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.
For today’s blog entry, I highlight results from the NASPP’s 2011 Stock Plan Design and Administration Survey (co-sponsored by Deloitte). If you missed our webcast highlighting the results, you can still catch the audio archive (and the transcript will be up in a couple of weeks). The full results will be published later this month; I’ll cover more highlights from the results in future blog entries.
The 2011 Domestic Stock Plan Administration Survey The last time the Domestic Stock Plan Administration Survey was conducted was in 2007, when it was part of the Domestic Design survey. This is the first time the Domestic Administration survey has been conducted and published independently.
Respondent Demographics
We received 603 responses, compared to 428 responses in 2007. High-tech companies still comprised the single largest industry in the survey, but dropped from 43% of the respondents in 2007 to only 34% of respondents in 2011. We picked up respondents in the “other” industries categories, which is a mish mash of industries that don’t fit into any of the other categories (one thing I like about writing a blog is that I can use words like “mish mash” that I can’t use in anything else I write). Respondents from the western region also dropped from 35% in 2007 to only 29% in 2011. We picked up respondents primarily in southeast and a little in the northeast. 37% of respondents are Fortune 500 companies (this was almost the same as in the 2007 survey).
Staffing and Outsourcing
A question I am asked a lot is what department stock plan administration is located in. 60% of respondents reported that HR/Comp & Benefits has primary responsibility for administering the company’s stock and option plans. This was up from 57% in 2007. I was surprised to see the number of companies that locate primary responsibility for stock plan administration in Treasury/Finance drop from 16% in 2007 to just 5% in the current survey. 9% of respondents task accounting with primary responsibility for stock plan administration, which did not change from the 2007 survey.
The percentage of companies that have no personnel dedicated solely to administering their stock and option plans increased from 31% in 2007 to 39% in 2011. At the same time, the number of companies outsourcing more than 75% of stock plan administration increased to 41%, up from 33% in 2007. Perhaps the increase in outsourcing contributed to the decline in staffing.
The Electronic Age
Companies continue to move to electronic processes. The percentage of respondents distributing grant agreements in paper format dropped to 33%, from 47% in 2007. 47% of respondents permit a digital signature on grant agreements for some or all employees, up from 34% in 2007.
Participant Communications
76% of respondents require employees to accept their grant agreements, which did not change significantly from 2007. Enforcement practices also did not change significantly, but an additional 4% (19%, up from 15% in 2007) of respondents cancel grants if they aren’t acknowledged within a specified period.
We are seeing more companies notify employees of expiring in-the-money options. Only 20% of respondents don’t provide this notice, down from 25% in 2007. And more companies are relying on a third-party to provide the notice (45% of respondents, up from 31% in 2007). I expect that this is the result of the brokers and other third-party administrators developing the functionality to provide these notices to employees and more companies getting comfortable with relying on the brokers to provide this notice.
See You in San Francisco! I hope to see all of my readers at the 19th Annual NASPP Conference, which is scheduled for November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance–and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong–on track to reach nearly 2,000 attendees–this year’s event promises to be just as exciting; register today to ensure you don’t miss out (and make your hotel reservations, because the hotel is close to selling out).
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.
Attend your local NASPP chapter meetings in Florida, Houston, Ohio, San Diego, Silicon Valley, and Wisconsin. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting and I’ll be at the Silicon Valley meeting; we hope to see you there!
It feels great to be part of the NASPP, and I appreciate the warm welcome I’ve received. For my inaugural blog I decided to focus on something I’m particularly passionate about: employee communications. Those who know me know that this is a soapbox I can often be found standing atop, waving my arms.
The Need to Communicate
The need to communicate with employees about stock plans knows no boundaries. Whether you are a public or private company, you have a large or small employee population, or you simply service those types of companies, employee communication is a core and critical aspect of offering and administering stock plan benefits. It is also an area that often is downgraded in priority when other demands rise. Year-end is just around the corner, and many companies are preparing to send out communications that are legally required, such as those mandated by IRC Section 6039. What about the communications that are not required by a statute? Is there a plan in place to carry out a voluntary long-term communication strategy?
Crafting a Communication Strategy
I’ve thought of a few areas to begin in focusing on a long-term communications plan:
• Choose your mediums, and use multiple! Don’t limit yourself to just one mode of communication with employees, such as email. Communication research shows that people receive and process information differently. Sometimes a visual is needed, sometimes in-person contact is necessary. Ideas for mediums include email, presentations, in-person meetings, FAQs, webcasts, mailers, and social networking sites (Facebook, Twitter).
