What do you do when someone has inadvertently been omitted from the grant approval process? You really can’t just slip the grant into the approval documentation, fully disclosed or clandestinely, and write it off to an “administrative error.” The bad news is that each situation has the potential to be unique, which makes it unlikely that you can create a standard response to a missed grant. For this reason, your grant policy probably can’t (even shouldn’t) attempt to address every potential circumstance surrounding a missed grant. The good news is that you can prepare yourself to evaluate the responses available to you in the event you do find a missed grant. These are my top five considerations:
Vesting
If a grant is left out of the approval process and needs to be approved at a later date, you need to know if the delay in approval will impact vesting. If your plan or grant policy already bases the vesting off a date other than the approval date or is flexible on the issue, it is possible that the grant can maintain the intended vesting dates.
Approval
It’s important to have a solid understanding of your plan and approval process under any circumstance, but when it comes to a missed grant, there are additional considerations. If the delayed approval will result in a grant that is different from your typical grants either in size or vesting schedule, you need to know who has the authority to approve the grant. If standard grants are approved by an officer, such as the CEO, it’s likely that a modification to standard terms will cause the grant to fall outside the parameters of the officer’s approval authority and may need to be referred to the compensation committee for approval.
Stock Price
If the grant in question is an option, then the stock price has likely moved on since the original approval date. If the price has dropped, it is easy to sell your employee on a grant of equal size and vesting with a better exercise price, but it may not be advisable to provide a disproportionately advantageous position to just one employee. Provided your plan permits it, it is possible to approve the option with the intended (i.e., higher) grant price.
If the stock price has increased, you have the opposite issue to contend with–the employee really shouldn’t be penalized for an administrative error. However, approving the grant at the lower exercise price would most likely result in a discounted option, making it subject to 409A. You can, however, develop a policy on how the company may compensate for this change in FMV such as increasing the number of shares or providing a cash payment to make up the difference.
If an RSU has slipped through the cracks in your approval process, making up for lost time can be less of a burden provided you have the flexibility in your plan to keep the intended vesting schedule. But, make sure that if your grant policy doesn’t lock in grant size based on the date of approval (e.g.; a value of $1,000 based on the FVM on date of approval).
Timing
Ideally, you never have to deal with a missed grant. Hopefully, if you do encounter one, the error is discovered virtually immediately. However, it is a good idea to think about what the company can do if a significant amount of time has passed between the date the grant should have been approved and the discovery.
One possible issue is vesting; if the grant should have already vested by the time the error is discovered. Like compensating for a higher exercise price, the company could choose to increase the number of shares or provide a cash payment to compensate for a missed sale opportunity. This is risky business because you are using counterfactual history–there is no way to know at what point the employee would have sold the shares.
Another issue comes up for companies that use a “total rewards” type compensation standard and one or more annual grants have been approved before the original missed grant is discovered. In a total rewards model, annual grant size would typically be based on a target total equity value or total compensation level. If the missed grant is not included in the calculations, then an annual grant approved after the error is likely to be larger to accommodate the value “missing” from that employee’s total equity value or compensation level.
Communication
Regardless of the circumstances leading up to a missed grant, communication is going to be key. No matter how you cut it, employees don’t appreciate being left out and bristle at the idea of being penalized for an administrative error, whether that idea is well-founded or not. This might sound a little like running a customer service call center, but it’s not a bad idea to have some apology verbiage ready that can fit most administrative issues; something that can help to reassure the employee that the company will “make it right” without actually obligating the company to provide recompense it isn’t prepared or able to accommodate. Whatever your response is to a missed grant, keep the employee abreast of the process as much as possible. Also, it’s probably best to avoid detailing the circumstances of the oversight even if you are trying to reassure the employee.
I see a lot of articles providing advice to employees on stock compensation, much of which focus on things like knowing what type of award you have and how it is taxed. While this information is important, I feel like it doesn’t really get to the heart of the matter or address employee’s most pressing questions concerning their stock compensation. So today I have my top six things your employees need to know about their stock compensation.
1. Just because your option/award is vested, doesn’t mean you should sell.
Likewise, employees shouldn’t hold an option just because it isn’t expiring soon. Employees should primarily base decisions to exercise stock options and sell option or award shares on investment-related considerations: the percentage the shares represent of their net worth, their tolerance for risk and the level of risk involved in holding the option/award/shares, and how they plan to use the gains.
2. Just because you work here, doesn’t mean the stock will always increase in value.
When deciding to hold an option/award/stock, employees should ask themselves if they are prepared to accept a situation where the stock loses all its appreciated value and becomes worthless. Of course, employees should also ask themselves if they are okay with losing out on future appreciation if they sell now.
While it is important to know the tax treatment (see #4), ultimately, this is an investment and the primary drivers of decisions regarding options/awards/stock should be grounded in sound investment strategies (see #1).
