I have a vivid memory of a moment that occurred during my first few weeks in the world of equity compensation. Freshly moved into the role of Stock Administrator, I was attending a meeting about the company’s upcoming IPO. I recall the General Counsel saying something like “…and we’ll need to figure out how we are going to keep track of the ISO QDs and DDs to make sure we properly report on the W-2 to the IRS.” That was a head scratching moment for me. Huh? What is an “ISO”? What is a “QD”? What is a “DD”? I think I’ve heard of the W-2 and the IRS.That moment was captured in my mind, because I left the meeting thinking to myself “with all these darn acronyms, I am never going to understand this stuff.” Fortunately, I did eventually get it figured out – but only after much confusion along the way. Of course, we’ve added so many new acronyms since that time. I often wonder how we can keep track of it all, and what new professionals in our industry must think about our heavy use of acronyms. In today’s blog I’m going to stick to the lighter side of things and offer up a quiz – for new and tenured stock compensation professionals. Can you pass the ECAC (Equity Compensation Acronym Challenge)?
The Rules of the Game
This is just for fun. There’s not even a prize. Yes, the answers are written in tiny print at the end of the blog. No, you can’t cheat.
All you need to do is answer the questions, check your answers, and have a bit of fun!
Here Goes…
Create your free online surveys with SurveyMonkey , the world’s leading questionnaire tool.
Check your answers below!
-Jennifer
Answers:
1. ISO = Incentive Stock Option
2. PSU = Performance Stock Unit
3. MSU = Market Stock Unit
4. DOMA = Defense of Marriage Act
5. DRO = Domestic Relations Order
6. EE = Employee
7. TSR = Total Shareholder Return
8. ESPP = Employee Stock Purchase Plan
9. HSR Act = Hart-Scott-Rodino Act
10. IFRS = International Financial Reporting Standards
11. FICA = Federal Insurance Contributions Act
12. SOX = Sarbanes-Oxley (as in the Sarbanes-Oxley Act of 2002 – and yes, there was a white house cat named “Socks” – different spelling!)
13. SEC = Securities and Exchange Commission (for those who picked “Southeastern Conference”, remember – this is an equity compensation, not sports, quiz!)
14. DRIP = Dividend Reinvestment Plan
15. IRC = Internal Revenue Code
16. MTM = Mark to Market
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 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:
Register the NASPP’s newest online program, Employee Stock Purchase Plan Essentials. Don’t wait–the early-bird rate is only available until this Friday, April 18.
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; the first webcast is today!
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!
The FASB recently ratified an EITF decision and approved issuance of an Accounting Standards Update on “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (their words, not mine).
What the Heck?
I was completely baffled as to when an award would have a performance condition that could be met after the end of the service period. After all, isn’t the period over which the performance goals can be met the very definition of a service period? So I spoke with Ken Stoler of PwC, who translated this into English for me.
Turns out, it’s a situation where the award is no longer subject to forfeiture due to termination of employment but is still subject to some sort of performance condition. Here are two situations where we see this occur with some regularity:
Retirement-Eligible Employees: It is not uncommon for companies to provide that, to the extent the goals are met, performance awards will be paid out to retirees at the end of the performance period. Where this is the case, a retirement-eligible employee generally doesn’t have a substantial risk of forfeiture due to termination but could still forfeit the award if the performance goals aren’t met.
IPOs: Privately held companies sometimes grant options or awards that are exercisable/pay out only in the event of an IPO or CIC. The awards are still subject to a time-based vesting schedule and, once those vesting requirements have been fulfilled, are no longer subject to forfeiture upon termination. But employees could still forfeit the grants if the company never goes public nor is acquired by a publicly held company.
The EITF’s Decision
The accounting treatment that the EITF decided on is probably what you would have guessed. You estimate the likelihood that the goal will be met and recognize expense commensurate with that estimate. For retirement-eligible employees, the expense is based on the total award (whereas, for other employees, the expense is also commensurate with the portion of the service period that has elapsed and is haircut by the company’s estimate of forfeitures due to termination of employment).
For example, say that a company has issued a performance award with a grant date fair value of $10,000, three-fourths of the service period has elapsed, and the award is expected to pay out at 80% of target. In the case of a retirement-eligible employee, the total expense recognized to date should be $8,000 (80% of $10,000). In the case of an employee that isn’t yet eligible to retire, the to-date expense would be, at most, $6,000 ($80% of $10,000, then multiplied by 75% because only three-fourths of the service period has elapsed). Moreover, the expense for the non-retirement-eligible employee would be somewhat less than $6,000 because the company would further reduce it for the likelihood of forfeiture due to termination of employment.