• Craft a message that repeats itself. One mistake often made in communication efforts is assuming that the message is heard and retained the first time. It often takes several attempts for a message to clearly register. Ensure your communication campaign involves repetition of your core message. • Don’t forget the value proposition. It’s easy to focus on communicating about the process, whether it is the process for accepting a new grant, accessing a brokerage web site, or other functional “must know.” In your quest to inform participants about how to do something, don’t forget to include why it is important. Your stock plans are only as valuable to your participant as the participant perceives the benefit. Remember that the total value of a grant or award is comprised of both the tangible cash value (e.g. the intrinsic value of a stock option) and intangibles, such as how the employee feels about their grant and worth to the company. • Think of key events and use them as opportunities. Communication doesn’t have to be a stand-alone event. Think of key events in the stock plan life cycle (new grants, vesting, exercise/release, significant company events such as a merger or major milestone achievement, etc.) and tie your communication efforts into those moments.
Last Thoughts
As you sit down to develop your year-end communication strategy, I challenge you to expand your efforts to include a plan for the entire year. Certainly unforeseen events will arise throughout the year that will require additional communication. The key is to place emphasis on managing participant perception of stock plan benefits by keeping in touch consistently, repetitiously, and using effective mediums. For communication ideas, be sure to stop by our Employee Communications Portal to view sample documents and other tidbits of information. You may also want to attend the “Maximizing Perceived Value of Equity Compensation”session at the 19th Annual NASPP Conference in November.
I’ve mentioned before that you shouldn’t believe everything you read on the internet about stock compensation. This can be true even if the information comes from a source that might be expected to be reliable. Rajal Mankad of Garmin pointed out some misinformation on the Turbo Tax website about qualifying dispositions of ESPP shares.
The Turbo Tax article includes an example of a qualifying disposition in which the FMV on the purchase date ($25) is less than the FMV on the grant date ($30). The purchase price is 85% of the lesser of these two FMVs ($21.25); the FMV of the shares when they are sold is $50. According to the article, the compensation income for the qualifying disposition is $3.75 per share (the purchase date FMV of $25 less the purchase price of $21.25). But, as I’m sure my readers are aware, this is not correct. Where the purchase price is not fixed at grant, the compensation income recognized upon a qualifying disposition of ESPP shares is the lesser of:
The discount as computed based on the FMV at grant (this can be calculated by subtracting the amount in box 8 of Form 3922 from the amount in box 3–in fact, this calculation is the reason why the amount in box 8 was added to the form in the final Section 6039 regs).
The difference between the FMV at the time of sale and the price paid for the shares.
Thus, in the example in the article, the compensation income for the qualifying disposition should be $4.50 per share ($30 FMV at grant multiplied by 15%).
The Turbo Tax article also suggests that the brokerage and other transaction fees can be used to reduce amount #2 above. I don’t believe this is correct. The final ISO regs were clear that the compensation income recognized upon disposition should not be reduced by the transaction fees; while those regulations are specific to ISOs, I think they serve to illustrate the IRS’s position on transaction fees. Moreover, in the case of a qualifying disposition ESPP, amount #2 above is specifically defined as the difference between the FMV of the shares at the time of sale and the purchase price. I think it is reasonable to treat the sale price as the FMV of the shares, but I don’t think the IRS would view it as reasonable to reduce the FMV by the transaction fees for the sale. Those fees are the amount necessary to facilitate the trade; they aren’t part of the price a willing buyer would pay a willing seller for the shares (which is the definition of “FMV”).
Congratulations Are in Order Congratulations to Mike Melbinger of Winston & Strawn for being selected as one of the BTI Client Service All-Stars 2011–a considerable achievement. Catch Mike’s blog on compensation at CompensationStandards.com.
John Olson of Gibson Dunn, a frequent speaker at NASPP Conferences, is also a BTI Client Service All-Star for 2011.
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.
Attend your local NASPP chapter meetings in Austin, Ohio, and San Diego. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting–be sure to say hello to her.
This Tuesday, I had the privilege of attending the CEPI’s 5th Annual CEP Symposium at the Santa Clara University. NASPP’s own Robyn Shutak and Barbara Baksa both received 2008 Volunteer Excellence Awards, and Barbara had the exceptional honor of being a “Super-SME”(subject matter expert)! If you are a CEP already, don’t forget that the volunteer efforts by outstanding CEPs like Robyn and Barbara are an essential part of the CEP program. For more information on volunteering, visit the CEPI site for CEP designees at http://www.scu.edu/business/cepi/current_ceps.cfm. If you are still in the process of earning the CEP designation, there are some fantastic opportunities through the NASPP to gain the knowledge expertise you will need like the Stock Plan Fundamentals and the Restricted Stock Essentials.
