As we reported in the Nov-Dec 2015 NASPP Advisor, Twitter CEO Jack Dorsey announced in October that he is giving 6.8 million shares of common stock that he owns back to Twitter, to be used in Twitter’s stock plan. I started looking into this a little further and found some interesting details.
Not So Fast
Dorsey donated shares he already owned to the plan, unlike other CEOs who have given back outstanding options or awards. Because of this, the shares can’t simply be added to the stock plan. For most companies, the only way to add shares reacquired from investors into a stock plan is to submit the allocation to a shareholder vote.
Why Not Contribute Awards?
It would have been less complicated for Dorsey to have agreed to the cancellation of outstanding options or awards, as other CEOs have done (e.g., see our coverage of LinkedIn CEO Jeff Weiner’s decision to forgo his stock grant in the Mar-Apr 2016 Advisor). These shares can be added back to the plan without shareholder approval. But Dorsey doesn’t have a lot of outstanding awards to give up; he has voluntarily worked without compensation since becoming CEO and, thus, wasn’t granted any awards in 2015. He only has 2,000,000 outstanding stock options.
Enter the Proxy Advisors and Institutional Investors
Of course, submitting the plan to a shareholder vote leads to an analysis of the plan by proxy advisors and investors. It can even lead to a new Equity Plan Scorecard evaluation by ISS. A bit of news that caught my eye was that Twitter had to agree to prohibit repricing without shareholder approval under the plan to secure a favorable vote. Repricing without shareholder approval is a deal-breaker under the EPSC.
It’s Complicated
My first thought on reading this was “no good deed goes unpunished.” But, on second thought, I’m not sure that’s the case here. I’m not even sure this is a good deed. Rather than submit the proposal as a allocation of shares to their existing plan, Twitter adopted an entirely new plan for just the 6.8 million shares. The amendment to prohibit repricing only applies to this new plan; as far as I can tell, repricing is still permitted without shareholder approval under Twitter’s existing plans (under which any currently underwater options would likely have been granted).
Where’s the Urgency?
I was surprised to note that Twitter had over 110 million shares available in its 2013 plan as of December 31 and that the plan includes an evergreen provision, under which close to 35 million shares were added to the plan this year. It looks like Twitter granted less than 25 million shares last year, so it seems hard to believe that they are going to need those 6.8 million shares anytime soon.
Which makes me wonder why Dorsey donated the shares. Was it just a publicity stunt? A way to increase employee morale? (And, if so, did it work? Better than donating the 2,000,000 outstanding options would have worked?)
There’s a lot being said about the new CEO pay ratio disclosure rules, most of it far better than anything I could write myself, so today, as a fill in for Jenn Namazi who is on vacation, I continue my new tradition of “borrowing” other blog entries on this topic.
Today’s entry is a nifty “to do” list for preparing for the CEO pay ratio disclosure that Mike Melbinger of Winston & Strawn posted in his August 6 blog on CompensationStandards.com. Given that the disclosure isn’t required until 2018 proxy statements, you might have been lulled into thinking that this isn’t something you have to worry about yet. While it’s true that there’s no need to panic, there is a lot to do between now and 2018 and it is a good idea to start putting together a project plan now to get it all done. Don’t let this turn into another fire that you to put out. Here are Mike’s thoughts on how to get started:
1. Brief the Board and/or the Compensation Committee as to the final rules and the action steps. Press coverage of the rules has been extensive. They are likely to ask.
2. Each company may select a methodology to identify its median employee based on the company’s facts and circumstances, including total employee population, a statistical sampling of that population, or other reasonable methods. We expect that the executive compensation professionals in the accounting and consulting firms very soon will be rolling out available methodologies (they began this process when the rules were proposed, two years ago). The company will be required to describe the methodology it used to identify the median employee, and any material assumptions, adjustments (including cost-of-living adjustments), or estimates used to identify the median employee or to determine annual total compensation.
