What It’s Like to Be on the Daily Show with Jon Stewart Ever wonder what it’s like to be interviewed by Jon Stewart on the Daily Show? Find out in this video by Broc Romanek, in which he interviews Kevin Roose (author of “Young Money”), who was a guest on the Daily Show earlier this year.
NASPP Conference Price Goes Up after This Friday! We’ve introduced phased-in pricing for this year’s NASPP Conference. The earlier you register; the less you pay. Don’t wait–the current discount is only available through this Friday, May 9.
NASPP To Do List
Here is your NASPP to do list for this week:
Register for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait–the price goes up again after this Friday, May 9!
Read Andrea Best’s newest blog entry in the NASPP Career Center, “From Management to Leadership: Cultivating Loyalty and Retaining an Enthusiastic Team.”
It’s not too late to sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; all webcasts have been archived for you to listen to at your convenience.
Retirement provisions constituted the most anticipated area of results in the 2013 Domestic Stock Plan Design Survey. I received several requests for a peek at the preliminary results in advance of our release of the final results. Now that the final results are available, I thought a summary of the data might be of interest to my readers.
The 2013 Domestic Stock Plan Design Survey Results
Automatic Payouts to Retirees: Just over 50% of respondents provide some sort of automatic payout to retirees–either full or pro-rata accelerated or continued vesting. Depending on the type of grant, another 5% to 17% provide a discretionary payout or some other type of payout.
Accelerated vs. Continued Vesting: For time-based restricted stock/units, acceleration of vesting (28%) edges out continuing to vest awards after retirement (23%). But, for stock options, the opposite is true–continued vesting upon retirement (27%) just edges out accelerated vesting (24%). And, for performance awards, continuing to vest (in other words, paying the awards out to retirees only at the end of the performance period rather than at retirement) wins by a landslide (44% vs. 8% or respondents). This makes sense–performance awards that pay out at retirement are problematic for a host of reasons: for starters, they provide the wrong incentive to potential retirees and don’t qualify as performance-based compensation under Section 162(m).
Full vs. Pro-Rata Vesting: For time-based awards, full vesting (vs. pro-rata vesting) is most common: 30% vs. 21% of respondents for RS/RSUs and 41% vs. 10% of respondents for stock options. But for performance awards, pro-rata vesting is more common (34% of respondents vs. only 18% that provide full vesting).
To be continued…tune in next week for the exciting conclusion to our foray into the world of retirement.
Here’s what’s happening at your local NASPP chapter this week:
KS/MO: The chapter presents a hot topics roundtable. Come enjoy springtime in the plaza and discuss grant practices, proxy filings, and any other topics that interest you. (Tuesday, May 6, 11:30 AM)
Philadelphia: Joel Joseph of Radford presents “The Accountants Speak! Best Practices and Pitfalls When Accounting for Equity Compensation.” (Tuesday, May 6, 12:00 noon)
I was intrigued a couple of weeks ago by an article about workers in India that were threatening to go on strike. One of the demands in order to avoid the strike? Stock options. I think part of my captivation came from my own point of reference – stock options are on the decline here in the U.S., so I’m surprised to see people actually striking for them. As it turns out, stock options are still quite popular in India. Tsk tsk to me for not being more “global” in my analysis of the perceived value of stock options. My new found intrigue with India was backed up by a study conducted by Ernst & Young, which I’ll explore in more detail in today’s blog.
We Want Stock Options!
According to an article on the Financial Express, union representatives for a group of auto workers “asked that all workers of Bajaj Auto should be given the option to subscribe to equity shares at a discounted rate of R10 per share, and that each workman be allowed to purchase 500 shares.” A similar demand was made in last year during a period in which workers were on strike for 50 days. I’d say these workers are passionate about their desire for an equity stake in the company. I wondered, though, why they didn’t ask for restricted stock units. I think I got my answer when I came across the study by Ernst & Young (which is also mentioned in the latest edition of the NASPP Advisor newsletter, due out next week).
