Tip #2 for Submitting a Winning Speaking Proposal My second tip related to speaking proposals is for issuers. Speaking at the NASPP Conference is a great way to attend and get complimentary registration. It’s also great for your career because you will establish yourself as a leader in the industry.
But wait, you ask: “How will my speaking proposal ever get accepted if firms that participate in the Proposal Assistance Program get extra advice and preference (see tip #1)? As an issuer, my company isn’t going to exhibit at the Conference.” Well, you know what they say: “If you can’t beat ’em, join ’em.”
Issuers can leverage the Proposal Assistance Program by partnering up with the firms that are participating in it. You most certainly have a variety of providers that you work with to manage your stock compensation program. I’m talking about your attorneys, accountants, compensation consultants, broker, administrator, etc. Think about which of these firms exhibited at last year’s Conference and are eligible to participate in the Proposal Assistance Program. These firms have an edge in the proposal selection process and their proposals will have even more of an edge if they include a client. Contact them to see if they need clients for any of their proposals. Many exhibitors tells us that finding clients to serve on their panels is the hardest part of submitting a proposal. Don’t wait to be asked–the squeaky wheel gets the oil, so contact your providers proactively about joining them on a proposal.
Or, even better, offer to submit a joint proposal. Each firm can submit only three proposals. But a joint proposal you submit on their behalf doesn’t count as one of their three. The more proposals a firm is on, the more speaking slots they’ll get, so I expect your providers will be appreciative of the offer. And proposals that include Proposal Assistance Program participants receive preference in the proposal selection process, so having one of these firms on your panel gives it an edge.
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course which will be offered next spring. This course is a great introduction to stock plan administration; register by February 14, 2014 for the early-bird rate.
Save the date for the 22nd Annual NASPP Conference: September 29-October 2, 2014 at the Mandalay Bay in Las Vegas.
Here’s what’s happening at your local NASPP chapter this week:
San Fernando Valley: June Anne Burke and Sinead Kelly of Baker & McKenzie highlight recent changes to keep your company’s stock plan in compliance in 2014. (Thursday, January 23, 11:30 AM)
San Francisco: Wendy Davis of Jones Day, Susan Garvin of Stock & Option Solutions, and Lydia Terrill of TIBCO Software present “Proxy Wars: How to Prepare Your Equity Disclosure Tables Without Shedding Any Blood.” (Thursday, January 23, 11:30 AM)
I’ll be at the San Francisco chapter meeting; I hope to see you there!
Companies that grant stock options know that there are a few core challenges that have maintained their existence throughout the life span of these types of equity arrangements. Among them: how to handle the impending expiration of an in-the-money, unexercised grant.
Does it Really Happen?
Stock plan education site, myStockOptions.com, cites the issue of expiring options as one of the “top mishaps with stock options that can cost you money”. This issue of lost dollars creates a conundrum for many companies – if the option expires, there is risk for a disgruntled employee who may decide to litigate. Even if litigation doesn’t happen, many employees who find themselves in that situation often beg for reinstatement of the option, which is not without cost to the company (in the form of additional compensation expense that would need to be incurred for the reinstated option, which would be treated like a new grant in-the-money grant for accounting purposes). These scenarios usually motivate employers to prevent the options from expiring.
Preventing Expiration
While the issue of expiring options remains relatively unchanged – as long as there are stock options, there will be concern around the impending expiration of in-the-money grants – the approaches to handling this situation continue to evolve. The most common practices include outreach programs to remind optionees that their grant is about to expire. This communication can be performed by the company, or, via a third party service provider. Although these programs seem to reduce the number of expired grants, there are no guarantees that a grant will be exercised – the action still falls squarely upon the participant.
New Ideas
In recent years, a new approach has emerged as a practical solution to this age old problem: the auto-exercise. The essence of the auto-exercise is that an in-the-money, otherwise unexercised stock option will automatically be exercised at or shortly before the close of the market on the date of expiration. The “type” of exercise that will be executed is usually determined by the company in conjunction with the service provider who will perform the exercise, in compliance with the company’s plan terms. I don’t have any formal survey data on which auto exercise types are most popular, but I’d say net issuance and sell-to-cover are on my radar as the most logical methods, with an edge to net issuance.