3. As I noted yesterday, the rules confirm that companies may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure). Assess your ability to calculate precisely all items of compensation or whether reasonable estimates may be appropriate for some elements. The company will be required to identify clearly any estimates it uses.
4. Begin to evaluate possible testing dates. The final rules allow a company to select a date within the last three months of its last completed fiscal year on which to determine the employee population for purposes of identifying the median employee. The company would not need to count individuals not employed on that date.
5. Consider tweaking the structure of your work-force (in connection with the selection of a testing date). The rules allow a company to omit from its calculation any employees (i) individuals employed by unaffiliated third parties, (ii) independent contractors, (iii) employees obtained in a business combination or acquisition for the fiscal year in which the transaction becomes effective. Finally, the rule allows companies to annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire. The rules prohibit companies from full-time equivalent adjustments for part-time workers or annualizing adjustments for temporary and seasonal workers when calculating the required pay ratio.
As I noted yesterday, the rules permit the company to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation arrangements that would result in a significant change in the pay ratio disclosure.
6. Determine whether any of your non-U.S. employees are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules only allow a company to exclude employees in these countries. (The rules require a company to obtain a legal opinion on this issue.)
7. The rules only allow a company to exclude up to 5% of the company’s non-U.S. employees (including any non-U.S. employees excluded using the data privacy exemption). Consider which non-U.S. employees to exclude.
8. The rules allow companies to supplement the required disclosure with a narrative discussion or additional ratios. Any additional discussion and/or ratios would need to be clearly identified, not misleading, and not presented with greater prominence than the required pay ratio.
The rules explicitly allow companies to apply a cost-of-living adjustment to the compensation measure used to identify the median employee. The SEC acknowledged that differences in the underlying economic conditions of the countries in which companies operate will have an effect on the compensation paid to employees in those jurisdictions, and requiring companies to determine their median employee and calculate the pay ratio without permitting them to adjust for these different underlying economic conditions could result in a statistic that does not appropriately reflect the value of the compensation paid to individuals in those countries. The rules, therefore, allow companies the option to make cost-of-living adjustments to the compensation of their employees in jurisdictions other than the jurisdiction in which the CEO resides when identifying the median employee (whether using annual total compensation or any other consistently applied compensation measure), provided that the adjustment is applied to all such employees included in the calculation.
If the company chooses this option, it must describe the cost-of-living adjustments as part of its description of the methodology the company used to identify the median employee, and any material assumptions, adjustments, or estimates used to identify the median employee or to determine annual total compensation.
Companies with a substantial number of non-US employees should seriously consider the ability of apply a cost-of-living adjustment to the compensation measure used to identify the median employee.
Last week, the SEC adopted the final CEO pay ratio disclosure rules. I’ve been on vacation, so I don’t have a lot to say about them, but Broc Romanek’s blog on ten things to know about the rules is better than anything I could have written anyway, so I’m just going to repeat that here:
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10″ Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules do not require companies to report pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). Your still need to disclose a pay ratio every year—but you don’t have to go through the hassle of conducting a median employee cost analysis every year. During those two years when you rely on a prior-calculated median employee, your CEO pay is the variable.
3. Pick Your Employee Base Within Three Months of FYE: The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date—but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees: Duh.
5. Part-Time Employees Can’t Be Equivalized: The rules prohibit companies from full-time equivalent adjustments for part-time workers—or annualizing adjustments for temporary and seasonal workers—when calculating pay ratios.
6. Non-US Employees & the Whole 5% Thing: For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue—can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year): The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay: The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted: Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for the Proxy Disclosure Preconference and August 25 Pay Ratio Workshop:Register now before the discount ends next Friday, August 21. The Proxy Disclosure Preconference will be held on October 27, in advance of the NASPP Conference in San Diego. Registration for the Proxy Disclosure Preconference also includes access to a special online Pay Ratio Workshop that will be offered on August 25. The Course Materials will include model disclosures and more. Act by Friday, August 21 to save!