It’s All in the Perceived Value…
We’ve long observed the downward trend in stock option issuances here in the United States. While that pattern continues, a study by Ernst & Young shows that stock options (referred to as ESOPs) remain popular in India, as reported in an article at the Indian business website LiveMint.com (“Evaluating Stock Options” by P.R. Sanjai and Aveek Datta, Mar. 25). The E&Y study reports that a whopping 88% of Indian companies still prefer stock option plans (compared to only 49% of multinational corporations). There are a few reasons why the immense popularity of stock options in India – one may be found in the perceived value that these equity types carry in the technology sector. When stock options were more popular, technology companies were heavy users, and in some cases a lot of wealth was created – even in the lower ranks of organizations. With India having a strong technology sector of its own, it may be that the perception of stock options took hold back in the boom times, and hasn’t really dissipated or refocused on other equity types. Though in checking around, it seems RSUs are also gaining in popularity amongst employees in India as well, but still trail stock options (at least from a perceived value perspective).
It May Not Be One Size Fits All
We often talk about how multinational companies need to consider the factors of the locales in which they do business. Things like culture, economics, business and regulatory climate all impact a company’s compensation approach in a jurisdiction. I would add to that analysis and perceived value beliefs about equity held by the local population. While a preferred form of compensation may not be feasible in certain jurisdictions, it may be wise for us to explore the perceptions of our employees abroad in order to better understand how equity compensation affects them. Do they place more “value” on one type of equity versus another? Although India is just one country, and stock options just one form of equity, it’s clear that the dynamics behind “why” a certain type of equity compensation may be preferred in a locale can be multi-faceted and require further exploration.
One Week Reprieve on Completing the Stock Plan Administration Survey But don’t wait any longer! This is it–we won’t be able to extend the deadline again; issuers must complete the survey by this Friday, May 2 to have access to the full results. The NASPP’s 2014 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP) is the best source of data on stock plan administrative practices. You’ll be sorry if you miss this chance: register to participate today.
NASPP Conference Price Goes Up after May 9 We’ve introduced phased-in pricing for this year’s NASPP Conference. The earlier you register; the less you pay. Don’t wait–register before the price goes up next Friday, May 9.
NASPP To Do List Here is your NASPP to do list for this week:
Register for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait–the price goes up again after May 9!
Read Andrea Best’s newest blog entry in the NASPP Career Center, “From Management to Leadership: Cultivating Loyalty and Retaining an Enthusiastic Team.”
It’s not too late to sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; all webcasts have been archived for you to listen to at your convenience.
For today’s blog entry, I have a couple of follow-up tidbits related to the recent EITF decision on accounting for awards with performance periods that are longer than the time-based service period. I know you are thinking: “Yeesh, it was bad enough the first time, how much more could there be to say on this topic!” but you don’t write a blog.
Background
To refresh your memory, this applies to performance awards that provide a payout to retirees at the end of the performance period contingent on achieving a non-market condition target (in other words, just about any goal other than stock price or TSR targets). Where awards like this are held by retirement-eligible employees, the awards will not be forfeited in the event of the employees’ terminations but could still be forfeited due to failure to achieve the performance targets. The service component of the vesting requirements has been fulfilled but not the performance component.
This also applies to awards granted by private companies that vest based on both a time-based schedule and upon an IPO/CIC.
The EITF came to the same conclusion you probably would have come to on your own. Expense is adjusted for the likelihood that the performance conditions will be achieved; as this estimate changes throughout the performance period, the expense is adjusted commensurately until the end of the period, when the final amount of expense is trued up for the actual vesting outcome. (See “Performance Award Accounting,” April 15, for more information.)
The IASB Does It’s Own Thing
I thought it was just a few maverick practitioners that had taken an opposing position. The alternative approach (which the EITF rejected), is to bake the likelihood of the performance condition/IPO/CIC being achieved into the initial fair value, with no adjustments to expense for changes in estimates or outcome (akin to how market conditions are accounted for).
It turns out, however, that the IASB is one of the maverick practitioners that takes this position. Apparently, the IASB thinks that option pricing models can predict the likelihood of an IPO occurring or earnings targets or similar internal metrics being achieved. Which makes this another area were US GAAP diverges from IFRS. Just something to keep in your back pocket in case conversation lags at the next dinner party you attend.