The keynote address and general session of the CEP Symposium centered on an issue that most companies should be grappling with today: the idea vs. the reality of equity compensation programs. The keynote address delivered by author and professor Hersh Sefrin really highlighted for me not only how psychology dominates our markets, but also the success (or lack thereof) of our equity compensation programs. It ties closely with companies moving to performance-based compensation in an effort to tie principal (shareholder) interests with agent (executive) interests. One thing that stood out for me is the realization that people are more risk averse when they have the potential to lose a “sure gain”. In other words, once an executive has reached a point at which their equity compensation has significant value, they may be less likely to take productive risks with the direction of the company than they would be while they still want to see an increase in the value of their equity compensation. A real way to counter this is to balance out the carrot with the stick; to incorporate a potential for loss or penalty that will create incentive to continue to be innovative and engage in productive risk. For more information on performance-based equity compensation, check out the Performance Plans portal on our site.
The general session, delivered by Sheila Lyons and Miriam Solomon of BNY Mellon, was on communicating the value of your equity compensation program. An essential part of communicating your program is to have a solid idea of what goal (or goals) your company is pursuing with equity compensation. It is important to make sure that the goal of the company is being met by the program. One common example of misalignment that I see is when the company would like to promote an ownership culture across the board as the main goal, but is not able to give grants that are sizable enough to be of any significance to the participant. Another issue to watch out for is conflicting goals within the program. If a company wants to use stock as a part of compensation and as a way to promote an ownership culture, then these two goals may conflict with each other and create difficulty when trying to communicate the value of the program to employees (will you compare it to salary/compensation or promote share retention?). I thought the best idea to come out of this session is that companies should probably be looking at stock plan communications from a marketing viewpoint to promote the value of the program to employees. This means identifying employee needs and promoting education around those needs. Some great ways to do this are to interview or survey employees to understand their experiences with the program, to work with managers so that they can talk with employees in a smaller setting, and to bring financial planning education into the mix through a 3rd party that does not represent the company. Don’t be afraid to get outside your comfort zone and employ some clever marketing when it comes to your equity compensation!
I recently read that Kohl’s is granting a make-up stock option to the Chairman of the Board because the company “failed to notify him” that his options were expiring–back in 2004! See the story here. Now, instead of $5 million in options that expired in 2004, he is being given around 130% of value of stock options (which is more than twice as many shares) that expire in 2015. Sounds to me like in this case ignorance is not only bliss, it is highly profitable!
It got me to thinking, as a stock plan administrator how much communication do you need to provide, and what will you do if you haven’t provided it or the participant didn’t act on the information provided? I’ve certainly answered the phone on situations like this; where someone has let a large amount of money (admittedly, not the $5 million that the Kohl’s chairman apparently lost out on in 2004) slip away because they had not read their grant agreement and did not understand that the option to purchase stock didn’t last forever, or that it was cancelled when they left the company. They aren’t fun calls, either for the person who is realizing that they missed out or for the administrator who most likely can’t do anything for them. Also, there is a definite difference in how management feels about the situation if the person is still an active, valued contributor to the company vs. an employee who terminated years ago.
The fact is that most grant recipients do not read their grant document or will not understand what they are reading without additional education. To be fair, I can’t confirm that the grant document correctly showed the expiration date in the Kohl’s case or that there wasn’t some other communication that indicated the grant would still be exercisable in 2008. However, the situation does highlight how important it is to maintain consistency through all participant communications as well as implement a solid education program to keep participants informed. Remind the participants as often as you can that they absolutely need to read their grant agreement and that they will be responsible for understanding the terms and conditions! In addition, companies should be sure to have a policy in place on how it will handle situations where the grant recipient has, through their own inaction, gotten into a situation where they have lost the opportunity to exercise or vest in their shares.
Stock plan administrators should be in the loop on all employee communications policies that have anything to do with equity compensation. It’s a good idea to have a sit-down meeting or conference call with your recruiting, HR, compensation, and legal teams to make sure that everyone understands the importance of consistent communications. If offer letters in the U.S. include an equity compensation piece, they should always also include a disclaimer that the grant is subject to approval and that the terms and conditions of the grant will be included in the grant agreement, which will supersede anything on the offer letter. In other countries, you will most likely not want to include the equity piece at all in an offer letter to avoid entitlement issues (a simple disclaimer may not be enough). Make sure that recruiters are being educated not to say anything that may be considered a verbal contract regarding equity compensation and that your HR team has good talking points to answer employee questions and actively participate in employee education. Also, many brokers now notify account-holders when an option is set to expire. Take time to understand your broker(s) policy, but be careful when educating participants to avoid making any guarantees that the broker will notify them of expiring options.