I’ve been listening to the recordings of the sessions at the 22nd Annual NASPP Conference. And frankly, I’ve been surprised—pleasantly surprised by how much I’ve learned. All of the sessions I’ve listened to have been very enlightening, even the ones where I thought I already knew everything on the topic.
Take the session on pay-ratio disclosure. I wasn’t really sure how interesting this session would be, since the rules haven’t been finalized yet. I mean, really, how much could there possibly be to talk about? But it turns out that the panel had a lot to say and all of it was very interesting. So for today’s blog entry, I feature five things I learned from listening to the panel, “Pay Ratio (& Other Issues): Pointers from In-House.”
1. Run a Test Calculation.
If you haven’t already, you really should perform a test of how you will calculate your CEO pay ratio. It might prove to be harder than you expect. Patty Hoffman-Friedes of Seagate Technology noted that they actually didn’t get very far in their test, but they are now much more prepared for the final calculation. Things you haven’t thought about come to light. Patty noted that Seagate provides shoes to employees in China and they had to think about whether those should be included in compensation.
2. How Will the Ratio Be Used?
The panel spent some time discussing how the ratio will be used by ISS and investors. Although it isn’t clear how ISS will use the disclosure, everyone felt that they will eventually use it. But, as Patty noted, perhaps the bigger question is how the NY Times will use the disclosure.
Stacey Geer of Primerica brought up a concern that hadn’t occurred to me: how employees will react when they realize they are below the median. Valerie Ho from ICF explained that she is planning to educate her HR business partners on the ratio, so that they can be prepared to address employee inquiries. She will also be looking to them for feedback on what employees are saying about the ratio.
3. Your Peers Are the Wildcard.
As moderator Barry Sullivan of Semler Brossy noted, the first year the rules are in effect will be a little bit like the Wild West. Everyone will have to decide on an approach and draft their disclosure without really knowing what their peers will be doing and how their ratio will compare to that of their peers.
Panelists recommend using your outside advisors—attorneys and compensation consultants—for a sanity check, since they will at least have some insight into trends and practices among their clients. Ask for feedback on your methodology and help with drafting the disclosure.
4. Year-Over-Year Comparisons Are Likely to be a Challenge.
Several panelists noted concerns about how much variation will exist in the results from one year to the next. If the median employee shifts from the United States to another country, if the company acquires another company, if there is a significant reduction in force, if a new CEO steps in—all of these events, and lots more, could cause significant year-to-year variability in the ratio, which could be confusing for investors and the media. Before you decide on a methodology, make sure you run comparisons of the results for the past several years, so you can get a feel for how much the number changes from one year to the next. And keep this potential for variability in mind when drafting the disclosure.
5. Thorough, Accurate, Ease of Calculation, Reliable, and Reproducible (and Defensible)
The panel touched on the various approaches companies can take to find the median employee. Primerica has 1800 employees located in the US and Canada; Stacy Geer can download W-2 income to a spreadsheet and calculate the median in about ten minutes. But fellow panelist Charles Grace of EMC—with 60,000 employees in 75 countries and upwards of 30 payroll systems—has a much more involved decision-making process. Include all employees in the calculation or use statistical sampling? What compensation to include? Patty Hoffman-Friedes noted that the range of approaches Seagate is considering could involve using salary, using actual wages earned, including benefits, or including all elements of compensation (even shoes for those employees in China).
Patty explained that Seagate has five touchstones that they are using to evaluate the methodologies: thoroughness, accuracy, ease of calculation, reliability, and reproducibility. Barry Sullivan noted that a sixth is defensibility. I think these are great touchstones for any company to consider as it decides on a methodology.
I’ve told you to complete the ISS policy surveys in the past and I’m sure a lot of you have scoffed. But this year is different; this year, you might want to think twice about blowing off the survey. ISS has announced that they are considering a significant shift in how they evaluate stock compensation plans. The ISS Policy Survey is your opportunity to give ISS some feedback about how you think they should be analyzing your stock plans.
