If you’re a regular reader of The NASPP Blog, you’ve probably caught wind of my passion for employee engagement and communications. In today’s blog, I’ll explore some important and creative ideas for crafting your stock plan’s communication approach for 2016.
I’m always on the lookout for new ideas and trends in getting the message out to employees. If you’ve got a stock plan, you’ve probably figured out that the stock plan is only as good as your participants think it is, and communicating about the plan is an important factor in determining its success. With so many modern tools and choices at our fingertips, figuring out the best options for communication can feel overwhelming at times. To help with that, I’ve come up with 5 communication ideas for 2016.
Cultivate Plan Champions
Sometimes the task of engaging employees feels extra-large because of the quantity of people involved. If your stock plan participants number in the hundreds or thousands, then you know what I mean. While you definitely want your outreach and education to reach all participants, you may also want to consider investing time and resources into developing a handful (a few or dozens, depending on your stock plan size) of stock plan champions – employees who already ooze engagement and, armed with the right information, could spread the word among their peers in the workplace. Consider some smaller meetings or one-one-one sessions with these champions to educate them and encourage them to spread the word. Some ideal candidates for the role may be those who frequently show up at your door to ask questions, or are vocal about their appreciation for the plan. Studies have long shown that word of mouth in the workplace does have an effect – people trust their friends, including co-workers.
Publish Benchmark Information
A wealth of stock plan information is publicly available, which makes it fairly easy to compare the attributes of your stock plan to those of your industry peers and competitors. You’ll want to gain support and approval from management before taking this step, but evaluating your stock plan compared to other plans and highlighting some of your plan’s unique or attractive features can help employees understand how their stock compensation may compare to the rest of the industry.
Create Videos that Reflect Corporate Culture
Hands down, some of the best stock plan videos I’ve come across have a common thread: they all reflect some element of the company’s unique culture. I recall listening in on a session at our 23rd Annual Conference this past fall where a panelist who works for Facebook talked about a family of foxes that lives on site at their corporate headquarters (the foxes even have their own Facebook page). The company created stock plan videos featuring…you guessed it…a fox, which added a unique factor, oozed creativity, and tied into something special about the company’s culture. Instead of a boiler plate corporate video, think of what may plug in well to your company’s culture and let that inspire a theme for your stock plan videos and communications.
Diverse Populations Need Diverse Communications
There are so many forms of diversity in employee populations, and all of them need to be considered. I keep hearing buzz that addressing the needs of a very diverse group of participants continues to be a hot topic. There are generational issues to consider, including how values, work habits, and communication preferences vary among different generations. Baby boomers are working longer, and there are more and more millennials graduating college and entering the workforce. There are cultural considerations in communicating with participants from multiple geographic and cultural backgrounds. If you haven’t seriously contemplated all of these factors in the past, this is the year to evaluate your stock plan demographics and really dig into which modes, formats, and messaging are going to succeed in engaging employees across the board. Just as with marketing efforts, it may be necessary to “target” select participant groups for different communications in order to ensure the message resonates with the audience and achieves the intended goal of engagement.
“If you can’t measure it, you can’t improve it.” (Peter Drucker)
All of the above steps are virtually pointless if you don’t measure their impact on employee engagement. Communicating is not about throwing information out to the universe and hoping it sticks. If you haven’t been steadily measuring your communication strategies and efforts, make it a goal for 2016. There are many ways to measure – I’ll share a few here:
Conduct an employee engagement survey (keep the questions and survey on the shorter side – the longer it is, the less likely employees are to remain engaged long enough to complete it).
Track email click rates (How many people opened the email? Did people click on links in the emails?)
See if you can gather data from your IT department on employee technology behaviors (How many employees use email? Which social media sites are most popular?)
Consider allowing participants to rate content. This will give feedback on what is most useful and engaging from their perspective.
Bonus!
I said 5 tips, but I couldn’t resist a 6th: Be discerning with your content. Set a high standard for the content you put out to participants. Chances are, they are already inundated with messages from a variety of sources on many topics. Being consistent in putting out high quality content builds trust – participants begin to realize that any information coming from you is worth their attention.
Remember, whatever you do – be prepared to measure, measure, measure it!
