you fail the burn rate test, you’ll have to hope that the plan cost is low enough and you have enough positive plan features (e.g., clawbacks, ownership guidelines) to outweigh the failure.
Be sure to tune in next week for my big FASB announcement (see the alert on the NASPP home page for a preview).
The tracking and taxation of mobile employees continues to be one of the most complex challenges in stock administration. Equity awards are being issued on a broader basis, which means more participants to monitor. Increased focus and scrutiny from tax authorities across the globe translates to a greater need to be vigilant with tax calculations and collections. One question we tend to hear over and over again: How are other companies handling this? In today’s blog, I’m able to provide some answers.
Thanks to data collected in a recent Morgan Stanley/NASPP Mobility Survey, we’ve got some insights into current mobility practices. First, the survey demographics:
289 respondents
All respondents verified that they represent an issuer firm and are involved in stock plan administration
Data was collected between July 15-25, 2014
Now, let’s dive into the details. Among the highlights:
Nearly three-quarters of respondents said they rely on a third party to assist with taxation of their mobile employees
42% of firms surveyed provide education to affected “mobile” employees
3 out of 10 companies believe their mobile workers are confused about how their movements can affect their global and domestic tax obligations
Nearly 40% of respondents reported a budget of $25,000 or less allocated to mobility efforts
Less than 4 out of 10 companies rate their mobility efforts as excellent or above average
Business travelers receive relatively low monitoring – only 14% of global and 15% of firms reported tracking business travelers
Practices around mobility continue to evolve. The results from this survey seem to suggest that there is room for improvement in some areas – including employee education, scope of tracking and overall administration. In my opinion, the category of business travelers continues to be an under-tracked component of mobile populations. Companies may be wise to increase their efforts in the business traveler category before tax authorities increase their compliance enforcement in this area. Additionally, it seems that the majority of companies are aware that mobile employees may be under educated about the taxation of their equity awards. This seems to be a prime area for a portion of the communication budget.
For more information, access the article “Workforce on the Move“, which includes analysis of survey results.
2014 Domestic Stock Plan Administration Survey Results
Tune in tomorrow, October 16 for our webcast “Trends & Analysis from the 2014 Domestic Stock Plan Administration Survey” and hear the latest findings from the industry’s most comprehensive survey on stock plan administration practices. The webcast will report on trends in the following areas:
Stock plan administration and communication
ESPP design and operation
Insider trading compliance
Stock ownership guidelines
Outside director plans
The survey is co-sponsored by the NASPP and Deloitte Consulting LLP.
To Do List
Here is your NASPP to do list for this week:
Did you know we recorded the entire 22nd Annual NASPP Conference? Order the audio today; buy just the sessions you want or save with a multi-session package.
The House Financial Services Committee has recently been engaged in efforts to help start-up companies raise capital, including a bill (H.R. 4571) that directs the SEC to increase the threshold (from $5 million to $20 million) at which companies are required to provide additional disclosures to employees under Rule 701.
Background
Privately held companies typically rely on Rule 701 to issue stock through compensatory awards granted to employees. Where a company has relied on Rule 701 for the issuance of more than $5 million worth of stock in a 12-month period, the company is required to provide additional disclosures to employees, including the financial statements of the company prepared in accordance with US GAAP, risks associated with purchasing the company’s stock, and a summary of the material terms of the plan.
Proposed Change
The legislation passed by the House Financial Services Committee directs the SEC to increase the $5 million threshold to $20 million and further requires that this amount be indexed to inflation on a five-year basis. The bill makes no other changes to Rule 701.
The $5 million threshold has been in place since Rule 701 was adopted in 1988. Originally, Rule 701 actually capped issuances at $5 million; in 1999 the Rule was amended to merely require additional disclosures when this threshold is exceeded.
This threshold is frequently a concern for private companies, especially technology start-ups and others that grant equity broadly throughout their employee population. Anyone who has tried to buy real estate recently in California knows that $5 million in today’s economy isn’t what it was in 1988. According to the inflation calculator on the Bureau of Labor Statistics website, $5 million in 1988 had the buying power of a little over $10 million today; half the amount of the increase proposed by the House Finance Committee. We guess if the House Finance Committee is going to go for something, they might as well go for broke (or perhaps the bill sponsors felt they needed a little room for negotiation).