This is not a new concept – auto exercise has been used for publicly traded options for years. However, in adopting this approach for internal stock plans, there are considerations – some of which were recently highlighted in a Fidelity memo titled “Safeguarding Your Employees’ Stock Option Grants“, available on the NASPP web site. This particular article heavily advocates the use of net issuance in these situations; I’ll recap some of the concepts (with my own flavor added) from that angle:
Cash Flow: Companies need to carefully consider their cash flow when determining which auto exercise method to use. Withholding of shares (net exercise) to cover the exercise costs means that the company will need to remit the tax payment, from its own coffers, to the IRS.
Plan Provisions: Again, regardless of which exact method is chosen, it’s important to ensure the chosen method is permissible under the plan terms. If there is no provision, it may be necessary to secure a plan amendment.
Treatment of Existing Options: When implementing an auto exercise program, a determination must be made as to whether this applies to all grants (existing and new) or only on a forward basis (new grants). Addition of this type of feature to an existing grant is considered a Type 1 modification for accounting purposes, but would be no incremental expense.
Threshold for Automatic Exercise: A determination needs to be made as to how far the options need to be “in-the-money” in order for the auto exercise to execute. Usually a threshold to net one share would be the minimum amount, since most plans and service providers wouldn’t permit a fractional share issuance in these scenarios.
What if the Employee Doesn’t Want Auto-Exercise?
Lastly, there’s the scenario of an employee who actually didn’t want to exercise their in-the-money options and complains that the company has now created a taxable event on their behalf. While that is a consideration, Fidelity points out that “the result of exercising in-the-money options still provides a net financial benefit to the employees, even after accounting for taxes. Moreover, companies routinely create taxable events by paying out full-value stock awards to employees, so a case can be made that the automatic exercise of in-the-money options should be treated no differently.”
Do YOU Have Auto-Exercise?
I do think this solution is slowly gaining traction. Let’s test that thought – take the quick poll below. I think it’s definitely worth consideration, especially for companies that seem to have a significant number of in-the-money options expire.
Submitting a Winning Speaking Proposal We will begin accepting speaking proposals for the 22nd Annual NASPP Conference next Monday, January 20. Each Wednesday until the submission period closes, I’ll offer a new tip for submitting a successful proposal.
My first tip is to participate in the Proposal Assistance Program. This program is open to any firm that exhibited at last year’s Conference and any firm that secures their booth for this year’s Conference before the submission period closes. So if you didn’t exhibit last year, don’t wait any longer to secure your booth for this year.
During the Proposal Assistance Program, we review all of your proposal ideas before you put any time into developing them. We tell you which ideas we like and offer suggestions to make them more compelling. We also give you suggestions for people we’d like to see on the panel. This way you can focus your efforts on the topics that are most likely to land you a speaking slot.
In addition, proposals submitted by participants in the program receive automatic preference over proposals submitted by non-participants. Exhibitors that participate in this program and follow our advice virtually always have at least one proposal accepted.
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 which will be offered next spring. This course is a great introduction to stock plan administration; register by February 14, 2014 for the early-bird rate.
Save the date for the 22nd Annual NASPP Conference: September 29-October 2, 2014 at the Mandalay Bay in Las Vegas.
Today I have a grab bag of short topics for you, each worth mentioning but none are really long enough for their own blog.
The Most Ridiculous Section 162(m) Lawsuit Ever Last year, a Delaware federal court ruled in favor of a company that was the subject of lawsuit alleging that their incentive plan had not been properly approved by shareholders for Section 162(m) purposes. The plaintiff argued that because Section 162(m) requires the plan to be approved by the company’s shareholders, all shareholders–even those holding non-voting shares–should have been allowed to vote on it. Shareholder votes are governed by state law but the plaintiff attorney argued that the tax code preempted state law on this matter. Luckily the judge did not agree.