You don’t need to do a complete overhaul all at once – focusing on one or two key areas can make a difference. Now’s the time to set your communication goals for 2016.
Towers Watson recently highlighted an observed correlation between communication efforts and both employee engagement and financial performance that outperforms peers in their Executive Pay newsletter (“Communicating Incentive Plans Better” – August 14, 2015). That motivated me to jump on my once-in-a-while bandwagon about effective employee communications. In today’s blog, I’ll explore some tips to think about, as well as highlight more opportunities for you to advance your education in this area.
5 Ways to Communicate Better
Towers Watson shared 5 tips to better communications. I am going to borrow those “tips” and expand on them with my own thoughts. Before I do, I want to throw out a couple of things. First, I think stock plan administrators are not often marketing people by training or trade. Some of us become effective communicators, but it’s important to remember that communicating about stock plans to employees is very much about marketing. Yes, we need to communicate the specifics, but we also need to deliver the intended incentive or value proposition to the participant, and that’s the marketing piece. Second, stock plan administrators should not necessarily need to wear the communication hat alone. I often hear administrators say that they feel responsible for driving plan communications. That may be true, but there can be tremendous value in engaging marketing expertise – not only as a fresh set of eyes on the communication strategy, but also because that marketing resource could bring a whole new set of tools to your employee education.
1. Treat employees like consumers. Companies spend thousands, even millions of dollars trying to figure out how to resonate with their consumers in the shortest amount of time. Capturing attention is valuable, and attracting the attention of your employee is not different than what is wanted from the consumer. Messages should be quick and designed to draw in their attention.
2. Ensure communications highlight the key messages and behaviours the plan is trying to drive. In summarizing this point, Towers raises a critical piece – it’s not enough to just communicate about things like performance metrics. Yes, employees need to know what the measurements will be, but just as importantly, they have to know what it takes to achieve them. In crafting communications about performance metrics (or even simple time based vesting), make sure the content includes not just the end goal, but identifies the path necessary to get there!
3. Show “what’s in it for me?” I’ve been guilty myself of not doing this part. Sometimes we focus on getting factual information out, and overlook or omit the value proposition to the participant. The ESPP has a 15% discount – so what? A great communication takes the “fact” that there is a 15% discount in the ESPP and expands the communication to explain why the participant should care about that (without crossing some of the fine lines I identify in the last paragraph of this section). Remember, your stock plan is only as valuable as your participant thinks it is.
4. Keep it simple. It’s easy to mistake a more advanced audience (like executives) as good targets for an overload of information. Towers Watson shared that discussions with top executives revealed, in some cases, little understanding about how the plans actually work. The reality is that matter who the audience is, keep the communications simple. The communications should not get more complex just because the audience is deemed to be more intellectual or higher ranking in an organization. Be sure to add in graphics, charts, or other visual information that reduces texts and illustrates a concept.
5. Segment. Not everyone learns the same way – some people need to see an example on paper, others can just read about it and understand. It’s imperative that any communication takes into account the recipient demographics. Once you know who is going to be on the receiving end, you can use different modes of communications – and even wording within a communication – to best connect with your audience. With so many tools available (videos, in person meetings, email, text, and more), you should have several choices in delivering your message.
Although I have introduced the word “marketing” to the communication mix, I also want to reiterate that there are some fine lines that need to be considered. It’s important that any marketing (or communication) message be reviewed by counsel to ensure there are no financial or luring promises, over education, or tricky guidance (for example, a marketing message of “The ESPP Can Save You Money on Taxes” is likely not going to fly. Although there could be tax advantages to participating in a qualified ESPP, the company cannot guarantee or represent specific tax savings and it could be risky to suggest such.) It’s time to take communications beyond simple facts and create an overall “marketing” campaign that captures participant attention and delivers on highlighting the value or incentive the stock plan was designed to achieve.
Exciting Education Opportunities
The NASPP’s 23rd Annual NASPP Conference kicks off in less than 3 weeks! We have an entire track at the Conference dedicated to “Administration and Communication,” so check out the list of those sessions to identify your must-attend panels.