Next Steps
This legislation still needs to be voted on by the full House, then by the Senate, and then signed into law by the President. GovTrack.us (where you can sign up to receive email, Twitter, or Facebook updates on the bill) gives the bill only a 31% chance of passing. And after the bill is signed into law, the SEC has to draft a proposed rule, solicit comments, review the comments and issue a final rule before the change will take effect.
But, what is particularly interesting here is that—unlike some other limits I’d like to see adjusted for inflation (the ESPP $25,000 limit and the ISO $100,000 limit come to mind)—Congressional action isn’t necessary for Rule 701 to change. This is a rule promulgated by the SEC; as such, it could be modified by the SEC with or without direction from Congress. The SEC revamped Rule 144 in 2007; it’s been a lot longer than that since Rule 701 was updated. Perhaps this legislation will put this issue on the SEC’s radar.
Here’s what’s happening at your local NASPP chapter this week:
Michigan: The chapter presents “Executive Compensation Trends.” (Tuesday, October 14, 11:30 AM)
Dallas: Two chapter meetings in one day! Lori Oliphant of Winstead presents “Preparing for the 2015 Proxy Season” with Steven Stark of Zale and C. Don Hager of DeBee Gilchrist at 7:30 AM at the JC Penney corporate office in Plano at 7:30 AM. Then Lori does it again at 3:00 PM at Winstead’s offices in Dallas, this time with Barbara Ashworth at AT&T and C. Don Hager of DeBee Gilchrist. (Thursday, October 16)
DC/MD/VA: Bill Dunn of PwC presents “What you need to know about Cost Basis changes and Regulatory Developments.” A cocktail reception will follow the meeting. (Thursday, October 16, 3:30 PM)
San Fernando Valley: Equity Methods presents “Ten Things You Want Your Comp Committee to Know BEFORE Performance Grants are Issued.” (Thursday, October 16, 11:30 AM)
NY/NJ: Joseph Blasi of Rutgers University presents “The Citizen’s Share: Notes From the Lab About What We Learn About Shares From Scientific Studies.” (Friday, October 17, 8:30 AM)
Earlier this week, Facebook completed its acquisition of WhatsApp, with a final valuation of the deal coming in just under $22 billion. Yes, that is “billion” with a “b.” If you guessed that the bulk of that $22 billion comes in the form of stock, you would be right. Facebook paid $4.59 billion in cash, and the remaining $17 billion was paid in shares (178 million of them). In addition, employees of WhatsApp received a cumulative 49 million RSUs, vesting over the next 4 years. Acquisitions are nothing new, but there was a certain buzz around the periphery of this deal that seems to be pointing towards a new era of Internet entrepreneurship.
It hasn’t been that long since the dot com boom swept Silicon Valley and the world of stock administration, but it sort of feels like a distant memory with the recession etched even more recently in our minds. Almost as soon as we forgot the “boom” and “bust” of the dot com era, familiar rumblings began again. Late last year, Forbes magazine published an article suggesting that a new era of Internet start ups is upon us. In that article, the author shared data from the Kaufman Index of Entrepreneurial Activity (KIEA) that the entrepreneurial rate in the U.S. is already well above the dot.com bubble of 15 years ago. I’m no Internet expert, but if the WhatsApp deal is any indication, maybe it’s true.
Time will tell whether a new era is upon us. The Wall Street Journal and Dow Jones VentureSource now have a running list called “Billion-Dollar Startup Club“, which seeks to keep track of start ups that are valued $1 billion or more by venture capital firms. Currently at the top of the list is cab-hailing app Uber – with a valuation of $18.2 billion (as of June 2014). Not every M&A deal comes with a billion dollar valuation or price tag, but, as the Wall Street Journal points out, that club is getting less exclusive. And with more growing companies moving into the Billion-Dollar Startup Club, we’re certainly hearing about deals loaded up with stock compensation – many of which are creating instant paper wealth, and not just for founders. We’ve covered a lot of new ground in stock administration over the past 20 years, and the interesting part is that we just don’t know what lies ahead. If there is a new generation of start ups on the horizon, hopefully that signals a broader reach for stock compensation as companies get creative in sharing their wealth (or potential wealth) with employees.