The plaintiff also argued that the company’s board violated their fiduciary duties because they used discretion to reduce the payments made pursuant to awards allowed under the plan. The plaintiff stipulated that this violates the Section 162(m) requirement that payments be based solely on objective factors. In a suit like this, the plaintiff attorney represents a shareholder of the company; it seems surprising that a shareholder would be upset about award payments being reduced–go figure. In any event, it’s fairly well established that negative discretion is permissible under Section 162(m) and the judge dismissed this claim.
Glass Lewis Policy Update Glass Lewis has posted their updated policy for 2014. For US companies, the policy was updated to discuss hedging by execs (spoiler alert: Glass Lewis doesn’t like it) and pledging (they could go either way on this). With respect to pledging, Glass Lewis identifies 12–count ’em, that’s 12–different factors they will consider when evaluating pledging by execs.
The policy was also updated to discuss the SEC’s new rules related to director independence and how the new rules impact Glass Lewis’s analysis in this area. Although we now have three perfectly good standards for director independence (Section 16, Section 162(m), and the NYSE/NASDAQ listing standards), Glass Lewis has developed their own standards and they’re sticking to ’em. I’m sure I’ve asked this before, but really, how many different standards for independence do we need? I’m not sure director independence is the problem here.
Should Your Plan Limit Awards to Directors? As you are getting this year’s stock plan proposal ready for a shareholder vote, one thing to consider is whether to include a limit on awards to directors. In 2012, a court refused to dismiss one of the plaintiff’s claims in Seinfeld v. Slager because the plan did not place sufficient limits on the grants directors could make to themselves and, thus, were not disinterested in administration of the plan, at least with respect to their own grants.
Here’s what’s happening at your local NASPP chapter this week:
Denver: Michelle Shepston and Jonathan Marks of Davis Graham & Stubbs present “2014 Proxy Season and Executive Compensation Update.” (Tuesday, January 14, 12:00 noon)
Chicago: Brian Wydajewski and Aimee Soodan of Baker & McKenzie present “Key Legal, Regulatory and Market Considerations in Preparing for 2014 International Annual Equity Grants.” (Wednesday, January 15, 7:30 AM)
Happy New Year! We’re barely a week into the new year, so I figure I can still get away with squeezing some celebration into today’s blog. It turns out that we at the NASPP have a fair amount of congratulating to do!
Lucky on LinkedIn
Congrats to Jessica Laddon, CEP, for being the 600th person to follow the NASPP on LinkedIn. The NASPP is very social – follow us this year on LinkedIn, Facebook and Twitter.
Question of the Week WINNER!
Many of our celebratory thoughts go to the winner and runners up of our Question of the Week contest. For those of you who are asking “What’s the Question of the Week Contest?“, it’s a weekly quiz challenge designed for stock plan professionals to test their know-how in a variety of areas, while competing against their peers. There’s a new question each week, and a correct answer earns points.
And the Winners Are…
A big congrats to screen name alias mamandmore for coming out on top of our 2013 contest, with a score of 515. The screen names of the top 5 scorers are:
In reviewing the scores from last year’s challenge, I couldn’t help but observe the originality of some of the screen names users are deploying in our contest. It seems nothing was off limits, from the range of “equity” and “stock” possibilities (Dividend Dame, Shera Queen of Equity, StockNerd, 2013 Scrambled Regs) to the patriotic (Starspangled) to impersonators (Paul Bunyan, Peter Pan, Scooby and Jane Austen, to name a few). Of course our sports fans were abundant as well (RedsFan, Patriots Fan), in addition to a few that would probably require a happy hour and some time to explain (Duke City Dude, No name game player, The Colorful Finch).
Work Hard, Play Hard
We’ve just reset scores and this week’s challenge starts a whole new contest, so this is the perfect time for NASPP members to sign up, create your screen alias and jump into the Question of the Week Contest. We leave all of January’s questions active for the entire month, so you have plenty of time to complete the first quizzes of the new game.