In today’s blog I want to draw attention to some of the other skills you may need to hone in order to be the best version of your stock plan self. For just a moment, I’m not talking about the laws and regulations you need to remember, or the best practices, or the intricate processes. I’m focused on completing the whole you (no, not in the “you complete me” Jerry Maguire form), from a stock plan sense.
4 Skills to Strengthen Your Brand
It’s easy to get caught up in trying to figure out how to tax a performance award in France or withhold supplemental income on a U.S. stock option exercise. Perhaps a part of our mental cycle even wonders if IFRS 2 is coming (or not) and what should be done to prepare. We spend significant time figuring out “things” and solving challenges. From an expertise perspective, that is fantastic and necessary experience. Just for today, though, I want to shift our thinking into contemplating what other skills might be needed to ensure you are the best stock plan professional you can be. On that note, I’ll share 4 areas where you can round out your skills and stand out from the crowd.
1. Enhance Your Writing Skills: Chances are you have to write employee communications, process documents and exchange emails back and forth with your internal business partners, participant population, and senior management. Nothing stands out more than communications that are overdone, underdone, or just plain confusing. One trick I use when writing a communication is to review it and cross out words that are not “necessary” to the sentence.
For example, instead of saying:
“For more information, please feel free to visit our stock plan intranet site, located in the XYZ portal on our company website.”
Consider saying: “More information can be found in the XYZ portal on our website.”
There’s nothing wrong with the first sentence, except that it’s a bit long and wordy. Too many of those in a row can lose the reader’s interest.
2. Refine Your Grammar: Here’s a question for you: In the U.S., do periods and commas go inside or outside of quotation marks?
Mary said “I like your stock plan process guide.”
OR
Mary said “I like your stock plan process guide”.
If you answered “inside,” then you are on your way to becoming grammar guru. Sub optimal grammar skills can weaken your credibility and the ability for others to depend on you. You may only get one chance at your message and it needs to be polished. One of my favorite outside resources to help with the quick or tough grammar question is Grammar Girl. In the middle of writing something? You can look up pretty much any grammar question you may have.
3. Polish Your Presentation Skills: Whether you are talking to your employees, to other stock plan professionals, or another audience, you’ll want your message to be received in a way that engages the recipient. This is an area where there is so much opportunity to share your message and build your brand. If you have a knack for articulating valuable information, that will help to establish you as an expert in your subject matter. A couple of quick tips to get started:
Record yourself doing a presentation. This can be done on your smartphone, computer, tablet or any device with a microphone. Listen to how you present. If you are using lots of “uhs and ahs” or have other little “ticks”, figure out how to obliterate them from your presentation vocabulary.
Use stories. Nothing engages an audience more than a great story. Whatever material you have to present, be sure to have plenty of story examples to add color and interest.
4. Plan Your Career Path: Surprisingly, many of us land in stock compensation but don’t plan our navigation from there. The industry is comprised of many moving parts, ranging from issuers, to service providers, to consultants. What’s your ultimate path? I recommend thinking about what skills and experience you may need to acquire along the way and develop goals to get there. Will you need to specialize in something in order to gain the expertise that will give you credibility down the road? Next week we have a great webcast planned on Finding the Right Job in Equity Compensation. In full disclosure, I’m a panelist on that webcast. Let me just say that you won’t want to miss it – there will be tons of information on how to build a career path and your personal brand in this industry.
It’s easy to get caught up in the day to day and forget about the other, softer skills that can make a difference in reaching our full potential. Even if you can’t work on them all right now, pick one to refine and help increase your value as a stock plan professional.
Unless you’ve been under a rock for the past several years, you know that the world of communication as we know it is changing…rapidly. It still amazes me just how small the globe has become with the invent of social media sites like Facebook and Twitter. Information spreads like a wildfire, instantly and with far reach. Finally, the regulatory world is catching up to the new era of information dissemination, starting with the SEC’s recent pronouncement that it’s okay to distribute information to investors through social media channels. I’ll explore the ins and outs in today’s blog.