New ISS Policy on Equity Plans?
According to a recent posting in Tower Watson’s Executive Pay Matters blog (“ISS 2015 Policy Survey — Expanded Focus on Executive Compensation,” July 21), ISS has stated that it is considering using a more “holistic, ‘balanced scorecard’ approach” to evaluate equity plans. The good news is that this might allow for a more flexible analysis, rather than the very rule-based, SVT and burn rate analysis ISS uses today. But, as the Towers Watson blogs points out, it also might result in a less transparent process. Less transparency equates to less confidence in how ISS will come out on your plan when you put it to a vote (and perhaps also more business for ISS’s consulting group).
The 2015 Policy Survey
ISS uses policy surveys to collect opinions from various interested parties as to its governance policies. Corporate issuers are one of the many entities that are encouraged to participate in the survey. This year’s survey includes several questions on equity plans, including what factors should carry the most weight in ISS’s analysis: plan cost and dilution, plan features, or historical grant practices.
There’s a good chance your institutional investors are participating in the survey; don’t you want ISS to also hear your views on how your equity plans should be evaluated?
What Do You Think?
Say-on-Pay and CEO Pay
The survey also includes several questions on CEO pay (that ultimately relate to ISS analysis of Say-on-Pay proposals), including questions on the relationship between goal setting and award values and when CEO pay should warrant concern.
Completing the Survey
You have until August 29 to complete the survey. There may be questions in the survey that you don’t have an opinion on or that aren’t really applicable to you as an issuer–you can skip those questions. But don’t wait to complete the survey, because I’m pretty sure the deadline won’t be extended. On the positive side, however, the survey is a heck of a lot shorter than the NASPP’s Stock Plan Design and Administration Surveys.
On September 18, the SEC proposed highly anticipated rules governing the ratio of CEO to median employee pay that public companies will be required to disclose in their proxy statements. In today’s blog, I provide a summary of the proposed rules.
Background
We’ve known this was coming since the Dodd-Frank Act was signed into law. The Act requires the SEC to adopt rules mandating that public companies disclose the ratio of CEO pay to that of the median pay of all other employees (see my blog entry “Beyond Say-on-Pay,” August 5, 2010). It’s taken a while for the SEC to propose the rules because, well, it’s a complicated topic and the SEC has a lot on its plate these days, including a host of other rulemaking projects under Dodd-Frank and the Jobs Act, not to mention investigating Rule 10b5-1 plans.
You Win Some
The Act requires that the ratio of CEO pay to median employee pay be based on “compensation” as defined for purposes of the Summary Compensation Table. So, in a worst case scenario, you could have had to prepare an SCT for all employees just to figure out the median employee compensation.
And, if you want, you can certainly still do that. But, for most companies, it’s about all they can do to put together the SCT for the 5+ execs for whom disclosure is required. So, instead, the proposed rules allow companies to figure out which employee represents the median based on any consistent, systematic method (e.g., based on W-2 income), then determine only that employee’s compensation as per the SCT. The pay ratio disclosure would then simply be the CEO’s pay as compared to the pay of the one employee that represents the median.
You Lose Some
That was the good news. The bad news is that the SEC has interpreted “all employees” to be literally all employees. That includes part-timers, seasonal, and temporary employees, and both US and non-US employees employed as of the last day of the company’s fiscal year. Pay for employees that were hired during the year can be annualized, but annualization is not permitted for seasonal or temporary employees. Likewise, location-based cost-of-living adjustments or full-time adjustments for part-time employees are not permitted.
More Information
For more information, see the NASPP Alert “SEC Proposes CEO Pay Ratio Disclosure Rules.” The proposed rules were issued just days before the NASPP Conference, so speakers at the Conference were able to address them during their presentations. In particular, Keith Higgins, the Director of Corporation Finance at the SEC, discussed the proposed rules in his keynote during the Proxy Disclosure Conference, and Mike Kesner of Deloitte provided a tutorial on the proposed rules in the session “Pay Disparity Workshop & How to Ensure Your Pay Practices Pass.” You can purchase the video of the Proxy Disclosure Conference or purchase the audio for Mike’s session.