Mid-Cycle Performance Grants
As I was reading Mercer’s “Grist Report” on the IASB’s decision, I noticed that they also had made a determination with respect to grants made in the middle of a performance cycle. These are typically grants made to new-hire employees. For example, the performance cycle starts in January and an executive is hired in February. All the other execs were granted awards in January at the start of cycle, but the newly hired exec’s award can’t be granted until February.
Under ASC 718, the grant to the newly hired exec is accounted for just like any other performance award. True, his award will have a different fair value than the awards granted in January and the expense of the award will be recorded over a shorter time period (by one month) than the other execs’ awards. But where the award is contingent on non-market conditions, the expense is adjusted based on the likelihood that the goals will be met and is trued up for the actual payout, just like any other performance-conditioned award.
The same treatment applies under IFRS 2, but only if the performance-conditioned award is granted shortly after the performance cycle has begun. Awards granted farther into the performance cycle (in my example, if the exec were hired in, say, June, rather than February) are accounted for in the manner applicable to market conditions (i.e., the vesting contingencies are baked into the initial grant date fair value, with no adjustment to expense for changes in estimates or outcome), even if the targets are internal metrics.
Hmmmm. I’m starting to wonder if discussions like this explain the dearth of dinner parties in my life.
Thanks to Susan Eichen at Mercer for bringing the IASB’s decision to my attention and for explaining the IASB’s positions with respect to mid-cycle performance grants.
Here’s what’s happening at your local NASPP chapter this week:
San Diego: Emily Cervino of Fidelity Stock Plan Services and John Wolff of GuideSpark present “Lights, Camera, Action! Viral Videos in Stock Compensation.” (Tuesday, April 29, 11:30 AM)
Orange County: Aaron Boyd of Equilar presents “At the Crossroads: Recapping Proxy Season and Anticipating Shareholder Meetings.” (Thursday, May 1, 11:30 AM)
Last week I touched upon my early days in equity compensation, when many of the acronyms and jargon threw me for a loop. Reminiscing about some of the early days of my career got me thinking about the new additions we have to this industry on a regular basis. I love going to NASPP Chapter meetings and meeting people who are brand new to this profession. After all, we all share some kind of strange unspoken bond. Nearly all of us landed here by chance, luck of the draw, or some other random coincidence. In today’s blog, I’m speaking to those new people – offering up 5 things that I wish someone had told me when I first landed in this industry.
Go to as many industry events as you can. There are two reasons for this one. First, this helps you gather information quickly – learning about many of the concepts that touch your world. New practices emerge, regulations change. The best way to keep on top of these changes is to get out and hear what the other experts in the industry are saying. Note that “industry event” can be a webcast, chapter meeting, conference, and so on. Second, you need to build a network of people that you can turn to when you have questions or require input. A great way to meet people is at chapter meetings and conferences. Don’t let the excuse of “I’m too busy” prevent you from getting out there.
Pursue as many education opportunities as possible. There is a lot to learn – regulations, tax code, practices, and so on. Especially in the early days, this can be a case of “you don’t know what you don’t know.” You may think you’ve learned a lot, only to realize there are topics that haven’t even been discovered yet. Take advantage of fundamentals courses offered (yes, the NASPP offers fundamentals courses every year – this year we’re doing two – Stock Plan Fundamentals and Employee Stock Purchase Plan Essentials).
Get your CEP! The Certified Equity Professional Institute at Santa Clara University offers you the opportunity to become certified in your equity compensation knowledge.
Find a mentor. Many seasoned equity compensation professionals are happy to share their knowledge and serve as a resource to others. Look for someone who is knowledgeable and approachable and ask them if they would mind if you contacted them with questions from time to time. Not only will you have a go-to person for your questions, but you’ll likely develop a great long term relationship. My early mentor actually hired me at one point! You just never know where those relationships will take you.
Offer to speak. Yes, you heard me correctly. I hear this all the time – “but I haven’t been in this industry for a lot of years” or “I’m not sure what I could speak about.” Make it a goal to get to the point where you can share your knowledge or experience on a particular topic. You probably already have plenty to speak about – you just don’t know it. Did you recently tackle a project and have great success? Are you a great writer and you turned out some amazing employee communications? You don’t have to be an expert in every single area of equity compensation in order to speak. What you do need to have is an experience or know-how that will be helpful to others. Taking on a speaking opportunity will also push you to dig even deeper into your topic, leaving you with more information as well.