The same concept applies in the case of the awards that are exercisable only in the event of an IPO/CIC, except that, in this situation, the IPO/CIC is considered to have a 0% chance of occurring until pretty much just before the event occurs. So the company doesn’t recognize any expense for the awards until just before the IPO/CIC and then recognizes all the expense all at once.
Doesn’t the EITF Have Anything Better to Do?
I had no idea that anyone thought any other approach was acceptable and was surprised that the EITF felt the need to address this. But Ken tells me that there were some practitioners (not PwC) suggesting that these situations could be accounted for in a manner akin to market conditions (e.g., haircut the grant date fair value for the likelihood of the performance condition being met and then no further adjustments).
I have no idea how you estimate the likelihood of an IPO/CIC occurring (it seems to me that if you could do that, you’d be getting paid big bucks by some venture capitalist rather than toiling away at stock plan accounting). And in the case of performance awards held by retirement-eligible employees, my understanding is that the reason ASC 718 differentiates between market conditions and other types of performance conditions is that it’s not really possible for today’s pricing models to assess the likelihood that targets that aren’t related to stock price will be achieved. Which I guess is why the EITF ended up where they did on the accounting treatment for these awards. You might not like the FASB/EITF but at least they are consistent.
Here’s what’s happening at your local NASPP chapter this week:
Ohio: Jennifer Tardif of Solium presents “How to Minimize Risk while Maximizing the Effectiveness of Equity Compensation Management.” (Wednesday, April 16, 11:30 AM)
San Francisco: Usman Zafar and Denise Scoville-Glackin of EASi present “Treatment of Equity Awards Upon Termination.” (Wednesday, April 16, noon)
Silicon Valley: Scott Barrall of Deloitte Tax, Suzie Bentley of Nvidia, and Julie Rumberger of HP present “Taking the ‘Ouch’ Out–Tax Balm for Stock Compensation.” (Wednesday, April 16, 11:30 AM)
Chicago: Andre Rooks of Mercer presents “Executive Succession Planning.” (Thursday, April 17, 7:30 AM)
Dallas: Nathan O’Connor and Raenelle James of Equity Methods present “2014 State of the Union : Equity Compensation Design, Valuation & Accounting.” (Thursday, April 17, 11:00 AM)
San Fernando Valley: Justin LaSalle and Mark Miller of Deloitte Tax present “To Mobility and Beyond! Taking the Mobile Employee Discussion a Step Further, for an Educated Audience.” (Thursday, April 17, 11:30 AM)
The NASPP Career Center, barely 18 months old, hit a new record this week with 39 active career opportunities. Is it a booming economy or something else? In today’s blog I’ll give you the lay of the land on opportunities, as well as a few insights on why so many jobs are up for grabs.
What’s the Career Center?
The NASPP launched our Career Center in the fall of 2012 to replace our job bank and offer NASPP members more robust Career resources, and it’s been growing steadily since that time. We’ve had over 300 industry job opportunities posted since inception! In 2013 we added both a blog (guest authored by Andrea Best, Ph.D of Stock & Option Solutions) and a podcast series.
Loads of Opportunities
From time to time I hear people say: “Yeah, I heard of that Career Center, but I’m guessing you only have a bunch of Silicon Valley jobs posted in there.” If that’s your thought, too, then you are going to be surprised at what I have to say next. The opportunities in the Career Center span 14 states in all regions of the continental U.S. Just in case you’re still a skeptic, I’ll list them here: CA, CT, GA, MA, MI, MN, NC, NJ, NY, OK, PA, TX, UT and WA. Yep, I checked my geography, and that covers, the west, midwest, east and southern regions of the U.S.
Job Seekers
If you’re looking for a job, we’ve got openings posted by both issuers and service providers. Willing to relocate? You’ve got a lot of choices. NASPP members can browse job openings, contact prospective employers and post their resume profile as well.
Job Recruiters
Have an opening? Be sure to post it in the Career Center. It’s free, and you don’t have to be an NASPP member to post a job.
Why the Job Boom?
I wondered the same thing. Is it an economic boom? Signs of lots of turnover? Or something else? It’s hard to know for sure, but the past two months of job reports turned out a steady rate of new jobs – nothing that suggests that unemployment rates will drop in the near future, but signs that seem to suggest the more employers will add jobs this spring. I personally observed in the Career Center that there were a number of companies with multiple job openings – perhaps a good sign?