The Social Media Question
The SEC’s review of social media as a means to communicate started benignly last summer, when the CEO of Netflix posted about a company milestone (exceeding 1 billion video streaming hours in a month for the first time) on his personal Facebook page. The SEC later opened an investigation, wondering if the company was in violation of Regulation Fair Disclosure rules (Reg FD). Essentially, the rule in question requires companies to disseminate information in a way that wouldn’t be expected to give an advantage to one group of investors over another. Usually this is addressed via filing a Form 8-K, or holding an earnings call, and, in some cases, posting on the corporate home page. In essence, investors should know where to look for information, and there shouldn’t be an advantage given to one group over another.
What I find interesting about the Netflix CEO’s post is that he had over 200,000 subscribers to his Facebook page at the time, many of them investors, and the information was probably distributed more quickly than it would have emerged from an SEC filing. Others agree – supporters lobbied the SEC to not pursue charges in this case. Netflix also had maintained that the information was already previously disclosed in a blog on their web site.
The SEC Decides…
Ultimately, the SEC had a “time to get with the times” moment and realized that the present communication reality includes social media, and that companies should be able to use these channels to distribute information. The caveat is that companies need to make it clear to investors which social media sites they will use to share the information. They also need to be wary of making disclosures via an executive’s personal social media page(s). The Netflix CEO was not charged with any wrongdoing.
The SEC’s report into this issue has so far only addressed fair disclosures to investors. However, I think in stock compensation we are also starting to have those “get with the times” moments, as it becomes more apparent that social media is a dominant form of reaching people in our modern era. I’m not suggesting a free-for-all communication campaign via social media, but I am encouraging stock plan professionals to continue to pursue integration of these communication modes into your stock plan communication strategy. I think it’s only a matter of time before these become mainstream in every type of communication campaign.
A Few Tips
If you’re venturing into social media channels to communicate with your stock plan participants, here’s a few things you’ll want to remember:
Look for Generation Gaps: While people across all generations have embraced social media, the younger generations have come to rely on it as a primary form of communication. Look at your stock plan demographics – if you’ve got a lot of under 34 year old participants (the largest social media user group is reported to be 18-34 year olds), you should know that email is out and social media is in.
Learn the Language: Social media communications should be short, direct and to the point. Forget the formality of email – it may seem like an abrupt change, but those using social media are used to the forward approach. In some cases, your characters are limited (e.g. Twitter – 140 characters) and you have to be short and sweet. Instead of saying “Enrollment time is here! It’s time to enroll in the XYZ Employee Stock Purchase Plan. Enrollment will take place between now and May 31, 2013.”, you’ll need to trim it to something like “ESPP open enrollment now through May 31st.”
Check non-U.S. Requirements: When communicating with employees outside the U.S., you’ll want to determine if there are any policies that restrict the use of social media in a particular jurisdiction.
Check with Counsel: Do get legal advice before undertaking broad communication efforts using social media. Try to get some guidelines for what types of communications will be ideal for this channel, and which to avoid. For example, maybe it would be good to announce that it’s open enrollment for the ESPP, but it may not be appropriate to announce that stock option grants have been approved. You’ll want to review your specific unique circumstances with your legal advisers.
I look forward to seeing what innovative communications rise out of this next generation of modes and channels.
Let’s face it: we live in an era of information abundance. Yes, I can remember the days when I had to go to the library to research something on a microfilm. If you mention the word “microfilm” to kids today, all you’ll get is a blank, puzzled stare in return (really, try it!). In recent years I’ve started to realize that we have access to so much information, that at times it seems like too much information (“TMI”). I think it hit me when my children’s pediatrician told me to stop googling (yes, googling is officially a verb) every little symptom. Why? Because there is so much information out there it’s hard to validate and assign credibility to what you read online. The term “TMI” isn’t in the Merriam-Webster Dictionary, but I did find it in the Online Slang Dictionary, so it appears that acronym may be here to stay.
