At the CEP Symposium later this month, I am part of a panel that will present on social media strategies that we can leverage in stock plan education programs. Recently, one of my co-panelists, Emily Cervino of Fidelity Stock Plan Services, wrote an article about this topic. I’m so excited about this idea that I asked Emily if we could publish her article as a guest blog entry.
3 Social Media Tricks to Make Stock-Plan Communications Irresistible
By Emily Cervino, Fidelity Stock Plan Services
Did you click on this article because, surely, you have the time to read just three things? And who doesn’t want “irresistible” communications? A quick read could make you a certified hero at work!
I hope you found the title catchy, compelling, and irresistible, because that was my intention. The title is my attempt at “clickbait”—a title that tempts you with information you need and want—but that you have to click to get. The main purpose of clickbait is to attract attention—simply by getting readers to click on it.
I’m gearing up for the CEP Symposium, where I’ll join Aftab Ibrahim, T-Mobile, and Barbara Baksa, NASPP, for a session on using social media tricks to make stock plan communications compelling. No, we aren’t talking about using actual social media for stock plan communications—that’s a no-go from the get-go for many companies. But we are interested in taking the tricks that make social media so addictive and applying them to stock plan communications.
If you are reading this article, you’re on social media and I’d wager that this isn’t your first foray into social media today. I can’t honestly say that I check social media every morning before I get out of bed, but it is a safe bet that by the time I’m done with my 2 minutes of teeth brushing (as recommended by the ADA) I’ve peeked at social media. Sometimes I brush even longer because, you know, one thing leads to another and I clicked here and then there, and then there’s a 30-second video I just have to finish!
Imagine a world where your employees eagerly gobble up your communications, clicking on videos and racing from article to article to absorb the nuggets of stock plan wisdom. Envision employees gathered in the break room sharing ESPP videos on their phone screens. And, treat yourself to the thought that employees look forward to this stuff, rather than approach it with the same enthusiasm as completing their tax return. It isn’t that outlandish. There are some simple, easy things that you can do. While you can go all out with expensive and custom work, there are a number of impactful changes—surefire tricks, as promised—that you can implement today.
Clickbait. Rethink your titles and subject lines to get your audience’s attention. Remember: You want them to open an email or click on a link. The words you choose need to drive action. Which are you more likely to read: “ESPP enrollment window closes on Friday. Enroll today” or “Top benefits you’ll miss out on if you don’t enroll in ESPP by Friday”?
Listicles. No, this is not a made-up word to try to get another click. A “listicle” is an article in a list format. It is easy to organize thoughts into lists, and short lists are tempting to read. Which sounds more compelling, “Equity plan: frequently asked questions” or “5 critical things to know about your stock grant”? When you use listicles, keep them short. Trying to tempt employees to read “36 Tips for Tax Time” is a tough sell. Admit it—you’ve scrolled through an article to check the length before you committed to reading it, haven’t you? Bonus tip: Listicle titles make great clickbait.
Interactive quizzes. I’m sure many of us have been lured in by these social media gems: quizzes that rate us on whether we can identify more movie stars than the average person or spot grammar errors or identify exotic foods. Try this out on stock plan topics with a simple five-question quiz. Don’t make it too hard—people like to succeed—and be sure to connect your participants with more information. For example, reward those who score 4-5 with “Congrats! You are a Stock Plan Pro. You are ready for our advanced topics (with a link to deeper content)” or, for those who score less than 4, “Looks like you could benefit from our video on stock plan basics. (with link to video).”
When you are browsing through different forms of social media, take note of what attracts your attention and contemplate if those attention-grabbing tricks can be integrated into your stock plan communications. And, if you are in the Silicon Valley, please try to join us for the CEP Symposium on March 28. We have a session packed full of examples and activities designed to get all attendees to rethink their approach to communications. #ThisSessionRocks.
Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.
Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, a member of NASPP, GEO, and NCEO, and a 2015 recipient of the NASPP’s Individual Achievement Award. Emily is a Certified Equity Professional (CEP) and she holds Series 7 and 63 securities registrations.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments.
Links to third-party web sites may be shared on this page. Those sites are unaffiliated with Fidelity. Fidelity has not been involved in the preparation of the content supplied at the unaffiliated site and does not guarantee or assume any responsibility for its content.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. 791858.1.0
Quick Survey on Stock Plan Education
The NASPP and Fidelity Stock Plan Services are pleased to announce a joint survey on stock plan education programs. Take this quick survey today to find out how your education program compares to your peers’. The survey includes fewer than 25 questions; you can complete it in less than ten minutes—do it today, before you forget. The deadline to complete the survey is Friday, December 11.
New Studies
We’ve posted the following new studies to the NASPP website:
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.
