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.
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!
Beneficiary designations are a surprisingly hot topic these days, with many experts now suggesting that they are not a good idea for stock compensation arrangements. We’ve looked at this issue before in the NASPP Blog (“Did Steve Jobs Have a Beneficiary?,” October 13, 2011), but we recently published the results of a quick survey on practices in this area, so I thought it would be a good time to take a look at the topic again.
The Allure of Beneficiary Designations
When they work, beneficiary designations work very well. The company has clear instructions on what to do with the deceased employee’s awards and can pay those awards out relatively quickly, with minimal documentation from the beneficiary (perhaps just a death certificate, instructions on how to distribute the awards, and documentation to complete any required tax reporting).
Without a beneficiary designation, the awards transfer to the heirs in accordance with the rest of the deceased employee’s estate. Unless some sort of trust arrangement that includes the employee’s awards has been set up, this likely means that the awards will have to go through probate. Depending on the size of the estate, probate can be expensive, can require the assistance of an attorney to navigate, and can take a long time (note however, that many states have expedited and simplified probate processes for estates that are less than a specified amount).
When Beneficiary Designations Go Bad
The operative phrase in the section above is “when they work.” When beneficiary designations don’t work, things get ugly. Beneficiary designations need to be regularly updated for life changes (marriages, divorces, births, deaths, etc.). And they need to comply with applicable local laws–in the US, state laws can inhibit the effectiveness of beneficiary designations; outside the US, this is even more of a problem. Where the validity of a beneficiary designation is called into question, the matter will likely end up in court–which can be a lot more expensive and slower than probate. Of greater concern, where a company pays out an award pursuant to an invalid beneficiary designation, in some countries the company could be liable to the rightful heirs.
If you are going to allow plan participants to designate beneficiaries for their awards, you’ll need a process for collecting and tracking the designations. You also really should have a process to remind participants to update their designations periodically–otherwise someone’s stock awards could end up being paid out to an ex-spouse (as described in the blog entry noted above). And, particularly for non-US participants, you should have a process for verifying that the designations don’t conflict with local laws.
All of which seems like a lot of work for something that few participants will benefit from. In the NASPP’s recent quick survey on the topic, 87% of respondents reported that fewer than five participants die while holding outstanding awards per year.
Survey Says
How many companies allow beneficiary designations anyway? Well under half and sometimes as few as only one-third, depending on the type of award. Among respondents to our quick survey:
40% allow beneficiary designations for stock options
37% allow them for restricted stock/RSUs
32% allow them for performance awards
35% allow them for ESPPs
Note that for all four types of awards, there was a small percentage (less than 5%) of respondents that are considering or in the process of implementing beneficiary designations. The rest of the respondents do not allow them.
Of those that allow beneficiary designations and have non-US employees, 68% allow the designations for all of their non-US employees as well.
23% of respondents ask employees to update their beneficiary designations when they receive a new award and 12% ask for updates annually. 61% don’t ever ask employees to update their beneficiaries, which seems like a good way to get into a situation where you are paying out an award to an ex-spouse.
43% of respondents store paper copies of beneficiary designations in house, 19% have some sort of in-house automated or electronic tracking system, and 32% rely on a third party to track the designations.
The New York/New Jersey chapter hosts June Anne Burke and Barbara Klementz of Baker & McKenzie for the presentation “International Developments for Global Equity Plans: The Latest Changes and Legislative Trends” on Friday, April 4. The meeting will begin at 8:30 AM.
This week I attended the annual CEP Symposium hosted by the Certified Equity Professional Institute at Santa Clara University. This was no ordinary CEP Symposium – it was the Institute’s 10th annual event, and also celebrated the Institute’s 25th anniversary. With so many great sessions at this event, it was hard to choose some tidbits to share in today’s blog. Finally, I decided to share with you 5 things I learned from Mark Borges, who delivered this year’s keynote address (and, by no coincidence, delivered the keynote at the first CEP Symposium years ago).
1. Performance-based pay is the new “norm.” That’s probably not surprising to many of us who are in the trenches of administering these programs, but the part that caught my attention is that shareholders are also catching on to the mainstream prevalence of these awards. The bottom line: if you are not using performance-based pay (which includes awards), your shareholders are likely to say something – now or in the near term future.