Equity Expert Podcast
We’d love for you to join us in celebrating our very first NASPP podcast series: Equity Expert. That’s right, you can download short episodes right to your computer, smartphone or other device and listen to them at your leisure. This series focuses on short interviews with some of the industry’s best and brightest. The first few episodes will offer general advice for establishing yourself as an expert in this industry. Later episodes will capture short bits of “how to” advice on very specific topics. Our inaugural episode features the NASPP’s Executive Director, Barbara Baksa. Next week’s episode will be an interview with John Hammond of Plan Management Corporation. It’s free: subscribe now!
Broc Romanek Encounters a Real Wolf of Wall Street Back when he worked for the SEC, Broc Romanek, editor of CompensationStandards.com, was pitched to by a broker in a boiler room operation. Check it out; it’s pretty amusing.
NASPP To Do List Here is your last NASPP to do list of 2013:
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course which will be offered next spring. This course is a great introduction to stock plan administration; register by February 14, 2014 for the early-bird rate.
Save the date for the 22nd Annual NASPP Conference: September 29-October 2, 2014 at the Mandalay Bay in Las Vegas.
Order the audio from the 21st Annual NASPP Conference. Just $65 per session for NASPP members–less per session if you purchase a multi-session package.
ISS has published its burn rate tables for the 2014 proxy season and the news isn’t good. For most industries, the ISS burn rate caps have decreased for 2014. For today’s entry, I have a few fun facts about the new burn rate tables.
For Russell 3000 companies:
Burn rate caps decreased for 14 of the 22 industries in the Russell 3000 that ISS publishes caps for.
Caps increased for seven of the 22 industries (automobiles & components, banks, consumer services, insurance, retailing, semiconductor equipment, and transportation) and the cap stayed the same for the utilities industry.
The largest decrease was for the media industry, which dropped from 5.6% last year to 4.43% for this year (1.17 points). ISS did not decrease the caps for any other industries by more than 1 point.
The largest increase was for the automobiles & components industry, which increased from 3.28% last year to 3.81% this year (.53 points).
For non-Russell 3000 companies:
Burn rate caps decreased for 15 of the 22 non-Russell 3000 industries.
Just as for the Russell 3000 companies, ISS increased the caps for seven industries, but not the same seven. For non-Russell 3000 companies, the industries where the caps were increased are banks, capital goods, commercial & professional services, consumer durables & apparel, insurance, retailing, and technology hardware & equipment.
ISS did not leave the cap the same for any non-Russell 3000 companies.
The largest decrease was 2 points, which is the maximum change (either increase or decrease) ISS allows from one year to the next (yes, ISS puts a cap on the change in the cap).
There were two industries for which burn rates dropped by 2 pts: energy and diversified financials. For energy, the maximum burn rate dropped from 9.46% to 7.46%, but would have dropped to 6.26% without ISS’s cap on changes in maximum burn rates. For diversified financials, the maximum burn rate dropped from 9.56% to 7.56%, but would have dropped to 7.17% without the cap.
For just under half of the industries where the maximum burn rate decreased, the decrease was greater than 1 point. In addition to energy and diversified financials, these industries included automobiles & components, pharmaceuticals & biotechnology, telecommunication services, transportation, and utilities.
The largest increase was in capital goods, which went from 6.69 in 2013 to 8.16 in 2014 (1.47 points).
It’s Like We’ve Got a Good Set of Tarot Cards
For anyone that listened to the NASPP’s November webcast highlighting the results of our 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting), this isn’t a surprise. The survey results foreshadowed this trend. Only 24% of respondents to the survey reported a three-year average burn rate of 2.5% or more (down from 31% in 2010) and, in the past year, almost one-fifth (19%) of respondents took action to reduce their burn rate. The ISS caps are extrapolated directly from actual burn rates (for each industry, the cap is generally the industry’s three-year average burn rate plus one standard deviation); ISS policy in this area simply reflects what is happening in practice.
The DC/VA/MD chapter wins the award for holding the first chapter meeting of the year. The chapter hosts Amy Lynn Flood of PwC and Don D’Anna of The Carlyle Group for a presentation on “Corporate Tax and Recharge Agreements,” this Thursday, January 9, at 4:30 PM.