What does my rambling have to do with stock compensation? This blog was prompted by an article across my Google alerts last week that referenced ESPPs. The piece in question was published by a reputable news agency, and yet I found misleading and inaccurate information about the mechanics of how ESPPs work. This prompted me to think about what our employee populations must be googling about their benefit plans, and even more concerning, what they are relying on as “truth”. For example, in the article titled “5 Ways to Increase Your Net Worth” and published by U.S. News & World Report, the author says: “ESPPs allow employees to withhold a portion of their paycheck to purchase company stock at a discount. Once purchased, you can usually sell your shares for a guaranteed return.” Last time I checked, there is no “guaranteed” return for an ESPP plan. Now, I think the author probably meant to say that there is a guaranteed formula for the purchase price (in terms of discount applied and/or look back), but that doesn’t solidify a certain dollar return upon sale. We’ve all seen the scenario where an ESPP purchase occurs one day and the stock price drops immediately, before the employee can even sell. It’s misleading to suggest that there is a guaranteed return, even though the publicity for ESPPs is great and the author is trying to highlight the benefits of such a plan. I’m concerned about an employee who reads a statement like this, signs up for the ESPP, and then expects a certain sale price down the road. Yes, the employee should verify the plan mechanics before joining, but we all know that employees often need assistance in getting the facts straight.
What Else is Out There?
A quick web search led me to several other inaccurate statements, and I’m sure there must be more out there. Here are a couple of samples:
– “Most startup employees don’t realize that it’s possible to ask to “forward exercise” their unvested options immediately after receiving their options grant.” This article makes no mention of needing to consult plan/grant documents and company policy to determine if early exercise is, in fact, permitted.
–“…the IRS considers this exercise a taxable event under the Alternative Minimum Tax because they just got something that’s worth more than what they spent on it.” This article does not identify the type of stock options that are being exercised, or explain that only ISOs are considered for AMT purposes (not non-qualified stock options). Imagine if an employee holding NQSOs read this article and assumes their exercise will trigger AMT.
I’m sure the list could go on and on as we explore the web and the information about there about stock plans. This further highlights that our need to communicate directly with stock plan participants is greater than ever before. It’s not only about informing them about the mechanics of their stock grants/awards. It’s also about being a direct resource to the employee and mitigating against the mis-truths they may find if they go hunting themselves. Make no mistake: if you fail to communicate with employees they will fill in the blanks on their own, and that’s a scary reality when it comes to stock plans and their complex layers. I list a few things you can do to ensure employees are receiving quality information:
Do communicate thoroughly about the terms and conditions of their grants/awards.
Do inform employees about the pitfalls of relying on online information; encourage them to validate information with you or your service provider before taking action based on something they read online. Even if you can’t give them official guidance, you can point them to other resources.
Do highlight reputable resources to obtain further information, such as myStockOptions.com, and/or a knowledgeable tax or financial adviser (emphasis on knowledgeable).
Don’t let random web articles be the sole source of information that your employees use to make sense of their stock plans. Some online content can certainly be a great supplement, especially from a credible source, but it’s in that context you want participants educating themselves online. The first and primary source of information should be the company. If you’re not communicating regularly, hopefully I’ve highlighted a few reasons to start. A great first step would be to visit our Employee Communications portal for sample documents and other valuable information.
Not-So-Stupid Equity Plan Questions: What Your Employees Are REALLY Asking By Pam Ellis of Solium Capital
Ever get those head-scratching questions from employees where you just don’t have a clue what they’re thinking, let alone asking? Let’s face it, this happens all the time, and often way more often than we’d like. But rather than throwing the question immediately in your circular file, you can turn this into a valuable lesson to understand the employee’s perspective better and learn what you can do to enhance your communication techniques.
At this year’s conference, I am leading a panel presentation that goes through this very analysis. Entitled “Not-So-Stupid Equity Plan Questions: What Your Employees Are REALLY Asking,” the panel consists of several service providers and an issuer who will review a list of common questions they have received and dig deeper to see what each one can teach us. Panelists include Bank of America Merrill Lynch, Prometheus Laboratories, Solium Capital, and UBS. The speakers from the various service providers are either involved in or have direct oversight of their stock plan call centers, so they hear firsthand the range and multitude of questions that come in across their broad base of clients.
Once the group started looking at common questions across the spectrum, they realized this was employee-relations gold and set out to illustrate how a company could use these questions to their advantage. The session focuses on 10 of the panelists’ favorite questions, analyzes the hidden message in each one, and provides recommendations on what the company can do to alleviate or eliminate these concerns altogether.