2. The proxy statement has become a “communication” tool, rather than a “compliance” tool. Some of the bigger brands have caught on to this concept and are investing in magazine-like layouts, looks and feels in designing and delivering their proxies. For examples, check out this year’s proxies from General Electric and Coca-Cola.
3. Executive pay litigation isn’t over. We’ve been through a couple phases of litigation initiated by shareholder plaintiff attorneys. The first round mostly focused on failed say-on-pay votes. The second round turns to inadequate proxy disclosures – mostly around stock plan proposals. Where is the litigation moving next? The eye seems to be turning to the technical non-compliance with the qualified performance based exception under Section 162(m).
4. Say-on-pay disclosures may be headed towards inclusion of more supplemental or responsive insights. It’s not far fetched to envision a table in the proxy that reports detailed results of shareholder say-on-pay votes and a matrix to address concerns raised by shareholders. 5. Don’t forget about the impending CEO pay ratio disclosure requirements coming from the SEC. The Commission is still scheduled to adopt rules this year, with a likely effective date somewhere in 2014 and implementation in 2016. These disclosures are expected to be both informative and inflammatory.
All in all, this year’s Symposium was a great event. I remember the first one – attended by somewhere around 75 people. This year’s attendance appeared to be just over 400. Congratulations to the Santa Clara University and the CEPI on their 25th anniversary in supporting the equity compensation profession, and for another successful event!
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!
PricewaterhouseCoopers has published a summary of SEC comments on stock compensation (“2013 SEC Comment Letter Trends: Employee Stock Compensation,” available in the NASPP’s Surveys & Studies Portal). The comments were made in the course of the SEC’s review of various types of public filings (mostly Forms S-1, but also some Forms 10-K and other filings). I thought it would be interesting to take a look at what PwC found for today’s blog.
Companies Targeted
The majority (79%) of the companies to receive comments were technology, pharmaceutical, and life science companies. But don’t read anything into this–as noted above, the majority of the SEC’s comments were on S-1 filings, and these industries represented the majority of IPOs last year (particularly IPOs where employees held substantial amounts of stock compensation).
Areas Commented On
81% of the SEC’s comments related to information on stock compensation included in the MD&A. Of the comments related to the MD&A, 90% related to the discussion of critical accounting policies, et. al., for stock compensation. Based on the sample comments excerpted by PwC, it seems that many of these comments requested more information on the valuation of the company’s stock on grant dates.
Types of Comments
PwC found that, overall, 50% of the comments related to disclosure, 41% related to valuation, and 9% related to other accounting issues. Of the 41% of comments related to valuation, many of these seem to relate to the valuation of the company’s underlying stock on grant dates, rather than the valuation of stock options. Also, a little over one-third of the comments that PwC classified as disclosure-related were on the disclosures related specifically to valuation. Another 29% were on disclosures related to IPOs; many of these comments focused on valuation of the company’s stock (specifically on the differences between the most recent valuation and the IPO price).
Accounting Recognition Comments
Not much here. PwC notes that:
“Interestingly, we did not come across many comments related to some of the more complex areas of stock compensation accounting. For example, we saw only one comment on classification of awards as equity verses liability, no comments on expense attribution methodology, one comment on award modifications, and no comments on determination of the grant date.”
Key Takeaways
Overall, it seems that the SEC either (1) focused primarily on stock valuation-related issues in their review of stock compensation info in public filings, or (2) focused on everything but simply didn’t find much to comment on beyond the stock valuation issues.
If you are a public company, this is probably good news. Because your stock is publicly traded, so long as your grant dates are accurate, there’s not a lot for the SEC to question with regards to your stock value. But if you are a private company, you’ll want to make sure your house is in order when it comes to grant date stock valuations.