Comments on the proposed rules can be submitted to the SEC until December 2, 2013.
It’s been months since I last discussed anything related to the Dodd-Frank Act so in today’s blog, I provide an update on SEC rulemaking related to the Act.
More Delays
The SEC recently updated its calendar for rulemaking activities pertaining to Dodd-Frank to delay a number of projects, including:
Requirements for companies to adopt clawback policies for compensation paid to executives.
Disclosure of the ratio of CEO pay to the median pay of all employees.
Disclosure of the relationship of executive compensation to corporate financial performance.
Disclosure of hedging policies for employees and directors.
Final rules on these projects are now scheduled to be issued no earlier than July and possibly as late as December 2012. This means we won’t have final rules in time for this year’s proxy season (but you had probably already figured that out for yourself). The SEC expects to issue proposed rules during the first half of 2012.
Accredited Investors
The SEC has amended the definition of an “accredited investor” to exclude the value of primary residences from net worth. This is an important definition under Regulation D, which provides a number of exemptions from registration for offerings of stock, some of which limit the number of nonaccredited investors that can participate in the offering.
Next up, the SEC is set to finalize rules prohibiting “bad actors” from participating in Rule 506 offerings. At first I thought this meant that Pauly Shore and David Caruso wouldn’t be able to participate in unregistered offerings, but it actually relates to felons and others that have been convicted of or sanctioned for securities fraud and similar activities.
These changes probably don’t impact the operation of most companies’ stock plans. Public companies generally register all the shares issued under their stock plans and private companies are generally relying on Rule 701 for an exemption from registration. Either way, neither has to worry about accredited investors or complying any with of the Regulation D exemptions (including Rule 506). But where a private company has exceeded the limitations in Rule 701 (10 points if you know what they are off the top of your head–no Googling) or where either public or private companies are making private sales of stock to investors outside of their stock plans, the Regulation D exemptions can come into play.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
On October 18, ISS issued a preview of some of the policy changes it is considering for the 2012 proxy season. In today’s blog, I take a look at proposed policy changes relating to how ISS evaluates CEO pay and stock plans submitted for shareholder approval for Section 162(m) purposes.
ISS, CEO Pay, and Company Performance
ISS currently evaluates CEO pay and company performance by comparing the company’s TSR to that of its GICS industry group to identify underperformance, then applying a qualitative analysis of various other factors that relate the CEO’s pay to TSR.
Under the newly proposed policy, ISS will apply a relative measure that compares the company’s TSR to that of its peers, which will be determined based on market capitalization, revenue, and GICS industry group. ISS will compare the company’s TSR ranking within the group to that of its CEO pay ranking. ISS will also consider the multiple of the CEO’s pay to the peer-group median.
In addition to the relative measure, ISS will apply an absolute measure that tracks changes in the company’s TSR against changes in its CEO’s pay.
The results of ISS’s pay-for-performance evaluation can impact recommendations ISS issues for the company’s Say-on-Pay proposal and stock plan proposals (if a significant portion of the CEO’s misaligned pay is in the form of equity), as well as individual director nominations.
ISS and Section 162(m)
In the past, when stock plans have been submitted for shareholder approval solely for the purpose of qualifying for exemption under Section 162(m), ISS has generally recommended that shareholders approve the plans. Under the newly proposed policy, however, ISS states that they will complete a full analysis of future plans submitted to shareholder vote for this purposes.This will include consideration of the total shareholder value transfer, burn rate analysis (if applicable), and specific plan features (such as repricing and change-in-control provisions).
This may particularly be a concern for newly public companies that wish to qualify performance unit awards for exemption under Section 162(m). Under recently proposed rules, the IRS clarified that the Section 162(m) exemption for post-IPO grants of stock options, SARs, and restricted stock made during a transition period does not apply to RSUs. Thus, newly public companies that wish to grant exempt performance unit awards will need to submit their plans for shareholder approval, triggering a full analysis of the plan by ISS.