A great example is the confusion employees have over year-end tax forms; like many people who think taxes are a waste of time and an unnecessary evil, they don’t bother to understand them or make sure the numbers are right. They don’t know what information to provide to a tax advisor, what forms they need to complete on their return, or even what income has to be reported. Tailoring education materials to include visual flowcharts and checklists can go a long way in making the employee feel more comfortable about the tax reporting process – and therefore more positive about their equity awards in general. Other concepts such as exercising underwater options and differences between equity awards and 401ks can create further headaches and incite plenty of brow-furrowing inquiries.
With a little bit of humor and audience participation, the panelists expect to demonstrate how there really are no stupid questions.
Don’t Miss the 19th Annual NASPP Conference The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.
I recently attended a great presentation on perceived value at the Silicon Valley NASPP Chapter All-Day. The panel was moderated by Emily Cervino of the CEP Institute and included Fred Whittlesey of Compensation Venture Group, Keith Pearce of Intel, and Jason LeBovidge of Fidelity Investments. In today’s blog entry, I summarize some of the points they discussed.
Perceived Value ≠ Fair Value Perceived value is the value employees assign to the grants they receive. This value is often completely different than the fair value of the award or even the cash value of it. For example, employees often have a higher perceived value of at-the-money stock options with a low exercise price than those with a high exercise price–the exact opposite of how the fair values for those options would come out.
Perceived value is different than fair value because, as Keith explained during the presentation, the formulas for the two values are different:
Perceived value = signal value + cash value
Fair value = time value + intrinsic value
At-the-money stock options have no intrinsic, or cash, value, so all of their fair value is derived from time value. Yet when employees consider their stock options, they don’t include any time value in the equation.
Signal Value
The good news, however, is that employees will consider the signal value of their options and awards and, unlike time value, this value is something that you can influence.
Signal value is what the option/award signifies to the employee. It’s an intangible quantity that represents how valued the grant makes the employee feel and how meaningful the grant is to the employee. The information you provide to employees about their grants and how you deliver the message can increase signal value.
A Few Ways to Increase Signal Value
Make a big deal out of the grant. For example,you might include a letter from the CEO in the grant package and have the CEO discuss the stock program at company meetings.
Promote the stock program using a variety of media: email, company intranet, HR blog, employee newsletter, posters around the office, benefits statements, etc.
Make things personal. Meet with employees in person about their grants. If your company is too large for you to do this, have managers or local HR reps hold these meetings.
Have employees provide testimonials about what the program means to them.
Make sure employees understand the stock program.
Don’t oversell the program; disappointment has a devastating impact on perceived value.
It’s Not Too Late to Enroll in the NASPP’s Financial Reporting Course The NASPP’s newest online program, “Financial Reporting for Equity Compensation” started on Thursday, July 14, but it’s not too late to get into the course. All webcasts have been archived for you to listen to at your convenience.
Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS and tax accounting. Register today so you don’t miss any more webcasts.
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.
How does your company approach the issue of in-the-money options that are nearing their expiration date? This has always been a potential issue for terminated employees whose vested shares are no longer exercisable for the full term of the option. We now also see more companies with options that are actually nearing full term, especially when the options have remained underwater for an extended period of time.
Communications
The first decision on expiring options is whether or not the company will endeavor to notify participants of the impending expiration. At face value, this appears to be a fantastic idea, but there are still issues to consider. Ideally, these communications would be automated to some degree to avoid the administrative burden of manual distribution.
Identifying the grants and employees who should receive a notice regarding expiring in-the-money options may not be easy. Even if your stock plan administration software has a report that generates a list, you could be faced with a daily verification depending on the vesting schedules for your employee options. Most brokers have the ability to alert employees of upcoming option expirations through the employee accounts and some may even be able to send out automated email notification.
Another important consideration is how to ensure that the communication is universal. It is reasonable to exclude specific groups of employees (e.g., employees holding underwater options), but it is important that the exclusion is consistent to avoid even the appearance of discrimination. When considering the timing of communications, keep your termination parameters and typical administrative delays in processing terminations in mind. As with any communication, you run the risk of an employee relying on the notification, not receiving it due to an administrative anomaly, and find yourself in the middle of a lawsuit.
