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.
This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers. Today’s entry is written by Bill Dillhoefer of Net Worth Strategies, who will lead the session “Supercharging Your Stock Option Grants.” 10 pts to Bill for successfully using the word “quants” in his entry!
My company has been providing equity compensation decision support services since 1999 so we have witnessed firsthand a great deal of the development in stock plan participant education. Here’s a brief summary…. The internet bubble (1995 – 2000) instigated many companies to begin offering broad-based employee stock option programs. These companies had to provide participants with basic information about their stock option grants because options were new and mysterious. This was the “Options 101” phase because these communication programs generally avoided the more complex aspects of stock options.
This early phase of participant education may have transitioned into one that addressed advanced topics had it not been for two major factors. First, the internet bubble burst, causing the appeal of stock options to decline because underwater grants were perceived as worthless. Second was the adoption of FAS 123(R), which eventually resulted in the curtailment of broad-based option programs and the increase in popularity of restricted stock/units. Consequently, the adoption of advanced stock option education programs never gained popularity among issuing companies.
Nevertheless, stock options are still a widely used means of granting equity to valued employees. Even if your company isn’t currently granting new stock options, if your employees have outstanding options grants you can significantly increase their perceived value. It is often said that “perception is reality” so by simply educating participants on the Black Scholes value of their grants, this value become a reality. Now you are probably thinking this is crazy because Black Scholes is WAY over their heads and will only serve to confuse and discourage people. On the contrary, learn the secrets and benefits of providing employees with Black Scholes based information by attending “Supercharging Your Stock Option Grants” at the 20th Annual NASPP Conference.
This presentation consists of four sections. Professor Anne Farrell will present academic research showing that individuals misunderstand the full value of their employee stock options and how basic training can significantly change their subjective valuations. Next, I will introduce two time value based metrics: Forfeit Value and the Insight Ratio. These metrics can be incorporated into stock option communication programs and can increase retention and motivation by helping employees make informed decisions. In the third section, Clinton Shoap from Cargill, Inc. will provide examples of how they have successfully used time value information with their employees. Finally, Larry Bohrer from Charles Schwab will describe their approach to helping companies to realize the full potential of their option awards and how complicated concepts can be understood by participants when presented in the right framework.
Who says Black Scholes is only for quants? Delivered in the right manner Black Scholes information can be fun and profitable for employees with stock options. “Supercharging Your Stock Option Grants” should not be missed.
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.
Jenn’s on vacation, so I’m blogging twice this week. Since I get an extra entry, I thought I’d focus on one of my favorite topics: why the stock plan administration team should be using focus groups.
Is Your Stock Plan Out of Focus?
A focus group is a small group of employees that give you feedback on your stock programs. It provides a structured mechanism by which you can learn a lot about how employees perceive the company’s stock programs and the education around those programs. And it costs virtually nothing to implement–other than a little time from you and the group participants. Focus groups are one of cheapest yet most effective strategies you can use to improve your stock programs.
Once you start to think about it, I think you’ll realize that there are many aspects of stock plan administration where a focus group could be very helpful. Here are a few ideas to get you started:
Employee Education: A focus group can give you preliminary feedback on any educational materials you create. Do the materials make sense? Do they raise additional questions that aren’t answered? Do employees respond positively to the message? I think that just about every employee communication you distribute and every presentation you do should be run past your focus group first.
Plan Design: Test out new plan designs with the focus group to find out what works and what doesn’t work–before you’ve made a significant investment.
Put an Ear to the Ground: Your focus group can give you a feel for what employees are saying about the company’s stock plans.
Be Prepared: By testing new programs and educational materials with your focus group, you’ll get a feel for how these strategies will be perceived by employees. You won’t be caught off-guard during the official roll-out and you can be proactive about addressing questions and negative comments.
Turn Naysayers Into Cheerleaders: One effective way to silence your critics is to bring them into the process and make them responsible for helping to improve the program.
Who Should be in the Focus Group?
Probably somewhere around 20 people is about the right for the size of the group, depending on the size and diversity of your overall employee population. You don’t want it to be so large that it is unwieldy but you need it to be large enough that you get a representative sample of employee opinions. Also, remember that not everyone will participate in every opportunity to provide feedback, so you want the group to be a little larger than the number of active participants you hope to have.
Here are few thoughts on who to invite to be a part of the group:
Employees that are particularly outspoken or that have demonstrated a strong interest in and/or understanding of the stock program.
Employees that show leadership and won’t be afraid to speak up. Ask department managers for suggestions.
Make sure a wide range of departments and job levels are represented.
Of course, it goes without saying that you should only invite employees that are eligible to participate in the stock plan. If you have multiple plans with differing eligibility criteria, you may need multiple focus groups (e.g., one focus group for the all-employee ESPP and a different focus group for the RSU program that is only offered to managers and above). It also might make sense to have regional focus groups (e.g., a US group and a separate group for EU employees).
Rotate employees in and out of the group regularly–no one should serve for more than year.
Finally, avoid the temptation to pad the focus group with your friends. For one thing, your friends probably don’t need a special, structured program to help them provide feedback to you; they already know where to find you. But also, your friends may not feel comfortable giving you the open, honest feedback that you need.
As our faithful readers know (because we’ve certainly harped on this topic enough), 2011 Forms 1099-B (which brokers will be sending out shortly) are subject to the new cost-basis reporting requirements. We’ve posted some resources to help you understand the new requirements and help you get a start on materials explaining them to your stock plan participants. In today’s blog entry, I highlight the new (and a few old) materials now available on Naspp.com.
Reporting Examples
We’ve created the following reporting reporting examples. Each example includes an annotated Form 1099-B, Form 8949, and Schedule D so you can see how sales of shares acquired under the various scenarios will appear on each of these forms:
We’ve also posted a sample FAQ on the new cost-basis reporting requirements and the new Form 8949. It even includes an annotated Form 8949. Use this as a starting point for your own FAQ for your stock plan participants.
We’ve also posted a sample email that might be sent to employees to alert them to the dangers of not verifying that the cost basis reported on their Form 1099-B is correct.
Flow Charts
Last year, we created the renowned Section 6039 flow charts (one member told us these charts alone made membership worth the cost), which explain how employees can use Forms 3921 and 3922 to report sales of shares acquired under ISOs and ESPPs on their tax returns. Those flow charts have now been updated for the new Form 1099-B and Form 8949. In addition, we’ve created flow charts for NQSOs and RS/RSUs.
For your employees, myStockOptions.com is a great resource, offering illustrated and annotated tax forms, FAQs, and numerous articles on how employees should report sales of stock on their tax return.
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.
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.
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.
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.