We recently posted the executive summary to the NASPP and PwC 2015 Global Equity Incentives Survey and, later today, we will be presenting highlights of the results in our webcast, “Top Trends in Equity Plans for International Employees.” For today’s blog entry, I highlight five findings that I think are significant:
Globalization Continues: Back when we did the 2012 survey, 20% of respondents said they expected to increase global participation in their stock plan and this trend held steady in 2015, with 19% again expecting to increase participation. In addition 77% of respondents said they expect global participation to remain the same. That leaves only a very small percentage of companies that expect to pull back their global stock plans.
Compliance Reviews Are More Routine: The percentage of respondents who said they conduct annual compliance reviews of their global stock plans increased to 43%, up from 34% in 2012. At the same time, respondents conducting only sporadic reviews dropped to 40%, down from 45%. It can be risky to wait until you hear about a regulatory change to conduct a compliance review; annual reviews help ensure that you know when the laws impacting your global stock plan have changed.
UK Takes the Lead in Challenging Tax Compliance: We asked respondents to indicate which countries they found to be challenging in terms of tax compliance. The UK was first, with 46% of the votes, up from 36% (third place) in 2012. China, however, is hanging in there at second place with 42% of the votes (China was in first place in 2012). France dropped to third place, with 26% of the votes (down from second place and 38% of the votes in 2012).
Mobility Compliance Up: The percentage of respondents tracking mobile employees continues to increase: 87% of respondents track formal assignees (up from 80% in 2012), 62% of respondents track mobile employees who aren’t part of an assignee program (up from 60% in 2012), and a surprising 27% track business travelers (up from 18% in 2012). But the tools for tracking mobile employees still leave something to be desired: 36% of respondents track this in an Excel spreadsheet, up from 29% in 2012. About another third (32%) outsource tracking to a consultant or TPA. The final third use a hodge podge of methods.
Participant Understanding Looks Like a Mountain Rather Than a Bell Curve: Only 34% of respondents felt that their global participants understand a good deal or completely understand their stock plan benefits. That leaves a two-thirds majority for whom participant understanding is at best, somewhat or partial. Global stock plans are a very expensive employee benefit, both in terms of the P&L and administrative cost. It seems a little crazy to invest resources like this in a plan and not also invest in the education to make sure participants understand it.
Be sure to tune in to the webcast later today to learn more highlights from the survey.
For today’s blog, we feature a guest entry from Bryan Wells of OptionEase on encouraging participants to value their stock compensation more.
Perception VS Expense Reality: Increasing Perceived Value via Participant Access By Bryan Wells of OptionEase
The disconnect between the fair value of awards from an accounting perspective and the perceived value of awards from a participant’s perspective has complicated equity compensation plan success since the introduction of FAS 123(R) (now ASC 718). While companies must take expense based on the accounting fair value of awards, it is the value that participants “perceive” their awards to be worth that actually drives behavior. There are many factors that contribute to the gap between accounting fair value and perceived fair value, but most will agree that communication is a major one. In many cases, participants either don’t fully understand their awards, or feel alienated from them due to a lack of real-time information and set of actionable interpretive tools. Thus, participants attribute a lower perceived value to the awards, making the awards expensive from an accounting perspective relative to the level of attraction, motivation, and retention that they create.
Most service providers offer actionable, real-time participant portals that help narrow this value gap.
These portals typically can be configured to communicate the specific information that administrators wish to show participants, as well as allow participants to actively manage their awards. Administrators are finding that providing plan-related documents, explanatory materials and alerts within their system to participants in a controlled environment increases participant understanding and involvement while decreasing administrative burden.
The intuitive dashboard-style user interface that some service providers are using allows participants to accept, exercise, and set tax elections for their awards with ease.
Participants leverage portal payout modeling tools to create a more concrete connection between their awards and the participant’s potential gain. This is particularly important due to the rise of performance grants with complex payout structures.
Brokerage integrations give further control to participants by allowing them to view detailed transaction scenarios before executing an exercise order, calculated with real-time data provided by the broker. Participant access transforms the equity compensation experience by empowering participants to take control over their award information.
The increase in retention and productivity that equity compensation provides is directly correlated with how participants, not valuation models, value the awards. Empowerment via participant access increases perceived value by giving participants both a greater understanding and sense of control. With many service providers offering robust, actionable, and easy to use participant portals, now is the time to consider opening your system up to your employees.
Do you know how much return participants in your company’s ESPP have realized on their investment? Recently, I ran across a blog about how Apple’s ESPP has produced millionaires and it got me thinking about how that sort of information might be used to promote an ESPP.
Apple ESPP = Millionaires In the blog (“$1.1 Million for Apple Employees,” Forbes, 10/19/11), author Troy Onink estimates how much money Apple employees that have participated in the ESPP for the past seven years have made, coming up with just over $1 million per employee.
Onink does make a mistake in his assumption: he assumes that each employee is contributing $25,000 per year to the plan. He bases this on the $25,000 limit, but he is apparently a little fuzzy on how the limit works–as my readers know, in a plan with a 15% discount (which Apple’s plan offers), the most an employee could contribute per year is $21,250 (and this assumes an appreciating stock price, contributions would be limited more severely in a declining market). Moreover, according to Apple’s Form 10-K, contributions are capped at 10% of compensation, so employees earning less than $212,500 per year can’t contribute the maximum under the statutory limit anyway. An employee earning, say, $150,000 per year can only contribute $15,000.