It’s that time of year again…when a stock plan administrator’s thoughts turn to proxy disclosures and stock plan proposals and ISS makes repeated appearances in the NASPP Blog. I recently blogged about the ISS policy survey and about their new Equity Plan Data Verification Portal. For today’s entry, I have another ISS update: the results of their policy survey. (And I’m not through with the topic of ISS yet–expect another entry when they release their updated policy and probably yet another when they release the burn rate tables for 2015).
Survey Respondents
ISS’s survey was completed by 370 respondents, 28% of which are institutional investors and 69% of which are issuers. Most of the respondents are located in the United States.
Balanced Scorecard
As I mentioned in my earlier blog, ISS has announced that they are moving to a “balanced scorecard” approach to evaluating stock plan proposals. This approach will weigh 1) the cost of the plan along with 2) the plan features and 3) past grant practices. (Since ISS already looks at all of these areas when evaluating a stock plan proposal, it’s not clear to me how this will differ from what they already do, but if they weren’t changing anything, I wouldn’t have anything to blog about, so I guess I can’t complain.)
The survey asked respondents how much weight each of these three factors should carry in ISS’s analysis of the plan. The results are kind of hard to parse, but I think the upshot is that respondents generally thought that plan cost should carry the most weight (in contrast to my informal and highly unscientific survey, where close to half of the respondents thought all three areas should carry equal weight). From the ISS press release:
With respect to how the plan cost category should be weighed in a scorecard, 70 percent of investors indicate weights ranging from 30 to 50 percent, with a 40 percent weighting cited most often. Sixty-two percent of investors suggest weightings from 25 to 35 percent for plan features; and 64 percent indicate weights ranging from 20 to 35 percent for grant practices. Weightings suggested by issuers were also quite dispersed, but generally skewed somewhat higher with respect to cost, and somewhat lower for plan features and grant practices compared to investors.
Factors Important in Markets with Poor Disclosures
ISS notes that in some developing/emerging markets, the quality of stock plan disclosures is poor. The survey asked respondents what factors are most important to evaluating plans in these markets. The results exposed an interesting discrepancy of opinion between institutional investors and issuers (at least for developing/emerging markets). Investors placed a lot of importance on the use of performance conditions (76% of investors rated this as “very important”); issuers didn’t place nearly as much importance on this (only 49% of issuers rated performance conditions as “very important”). 10% of issuers rated performance conditions as “not important at all” whereas all investors thought performance conditions were at least somewhat important.
Another fabulous NASPP Conference! Here are a few more scenes from Las Vegas:
For the opening keynote, panelists Jiminy Cricket (aka Don Delves of Towers Watson), Johnny Rocco (aka Mike Kesner of Deloitte), The Silver Bullet (aka Jan Koors of Pearl Meyers), Monte Carla (aka Liz Stoudt of Aon Hewitt/Radford), and Compensation Cowboy (aka Barry Sullivan of Semler Brossy Consulting) fought to be the last surviving compensation consultant. Captain Cashbags (aka Broc Romanek of CompensationStandards.com) moderated the panel.
The Conference had closed to 1800 attendees! The morning keynote was jam packed!
Attendees relax and enjoy a conversation in the UBS exhibit booth.
Karen Moses of Xoom won a GoPro camera for playing the Networking Game in the Conference app. Karen is flanked by Dan Coleman of Radford (appropriately dressed in a tux for his role as raffle emcee) and me. Radford stepped up the raffle drawing process by developing the Monte Carlo Raffletron 2200, which applied the principles of the Monte Carlo simulation to randomly select a raffle winner.
The NASPP hosts an annual luncheon for our Chapter Presidents. In this year’s luncheon, the presidents enjoyed a lively discussion of the challenges involved in leading a chapter.
Sheila Frierson of Computershare catches up with a colleague during a break.
I look forward to seeing everyone in San Diego in 2015! Follow the NASPP on LinkedIn, Twitter, and Facebook for more updates on the Conference.