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 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:
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; the first webcast is April 16.
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!
The NASPP’s 2014 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte Consulting LLP) is now open for participation. This is the industry’s most comprehensive survey on stock plan administration, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 25 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
The Latest Trends in ESPPs: Rumor has it that companies have been implementing new ESPPs and have been enhancing the benefits (discount, lookback, etc.) in their existing ESPPs. We saw a decline in both the number of ESPPs and the benefits offered under ESPPs in the last survey, so I’m very excited to see if this trend really has turned around.
Automatic Exercise on Expiration: For the first time ever, the survey collects data on this emerging practice. I think it makes a lot of sense so I’m very interested to see what percentage of respondents have implemented this program.
Rule 10b51 Plans: Has the recent negative attention that Rule 10b5-1 plans have received from academics and the media impacted the use of these plans? My money says no; if anything, I expect usage to have increased a bit; we’ll see if I’m right when the survey results are published.
Stock Ownership Guidelines: The 2011 Stock Plan Administration survey saw a 35% increase in the percentage of companies that have stock ownership guidelines, a remarkable increase–far higher than we expected based on responses to the 2007 survey. If everyone that said they were considering implementing stock ownership guidelines in 2011 survey did actually implement them, close to 80% of all respondents will now have these guidelines in place.
Social Media: The topic du jour when it comes to educating employees these days is the use of social media (Facebook, Twitter, LinkedIn, etc.) I think these tools have significant potential for reaching younger employees. I look forward to finding out what percentage of respondents use them now and setting a baseline that we can use for comparison purposes in future years.
April 25 will be here before you know it and you are definitely going to want to have access to the full survey results. If you are an issuer, register to participate today. (Service providers that are not eligible to complete the survey can access the full survey results at no cost, provided they are members of the NASPP. This access is available to service providers only; issuer companies must complete the survey to access the full survey results.)
We’ve covered the range of insider trading cases in past editions of the NASPP Blog – ranging from employees gone rogue with inside information, to the accidental tipping off of friends during a Sunday brunch, to the SEC’s recent vigor in pursuing these cases. Just when I thought there were no more angles to cover with the SEC’s recent and ongoing crackdown on insider trading, I find myself surprised. It turns out the latest pair to settle SEC charges of insider trading are two husbands, both who gleaned inside information from their wives about their employers and used that knowledge to trade profitably.
Are Spouses Precluded from Trading?
I’ve read many an insider trading policy, and they often attempt to extend the boundary of insider trading parameters to spouses and other family members living in the same home. Even if a policy doesn’t address it, it pretty much goes without saying that a spouse shouldn’t be trading on any information received from their partner about the partner’s employer.
Sneaky Husbands
This week the SEC reiterated their no-nonsense approach to pursuing insider trading charges when they settled charges against two husbands. What strikes me is that, based on the facts available, the “tipping” in this case was so benign – virtually through the normal co-existence that occurs in a same-household relationship. In one case, a husband put two and two together as his wife talked about an upcoming acquisition. In the other case, a wife talked on the phone to her employer about the fact that the company would be missing their earnings target for the first time in 31 quarters, all while on a leisurely vacation drive to Reno with her husband. When they returned from vacation, the husband structured a series of trades to profit off the earnings miss. In both cases, the wives reportedly instructed their husbands to never, ever trade on any information shared or overheard.
Neither of the wives were charged in the SEC’s investigation. However, the penalties to their spouses weren’t cheap – both husbands settled with the SEC for double the amount of their profits in the case (a $300,000 settlement for one husband based on $150,000 in profits, and a $280,000 settlement in the other case, based on $140,000 in profits).
Tipping from Merely Existing?
Many of us in stock compensation can probably relate to the manner in which the inside information in these cases were obtained. How many times are we on a conference call at home, or explain to a spouse that we have to work late because of the “deal” that’s in the works? It probably is somewhat routine for our issuers, and not a far fetch for our service providers and consultants either. While both wives in these two cases seemed to do everything right by instructing their spouses not to trade, insider trading still happened. I’m not suggesting that all of our co-habitants out there are likely to trade on overheard information, but I’m guessing these wives didn’t think their husbands would do it either. Perhaps this is the right time to clip the articles on the matter and remind our spouses, significant others, roommates, and anyone else who is in a position to overhear or learn from our work habits, that the SEC is on a roll and the penalties can be significant. Not to mention the public embarrassment that occurs from having your name liked to insider trading in the public eye. Yes, it can happen to you. Just ask two wives in Silicon Valley.