4. Taxation of stock compensation is tricky–be careful, be very, very careful.
Wash sales, AMT for ISOs, ill-advised Section 83(b) elections, and losses on ESPP disqualifying dispositions are just a few of the potentially disastrous tax traps that abound in stock compensation (and, starting in 2011, add Form 1099-B cost-basis reporting to this list).
5. Know what you have, when you’ll have it, how long you’ll have it for, and what you have to do to secure it.
Employees should make sure they know their grant type, vesting requirements, termination and expiration conditions, transaction procedures, and other key grant terms to ensure they don’t inadvertently lose out on any benefits.
6. Don’t believe everything you read on the internet!
Employees should be especially wary of the stuff they read in anonymous discussion forums (and should never look to these forums for answers to their own questions). Some of the misinformation out there on stock compensation is downright horrifying.
You might want to review your educational materials to make sure they address these topics (especially #6). For information on stock compensation that is always accurate and is easy for employees to understand, check out mystockoptions.com and “Consider Your Options” by Fairmark Press.
NASPP New Member Referral Program Extended! Due to overwhelming demand, we have extended the NASPP New Member Referral Program to September 3. But don’t wait–we won’t be able to extend the deadline again. Use our sample email today to get started on your referrals today, so you have plenty of time to qualify.
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 divorce case involving stock options that has some potential lessons for stock plan administrators recently came to my attention. The case involves grants that were divided in a divorce settlement and then later cancelled due to the employee’s termination.
Divorce is Expensive–Especially If Options Expire Unexercised
Under the terms of the divorce settlement, the employee’s options and SARs were split equally between him and his ex-spouse. The grants were non-transferable, so the employee was required to hold half of the grants in constructive trust for the ex-spouse. Upon exercise of that portion of the grants, the employee would then have to pay over the proceeds to the ex-spouse.
After the settlement was final, the employee terminated his employment and, as a result, the period in which the grants could be exercised was curtailed. The employee did not exercise the grants within that period and the grants were cancelled. The employee’s ex-spouse then claimed that the employee owed her the value of her half of the grants–about $15,000–because, by failing to exercise the options/SARs within the prescribed period, the employee had deprived her of the opportunity to realize this gain.
The employee had been under the impression that he could take the options/SARs with him. I’m sure anyone involved in stock plan administration can read the subtext here: the employee likely asked his (uninformed) best buddy at work what would happen to the grants and never bothered to check his grant agreements, exit paperwork, or even call stock plan administration to ask about the grants. I imagine that it’s even possible that this lack of follow-through was a contributing factor in the divorce in the first place.
The end result is that the court agreed with the ex-wife and the employee now owes her about $15,000.
Lesson 1: Appropriate Cancellation Procedures
In this case, the options/SARs were non-transferable and were all still held by the employee. Thus, when the employee’s termination was entered into the stock plan database, it was likely automatically applied to all of the options/SARS. Where the options are transferable and have been assigned to the ex-spouse in the company’s stock plan database, this procedure might not work quite so efficiently. If you are transferring grants divided in a divorce settlement to an ex-spouse, it is critical that you remember to cancel those grants along with the grants held by the employee when the employee terminates.
Lesson 2: Cancellation Notification
The second lesson here is to make sure that, in the event the employee does terminate, it isn’t your job to notify the ex-spouse that the grants he/she has a right to are subject to cancellation. At the time that you receive notice of the divorce settlement, make sure that any responsibility for providing subsequent notices about any change in the status of the grants (due to termination, change-in-control, repricing, stock split, etc.) falls squarely on the employee’s shoulders and that the employee is aware of it. You have enough to do keeping track of employees; you don’t need to take on their ex-spouses as well.
Lesson 3: Stay Out of It
I think this case is a good argument for not allowing transfer of options and awards upon divorce. By not permitting the transfer and requiring the employee to exercise the options/SARs on behalf of the ex-spouse, the company effectively distanced itself from all of the proceedings related to the grants. This also helped to clarify that the employee was responsible for alerting the ex-spouse to the fact that the options/SARs were going to cancel as a result of his termination. Where the company has transferred grants to an ex-spouse and is in communication with the ex-spouse about them, the lines may get a little blurry.
18th Annual NASPP Conference Don’t miss the 18th Annual NASPP Conference from Sept 20-23 in Chicago. This year’s program is phenomenal–we’ve planned over 40 sessions on critical and timely topics. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad–get started on your referrals today to make sure you are included in the June raffle. And the new members you refer save 50% on their membership–it’s a win-win!
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.
As you know, this year’s NASPP Conference is completely sold out! It’s a first for the NASPP. Luckily, this year not only can you purchase the audio online with the course materials; you can even choose how much of the Conference you would like to receive! Of course you won’t want to miss out on any of the spectacular sessions we have for this year, but if your budget is limited, you can opt for a single-session or five-session package. If you order before the Conference, you will receive a 10% discount off the standard pricing!