Automatic Exercise
More brokers are now willing and able to support a company’s policy to have expiring in-the-money options automatically exercised on the day before they expire. Automatic exercise has existed for many years for publicly traded options, so it’s not a stretch to apply the same logic to an employee plan. However, there are more considerations for employee stock options.
Exercise Type
When instituting an automatic exercise policy, careful consideration should be given to how the employee will pay the exercise price and tax withholding associated with the transaction. It is possible to initiate a same-day sale on an expiring option on behalf of the employee providing you have the appropriate permissions to do so and your broker is willing to execute the transaction. However, my opinion is that the best fit for an automatic exercise is some form on net share settlement. The key advantage is that employees would simply receive the net shares in their account, which could be held or sold at their discretion. You won’t have to ensure that brokerage accounts are open and unrestricted and you don’t have to worry about coordinating a market transaction. Regardless of the exercise type you choose, there should be a way for employees to opt out of the automatic exercise.
How Much is Enough?
Another consideration for automatic exercise is just how in the money options need to be for an exercise, especially if you are doing a net share settlement. Even with a sell-to-cover transaction, it is better if the employee receives more than a fraction of a share in value for the transaction. For non-qualified stock options, you have to account for not only the exercise price, but also the tax withholding, which could dramatically reduce the value returned to the employee. Although in general some value is better than nothing, there are many situations where the exercise of an option that is barely in the money could actually do more harm than good. If you set a minimum value, be sure that it can be consistently administered and is clearly communicated to employees.
Documentation
If you are instituting a new automatic exercise policy, confirm with your legal team on how to handle both existing options and new grants. Does your plan accommodate and will your company feel comfortable simply making it a policy and notifying employees, or will you need to have some kind of agreement from employees. For future grants, will you need to include specific language for an automatic exercise in the grant agreement?
Early Bird Special for the 19th Annual NASPP Conference
Speaking of expiring options, don’t miss out on your option to register for the 19th Annual NASPP Conference at a reduced price! Now through May 13th, NASPP members will receive a special discount on Conference registrations. Register today!
I don’t spend a lot of time talking about investor relations because it generally isn’t something that stock plan administrators are closely involved with. But, I do spend a lot of time talking about and thinking about ways to get creative with employee communications. I ran across an article, Communicating Executive Pay Information on the Web, that revealed how closely related these two topics can be. Of course, this should come as no surprise to me because employees receiving equity compensation are investors.
In this article, author Dominic Jones makes the point that companies will be putting all their efforts into “trying to spruce up their mandatory proxy statements” in an effort to comply with Say on Pay regulations when the reality is that most investors won’t even read the key pieces of information that the proxy contains. This is very much like the efforts of stock plan administrators who have to spend so much time and energy ensuring that communications meet regulatory requirements that there doesn’t feel like there’s any left over to actually communicate with employees.
Simplify
Jones points out that the compensation disclosures are not only difficult to read, they are also difficult for investors to access. Stock plan management has the same issue with grant agreements, which are lengthy and filled with dense text. Even online grant agreements that require employees to open and/or actually scroll through often don’t get read at all. The fact that grant agreements really do need to contain all the necessary legal references and disclaimers doesn’t preclude alternate delivery methods for the key information contained in them–and the same goes for tax communications.
Be the First “Result” in Employee Searches
The article also talks about where most investors will turn to get information on executive compensation (since they apparently won’t be reading proxy statements). According to Jones, most shareholders will be soaking up information from other sources like the media (or social media) and their friends. Well, the same thing happens with employees. Stock plan administrators need to compete with other sources of information like media, co-workers, personal advisors. To be the source that employees turn to first, information on equity compensation must be both visible and accessible. You don’t want your employees to have to go digging for essential information on their equity compensation. Issues like taxation can get buried layers down into the company intranet, or lost in a stack of other communications.
Modernize
Being accessible isn’t just about having open office hours, a standard email for employees to use, or a special page dedicated to top issues. Accessibility means reaching employees through formats they are most likely to notice. In the world of investor relations, Jones suggests using videos, surveys, and social media. Not bad advice for stock plan administrators either. (By the way, my esteemed colleague at TheCorporateCounsel.net, Broc Romanek, gets major kudos from Jones on his explanation of shareholder compensation surveys.)