To those who are newer to this field, there are many of us who have been in your shoes. It may feel like you are sometimes lost in a sea of information and concepts, but as you learn more you will come to realize what the rest of us have – this is a pretty awesome industry to put your stake in the ground. There’s never a dull moment – regulations change, new practices and people come onto the horizon. You know what they say – “variety is the spice of life”, and we certainly don’t lack in variety. So if you’re new to the industry and wondering where to start, try the 5 steps above and you should be well on your way to making your own mark in this wild field called equity compensation.
Time Is Running Out to Complete the Stock Plan Administration Survey The NASPP’s 2014 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP) is now open for participation. If you are an issuer, you have to complete the survey by this Friday, April 25 to access the full results. You’ll be sorry if you miss this chance: register to participate today.
NASPP To Do List Here is your NASPP to do list for this week:
It’s not too late to sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; all webcasts have been archived for you to listen to at your convenience.
Register for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait–the price goes up again after May 9!
At the same time that the IRS released regulations designed to clarify which restrictions constitute a substantial risk of forfeiture under Section 83 (see my blog entry “IRS Issues Final Regs Under Section 83,” March 4), a recent tax court decision casts doubt on the definition in the context of employees that are eligible to retire.
Background
As my readers know, where an employee is eligible to retire and holds restricted stock that provides for accelerated or continued vesting upon retirement, the awards are considered to no longer be subject to a substantial risk of forfeiture, and, consequently, are subject to tax under Section 83. This also applies to RSUs, because for FICA purposes, RSUs are subject to tax when no longer subject to a substantial risk of forfeiture and the regs in this area look to Section 83 to determine what constitutes a substantial risk of forfeiture.
Although there’s usually some limited risk of forfeiture in the event that the retirement-eligible employee is terminated for cause, that risk isn’t considered to be substantial. As a practical matter, at many companies just about any termination after achieving retirement age is treated as a retirement.
Austin v. Commissioner
In Austin v. Commissioner however, the court held that an employee’s awards were still subject to a substantial risk of forfeiture even though the only circumstance in which the awards could be forfeited was termination due to cause. In this case, in addition to the typical definition of commission of a crime, “cause” included failure on the part of the employee to perform his job or to comply with company policies, standards, etc.
Implications
Up until now, most practitioners have assumed that providing for forfeiture solely in the event of termination due to cause is not sufficient to establish a substantial risk of forfeiture, regardless of how broad the definition of “cause” is. Austin seems to suggest, however, that, in some circumstances, defining “cause” more broadly (e.g., as more than just the commission of a crime) could implicate a substantial risk of forfeiture, thereby delaying taxation (for both income and FICA purposes in the case of restricted stock, for FICA purposes in the case of RSUs) until the award vests.
On the other hand, there are several aspects to this case that I think make the application of the court’s decision to other situations somewhat unclear. First, and most important, the termination provisions of the award in question were remarkably convoluted. So much so that resignation on the part of the employee would have constituted “cause” under the award agreement. There were not any special provisions relating to retirement; all voluntary terminations by the employee were treated the same under the agreement. In addition, the employee was subject to an employment agreement and the forfeiture provisions of the award were intended to ensure that the employee fulfilled the terms of this agreement.
Finally, the decision notes that, for a substantial risk of forfeiture to exist, it must be likely that the forfeiture provision would be enforced. I think that, for retirees, this often isn’t the case–the only time a forfeiture provision would be enforced would be in the event of some sort of crime or other egregious behavior. Termination for cause is likely to be met with resistance from the otherwise retirement-eligible employee; many companies feel that, with the exception of circumstances involving clearly egregious acts, it is preferable to simply pay out retirement benefits than to incur the cost of a lawsuit.
Never-the-less, it is worth noting that 26% of respondents to the NASPP’s recent quick survey on retirement provisions believe that awards held by retirees are subject to a substantial risk of forfeiture.