Barbara Baksa, Robyn Shutak, and I will be hosting a timely session on encouraging ESPP participation in a down market. Now is the perfect time to get your employees excited about your company’s ESPP program! In the spirit of that, I’d like to offer you my top five ways you could be drumming up participation for your ESPP, but probably aren’t.
Tip #1: Put notices in employee paystubs.
This is a great way to reach all employees, especially those that do not spend time at a computer and won’t be able to access your more technology-driven approaches to ESPP communications. Congratulate those that are participating in the ESPP, announce your open enrollment, or distribute an FAQ.
Tip #2: Get managers involved in your enrollment campaign.
Circle the wagons and get all your managers on a unified message! Provide managers with talking points and require them to spend time with the employees on their team promoting your ESPP program.
Tip #3: Create employee focus groups to test new communications strategies.
Your ESPP campaign is a marketing campaign; why not treat it like one? As you brainstorm ideas, get focus groups of employees from different segments of your employee population together and run your ideas past them. This is especially helpful when trying to explain your ESPP to employees and offers you a perfect opportunity for feedback in a personal and dynamic setting.
Tip #4: Publish or record short interviews with ESPP participants.
You have employees who are excited about the ESPP, who understand it and value it. Let them tell their peers in their own words why they participate, how long they’ve held their stock from ESPP purchases, what they’ve done with their sale proceeds, or how the return from the ESPP compares to their other investments. Once you have enough interviews, put together a short advertisement with an inspiring soundtrack with a clip from each interview!
Tip #5: Get creative – Blog it!
I’m sure you know that we’re a fan of blogging here at the NASPP. Don’t be shy; you can get out there and blog, too! You can include questions you get from employees, participation increases you are excited about, announce when purchases are complete, and include quotes from happy participants.
Want more? This is just the tip of the iceberg on all we have in store for you at our session, Leveraging Your ESPP in a Down Market. We also have great supplemental materials for this session including a second slide deck on communicating your ESPP to your employees. I’m really excited to get my hands on the final Conference materials this year! Almost all of our sessions include supplemental information you can’t get anywhere else–like sample documents, extended outlines, additional slide decks, checklists, and articles. If you made the cut-off and you’ve already registered, I’ll see you in San Francisco!
We all know that the quality of your employee communications program is essential to gaining employee support and enthusiasm for your stock programs. But, sometimes it’s hard to find fresh ideas on exactly how to go about communicating with your employees. You know the general idea; presentations, FAQs, intranet, information packets, e-mails, etc. There are two basic pieces to conquer: what communication methods work best for your employee groups and what content should you provide.
It’s great if you can ramp up your learning curve by taking advantage of others’ experiences. You can do this by seeing how other companies communicate to their employees and by learning what has been effective for them. Unfortunately, because many companies are hesitant to make their employee communications public it can be difficult to find sample communications to compare against your own.
One big exception to this is any program or corporate transaction that involves a Tender Offer (such as options repricings or mergers). Because every communication regarding the transaction must be included as an exhibit in the Schedule TO, you can find great samples on how other companies have approached the communication process. You can search for these filings on the SEC website either by company or by the Form type (“SC TO” for Tender Offers). Even better, you can use the Full Text Advanced Search to drill down on your search criteria. For example, you can use the Boolean phrase search to find the phrase “options exchange” (keep the quotes in there) used in any Form SC TO-C. You can even narrow it down by Standard Industrial Classification (SIC).
You may also choose to search the news first for companies that have filed a Schedule TO with the SEC. For example, Intel’s option exchange progam has been in the news recently. VP and Director of HR, Richard Taylor, has been doing a great job of trying to stay ahead of the rumor mill with informative updates like this one. In this communication, Taylor has taken some of the common questions that he’s received regarding the options exchange program and addressed them publicly (and in several languages). This is a fantastic strategy not only for options exchanges, but for all of your equity compensation programs. The truly advantageous part of finding communications like this for the rest of us is that it provides a window into the types of problems that companies may be encountering. If you see that another company has had to address a particular issue, you can turn around and try to proactively provide information to your employees to squelch that particular issue.
Of course, there are many other types of communication that would be wonderful to have samples of. We do have a variety of sample communications in our Document Library. Remember, though, that sample documents are just that; samples. You can use them to get ideas or to see if other companies are dealing with similar issues, but you should not expect them to be templates that you can just plug your company’s information into and use. I would like to encourage all our members to submit whatever communications materials they can to the Document Library. Sometimes the best resource a stock plan professional has is another stock plan professional!
Also, if you are looking to put some zing into your ESPP communications strategy, don’t miss the Conference Session of the Week from Barbara’s Tuesday entry!