Section 6039 Webcast
Today we have the NASPP’s next installment in our “Ask the Experts” series, Last Chance to Ask About Section 6039 Returns (4:00 – 5:30 pm, eastern time). We received a resounding number of technical and administrative questions for this webcast; if you’ve got any loose ends on Section 6039 compliance, this is the session you cannot miss!
The upcoming tax season is shaping up to be a confusing one for your plan participants. They will be receiving new bits of information regarding their equity transactions, all intended to be helpful. The problem with information is that it’s only helpful if you can understand it. As your company gears up for your Section 6039 reporting, don’t push cost basis reporting off as an issue that can wait until 2011 year end.
As Barbara pointed out in her June 2nd blog entry, requirements for cost basis reporting come in phases and 2011 marks the first phase. For regular stock sales, this will be very helpful. For equity compensation, however, this first phase actually provides misleading information. The cost basis that is required to be in Box 3 of the new Form 1099-B is only the purchase price of the shares, not the actual cost basis. While it is permissible for brokers to go above and beyond the requirement ahead of schedule, I doubt that it will be feasible for, especially for sales of ESPP shares, to put processes in place to capture and incorporate the necessary information to report the true cost basis for all sales in 2011.
Tower of Babel
What the communication quagmire boils down to is that employees are receiving an increasing number of communications with numbers that represent some piece of their tax puzzle, but not all the numbers will match or even be relevant. The message to your seasoned employees can be simple and clear: There is absolutely no change in the way you need to report your income or capital gains. This is true for both the Section 6039 information statements that employees may receive for this upcoming tax season as well as the changes to 2011 Forms 1099-B. Your new employees or those who still haven’t fully grasped the concepts behind tax reporting, on the other hand, will need to be given the resources to avoid making costly mistakes.
Double Trouble
Just to review, let’s talk about an NQSO exercise. At exercise, the employee realizes income on the difference between the exercise price and the FMV on the exercise date. For example, if 100 shares of an option were exercised for $10 per share when the FMV is $15 per share, the employee would pay an exercise price of $1,000 and realize ordinary income of $500. The new cost basis for these 100 shares is the exercise price plus the income, which is $1500 or $15 per share.
If the exercise in this example takes place in 2011 and the employee sells 11 shares to cover the taxes due, she or he will receive a Form 1099-B from the broker for the 11 shares showing a cost basis of $10 per share. Leaving the fees and commission on the sale out of the conversation, this means that the employee could easily misunderstand and pay capital gains taxes on that same $5 per share that is reported as income on his or her W-2–effectively paying taxes twice.
The Broker Connection
Brokers are making changes to their back-end systems and the user interfaces to accommodate lot ID for sales of shares. Some brokers already have electronic lot selection for some or all brokerage accounts, but the functionality may not yet apply to shares from employer equity plans. You will want to work closely with your broker(s) to understand what any changes will look like for employees, especially if there will be enhanced modeling features. Get educated on how the broker will determine which lot of shares is being sold through employee accounts and if or how employees can designate specific lot sales when selling online.
Now is also a perfect time to provide information to employees on the acceptable methods for determining cost basis of shares and how to plan for tax filing before they engage in a sale. Many brokers have information and FAQs already available that you can leverage to educate your employees.
Because cost basis reporting is only required for sales of shares that were acquired on or after January 1, 2011, you’ll also want to know what your broker is planning to do about reporting for shares purchased prior to 2011.
Break it Down
If possible, provide your employees with an FAQ that illustrates the cost basis of shares sold from each type of equity award that you offer this year so that next year’s conversation won’t mean starting from scratch. If you need a refresher in any of these, the Conference session, “IRS Cost-Basis Reporting: Are Your Stock Plans Ready?” includes a great list. By working to get employees familiar with the term “cost basis” right now, you help them with their tax reporting for this year, making next year’s conversation easier. If you issue ISOs or have an ESPP, any discussion of cost basis must include a refresher on qualifying vs. disqualifying dispositions, which works perfectly into any plans you have in place for educating employees on the Section 6039 information statements they’ll be receiving.