Here’s what’s happening at your local NASPP chapter:
Seattle: Geoff Hammel of ISP Advisors and Lisa Leitner of Outerwall present “Share Ownership Guidelines – How to Handle this Governance Golden Child.” (Monday, March 24, 11:30 AM)
Connecticut: Bruce Brumberg of myStockOptions.com presents a webinar on “Tax Season Communications: Challenges for Employees and Common Questions.” (Tuesday, March 25, 1:00 PM)
Wisconsin: Bryan Ortwein, of Towers Watson presents on the CEO pay ratio disclosure rules. (Wednesday, March 26, 11:45 AM)
Houston: Shane Tucker and Stephen Jacobson of Vinson & Elkins present “Whoops! Avoiding Common Pitfalls in Equity Compensation Plans (Part II).” (Thursday, March 27, 12:00 PM)
Twin Cities: Jim Sillery of Buck Consultants presents “Executive Compensation Practices and Trends in the Middle Market.” (Thursday, March 27, 7:30 AM)
Boston: Rob Melz of State Street Corporation, Christopher Hall of Global Tax Network, and Jewon Wee of Independent Stock Plan Advisors present on logistics and challenges of administering equity plans for a globally mobile population. (Friday, March 28, 8:30 AM)
We’re into late March and I’m reminded of the centuries old English proverb: “March comes in like a lion and goes out like a lamb.” Somehow I think it’s the reverse for the stock plan world; as many of us get to this point in the year, we’ve found that we moved on from year-end reporting to a busier proxy season.
Say-on-What?
Perhaps I speak for many of us when I suggest that the term “say-on-pay” has almost become like white noise in the background. For so long it was talked about everywhere – with so much attention spent on dissecting how companies were implementing say-on-pay driven practices and proxy voting outcomes. Well, say-on-pay is still here, and while many of us are used to it, there are still a fair number of companies that still fail to gain an affirmative say-on-pay vote when proxy season comes. A few days ago, Broc Romanek of CompensationStandards.com blogged that the 2nd say-on-pay failure for this proxy season just happened. This particular company was one that received an affirmative say-on-pay vote the year before. All in all, 74 companies failed the say-on-pay vote last year. Let’s hope those numbers start a downward trend this season. I’m not sure if I’d put my money on a downward spiral just yet, though. According to an informal poll on CompensationStandards.com, 82% of respondents felt that somewhere between 41-90 companies would fail to obtain affirmative say-on-pay votes this season. Yikes!
Keep Your Eyes Wide Open
The message of today’s blog is that while say-on-pay is not so much a “hot topic” in stock compensation at the moment, it is proxy season, and shareholders are still very much engaged in expressing themselves via their say-on-pay votes. Additionally, last year we had much discussion on the wave of litigation aimed at better proxy disclosures. These are the things to keep in mind as you sit at the proxy table this year. While it’s obviously good to care about any proposal in your proxy statement, if you’ve got stock plan related proposals on the table, you’ll want to have your radar up to understand how shareholders (and their lawyers?) are reactive to your proxy statement as a whole. A negative vote against a stock plan matter may simply be a by-product of shareholder unhappiness related to other aspects of the company’s disclosures.
Although we many be feeling complacent with the concept of say-on-pay, now is not the time to relax our efforts to ensure that all disclosures will stand up to the continued scrutiny of shareholders and their advisors.
In separate proxy related news, the Wall Street Journal reports that it looks like proxy advisory firm ISS is set to change hands (for the third time in seven years).
Hot or Not? The Hot or Not game lets you rate potential topics for the NASPP Conference but it’s only available for a short time. Don’t miss your chance to play.
ESPP Essentials The NASPP’s newest online program, Employee Stock Purchase Plan Essentials, covers the regulatory framework and day-to-day administration necessary to oversee Section 423 ESPPs. This two-webcast program is a great crash course in everything you need to know about ESPPs. Register today–the early-bird rate expires on April 18.
NASPP To Do List Here is your NASPP to do list for this week:
Play the Hot or Not game to give us your input on what topics should be offered at the NASPP Conference.
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!.
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; the first webcast is April 16.
It’s once again time to play the Hot or Not game. I have a list of possible topics for the 22nd Annual NASPP Conference; your job is to tell me whether each topic is “hot” (or not). Some quick guidelines:
Sizzling hot means you’d definitely want to attend a session the topic
Lukewarm means you might be interested in this topic
Ice cold means that you have no interest in this topic
No opinion means you don’t really know what the topic is or otherwise don’t have an opinion on it
Survey Results Too late! You missed your chance to vote, but you can review the results below.Click on the thumbnails to see the full-sized charts.
Accounting & Tax Topics
CIC Related Topics
Global Topics
Other Topics
Thanks for participating! The 22nd Annual NASPP Conference will be held in Las Vegas from September 29 to October 2. Based on the speaking proposals we received, we will have a phenomenal program this year–our best ever! Don’t pay more than you have to to attend; register by May 9, before the price goes up!