Which means that Apple’s employees probably haven’t made quite as much through the ESPP as Onink thinks. Nevertheless, regardless of how much Apple employees contributed to the ESPP, the 635% return that Onink calculates is still applicable. Even with contributions capped at 10% of compensation, that’s nothing to sneeze at.
What About Your ESPP?
If you were writing a similar article about your own company’s ESPP, do you know how much money your employees have realized on their ESPP? For example, if an employee enrolled in your ESPP seven years ago, bought stock on the first purchase date, and still held that stock today, how much would it be worth?
More important, is the amount an impressive return? Because if it is, I think I’d mention that in the materials promoting the ESPP. Frankly, if I were the stock plan administrator at Apple, I think I’d be passing out copies of this article to everyone not currently enrolled in the plan.
Take a Lesson from Your 401(k)
The educational materials for your 401(k) plan most likely talk about return on investment and give examples of how much money employees will have when they retire for specified investment levels. Why not do something similar for your ESPP?
You have to be a little careful here–you don’t want to be promoting the ESPP as a retirement plan–estimate a return over a shorter period. (Onink has a blurb about using ESPP proceeds to pay for kids’ college educations. I don’t recommend counting on the ESPP to pay for college, retirement, or anything important.) But you could have an example of how much return employees might have realized if they had enrolled in the plan five to ten years ago (this time frame helps to emphasize that this is a long-term investment). You could also run some numbers using disposition data and calculate the average return employees are actually realizing on their sales of shares acquired under the plan.
Of course, when discussing potential returns, always remember to include a disclaimer about past stock price performance not necessarily being indicative of future performance. I’m betting this disclaimer is included in your 401(k) materials–another lesson we can learn from this plan.
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.
We think of SEC documents as a snore, but the complaints issued by the SEC’s enforcement division can be more interesting than you think. Today I look at a recent complaint related to insider trading that illustrates how important it is to make sure employees understand the laws in this area.
In the complaint (SEC vs. Toby G. Scammell), the SEC alleges that Toby Scammell, an employee of an investment fund, found out about Disney’s acquisition of Marvel Entertainment before the deal was announced publicly (by sneaking a look at his girlfriend’s Blackberry), purchased call options on Marvel, and then sold them at a 3,000% profit after the deal was announced.
This is a good case for me to write about because, as far as I can tell from the complaint, Disney wasn’t in any way at fault for this. Scammell didn’t work for Disney and his girlfriend, who did work for Disney as an extern, didn’t voluntarily give the information to him. So I don’t have to suggest that an NASPP member had less than perfect procedures (I’m sure all of you are perfect anyway).
There are many things that are interesting about this case and there’s definitely some entertainment value in reading the complaint (or at least the SEC’s summary of it). What I find most interesting is that Scammell isn’t some high level executive or celebrity (a la Martha Stewart) and, although he realized a 3,000% profit, his investment apparently wasn’t that much to begin with, because that only worked out to around $200,000. On the surface, the whole thing hardly seems worth the SEC’s time, but not only is the SEC pursuing the case, it has garnered a fair amount of attention from the media.
And this is exactly why you have an insider trading compliance policy and why you want to make sure all your employees, not just your executives, understand it. Even if your employees aren’t subject to black-out periods and don’t regularly have access to material, non-public information, it is important that they understand what insider trading is, that it is prohibited by law, what the penalties could be, and your company’s insider trading compliance policy. You just never know what someone is going to overhear or come across–a confidential document could be left out on a copier, for example.
Insider Trading = Bad News for Everyone
Here’s why you don’t want your employees to be prosecuted for insider trading:
It’s bad news for your employees. They could pay stiff penalties to the SEC and/or face criminal prosecution (and have to pay back all the money they made on the trades, of course). They might also end up being fired for cause, since this is a common provision in insider trading compliance policies. Even if they aren’t guilty–and Scammell has been vocal about professing his innocence–their legal fees are likely to be significant (unless they opt for a public defender).
It’s bad news for the company–literally. The SEC prosecuting your employees for insider trading is likely to generate a lot of unwanted media attention, as evidenced by the flurry of articles, blogs, etc. on this case (which I am now contributing to).
It’s more bad news for the company. If the SEC is successful in prosecuting your employees for insider trading, then they could potentially focus their attentions on the company as well. Your insider trading compliance policy demonstrates that you actively discouraged employees from insider trading and could protect the company from an SEC enforcement action.
Your insider trading compliance policy is not just ceremonial or a formality. It is an important policy that protects both the company and its employees. A key part of your stock plan education program is to make sure employees understand this policy, even if they aren’t subject to black-out periods, and understand the types of transactions that are prohibited by law and by your policy.
For more information on insider trading compliance polices, check out this month’s Compliance-O-Meter quiz.
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.
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.
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.
Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.