Comments and More Information
ISS accepted comments on the policy through the end of October. (We posted an NASPP alert on the policy changes shortly after ISS issued the proposal. If you follow the NASPP on Twitter or Facebook, then you knew about our alert in time to submit comments to ISS.)
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
A new study reporting that some CEOs make more than their companies pay in taxes has been making a splash in the media lately. Today I offer some comments on the study.
Executive Excess 2011: The Massive CEO Rewards for Tax Dodging The study looked at the 100 highest paid CEOs in the US and found that 25 of them earned more than their companies paid in taxes. The study also found that the average pay of the 25 CEOs exceeded the average pay of CEOs at all Fortune 500 companies, but, as one criticism of the study points out: “any subset of the 100 highest-paid CEOs in the country is going to have higher average pay than S&P 500 CEOs in general,” so this isn’t exactly groundbreaking.
The study also emphasizes that most of the 25 companies received tax refunds. Maybe I’m missing something here, but I thought getting a tax refund means you paid too much in tax, the IRS earned interest on your money all year, and then gave your excess payment back without interest at the end of the year. The companies that didn’t get a tax refund were the clever ones because they earned interest on their money all year, rather than the IRS–they aren’t necessarily paying their CEOs any less.
Compensation Apples to Tax Oranges
One problem I have with this study is that CEO pay isn’t directly related to the company’s tax bill. The two amounts really have nothing to do with each other. In fact, amounts paid to the CEO are an expense to the company; expenses reduce the company’s profitability which in turn reduces the amount the company pays in taxes.
Companies that aren’t profitable don’t pay any taxes. If CEO pay shouldn’t exceed the company’s tax bill, does this mean that CEOs at companies that aren’t realizing a profit shouldn’t be paid anything? That’s really going to put a damper on the start-up market.
Don’t get me wrong, I agree with the principle that many CEOs of public companies are paid excessively–I’m just not sure that the company’s tax bill is the appropriate yardstick by which we should determine what is excessive.
Is Senator Levin Behind This?
The study includes a special side bar (on pg 7) that explains how stock options contribute to this problem by producing a tax deduction for the corporation that differs from the expense recognized for the option–something Senator Carl Levin has been trying to change for years (see my August 9 blog, “Senator Levin, Still Trying“).
The study says that “The amount of compensation the executive receives on the exercise date is often substantially more than the book expense of the options…” I take issue with this statement. I’ve never seen any data to back it up, I don’t see any data backing it up in this study, and I know that many options end up underwater or result in a spread at exercise that is less than the grant date fair value. In fact, I’d love to see an analysis comparing grant date fair value to spread at exercise for a wide range of stock options at a wide range of companies, if anyone out there wants to take the project on.
CEOs Pay Taxes Too
One reason why compensation results in a tax deduction for the company is that the individual receiving the compensation pays taxes on it. So, while the company might be getting a tax break, the CEOs are still paying tax, probably a lot of tax.
NQSO exercises are certainly subject to tax. The US corporate tax rate for large public companies is around 34% to 35% (at least according to Wikipedia–I know nothing about corporate tax rates). The highest federal marginal income tax rate in the US is 35% and I have to believe that the CEOs in the study are paying tax at this rate (plus they are paying FICA taxes and the company is paying matching FICA taxes on the income). So whether the company pays tax on the income or the CEO does, it seems like the tax revenue is about the same (maybe slightly higher when the CEO is paying the tax because of FICA).
For example, let’s say that a company earns a profit $100 million and the CEO of the company holds an NQSO with a spread of $1 million. If the CEO doesn’t exercise the option, the company pays tax on $1 billion. If the CEO does exercise the option, the company pays tax on $99 million, but the CEO pays tax on the $1 million spread–at possibly a slightly higher rate than company would have paid. Tax revenue for the US federal government is about the same either way.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.