As announced yesterday, we’ve extended the deadline to participate in the Domestic Stock Plan Administration Survey that the NASPP co-sponsors with Deloitte Consulting. For today’s blog entry, I have six things I am excited about learning from this year’s survey.
Domestic Mobility Compliance: New this year, we’ve added questions on tax compliance for domestically mobile employees. This is an area of increasing risk and I’m curious to learn how far companies have come in their compliance procedures.
ESPP Trends: This survey takes an in-depth look at the design and administration of ESPP plans. I hear rumors of increased interest in ESPPs—both in terms of companies implementing new plans and enhancing the benefits in their existing plans; I’m excited to see if this plays out in the survey results.
Stock Plan Administration Staffing: This is the only survey I’m aware of that collects data on how stock plan administration teams are staffed, the department that stock plan administration reports up through, and how companies administer their plans. It is always intriguing to see the trends in this area.
Ownership Guidelines: The prevalence of ownership guidelines has increased dramatically in the last decade, with 80% of respondents to the 2014 survey reporting that they have these guidelines in place. Has this trend topped out or will we be reaching near universal adoption of ownership guidelines in this survey?
Rule 10b5-1 Plans: These trading plans have become de rigueur for public company executives, with 84% of respondents to the 2014 survey allowing or requiring them. We’ve expanded this area of the survey to capture more data on policies and practices with respect to these plans.
Director Pay: The survey reports the latest trends in the use of equity in compensating outside directors. I’m particularly interested in seeing what percentage of respondents indicate that they have imposed a limit on the number of shares that can be granted to directors. This is a best practice to avoid shareholder litigation but adoption of it was low in the 2014 survey—have we made progress on this in the past three years?
If you are interested in these trends, too, you’re going to want to participate in the survey so that you’ll have access to the results. It’s not too late to participate, but you have to do so by the end of this week. We’ve already extended the deadline once; we can’t extend it again. Register to participate today!
– Barbara
* Only issuers can participate in the survey. Service providers who are NASPP members and who aren’t eligible to participate will receive full access to the published results.
I’m fascinated by how the field of stock compensation has changed over the years, so I love that the NASPP has been conducting surveys on stock compensation since 1996. For today’s blog entry, I have created an infographic comparing the data in our most recent survey on ESPPs to surveys the NASPP has conducted since before FAS 123(R) was adopted.
The 2016 ESPP survey is a joint project of the NASPP, the NCEO, and the CEP Institute. It was conducted in January and received over 200 responses. I compare the results to editions of the Domestic Stock Plan Administration Survey that were conducted in 2014, 2011, 2007, and 2004. All editions of this survey were co-sponsored by the NASPP and Deloitte Consulting, except the 2004 edition, which was co-sponsored by KPMG.
My infographic is interactive! Select a year to see how the data changes from one survey to another. Hover over the charts with your mouse to view the data points. (If you have trouble seeing the infographic, click here to view it on a separate page.)
I often encounter confusion over the difference between 401(k) plans and ESPPs, as well as the misperception that these two plans don’t mix: employees should participate in one but not both. The truth is that participating in both plans can be great for employees. Moreover, recent research from Fidelity shows that offering an ESPP can enhance your 401(k)
Two Great Plans that Go Great Together
A 401(k) is a great tool to save for retirement: employees invest their own money on a tax-exempt basis (except for FICA), the company may offer a match as an incentive to participate, and, in many cases, employees are able to hold their plan assets in a variety of diversified investments.
With an ESPP, employees also invest their own money in the plan, but on a post-tax basis. Instead of a match, most plans offer a discount. The ESPP is not a diversified investment (employees must sell their stock and pay tax on it to diversify) and, although employees can certainly hold their stock as along as they want, they are not incented to hold until they retire, as is the case with a 401(k).
Another difference between these two plans: the maximum contribution to a 401(k) is increased periodically for inflation, whereas, as far as I can tell, the $25,000 limit under Section 423 has not been increased since the section of the tax code was enacted.
A 401(k) is a great tool to save for retirement; an ESPP is a great way to provide employees with additional earnings that are more liquid than their 401(k) holdings and can be used for to meet employees’ other financial needs. In addition, an ESPP allows employees to participate in the company’s success; in a 401(k), employees’ assets are often invested in mutual funds or other alternatives that aren’t related to the company.
401(k) loan rates were lower across the board when companies offer an ESPP, regardless of company size.
Employees with access to both an ESPP and a 401(k) tend to borrow a smaller amount from their 401(k), and had a lower outstanding loan amount.
Employees at large companies (more than 10,000 employees) with both an ESPP and 401(k) borrowed an average of $2,000 less than employees with only a 401(k), and had an average outstanding loan balance of $3,000 less than employees without access to an ESPP.
The difference was especially notable among small companies (fewer than 500 employees), where 9% of workers took out new 401(k) loans when an ESPP was also available, versus 14% at companies that don’t offer an ESPP.
The outstanding loan rate at small companies was also significantly lower, with only 14% of ESPP/401(k) workers having an outstanding 401(k) loan balance, compared with 23% of employees at 401(k)-only companies.
Free lunches (not too mention breakfasts, dinners, and snacks), open offices, games and nap rooms, shuttle services for commuting employees—we all know Silicon Valley operates a little differently than the rest of corporate America. But just how different is the Valley when it comes to stock compensation?
Last week, I attended a presentation hosted by the Silicon Valley NASPP chapter on how Silicon Valley differs from the rest of the United States when it comes to stock compensation. Tara Tays of Deloitte Consulting ran special northern California cuts of the results of the NASPP’s 2013 and 2014 Domestic Stock Plan Design and Administration Surveys and compared them to the national results. She was joined by Sue Berry of Infoblox and Patti Hoffman-Friedes of Seagate Technology, who provided color commentary.
As it turns out, not as different as you might think. In many areas, the northern CA data aligned fairly closely with the national data. These areas included the use of full value and performance awards, overhang levels, timing of grants, termination and forfeiture provisions, and performance metrics. But here are five areas where Silicon Valley does its own thing:
Burn Rates
This probably isn’t a big surprise to anyone, but burn rates are higher in Silicon Valley. Nationally, 77% of respondents report a burn rate of less than 2.5%. In northern California, only 56% of respondents report burn rates below this level. Interestingly, however, the higher burn rates did not translate to higher overhang; in this area the northern California numbers align closely with the national data.
Clawbacks
In the national data, 60% of respondents report that equity awards are subject to a clawback provisions, representing an almost 90% increase in the use of these provisions since our 2010 survey. But this trend doesn’t appear to have taken hold yet in Silicon Valley; only 34% of companies in northern California report that their awards are subject to clawbacks.
RSUs
While usage of full value awards (vs. stock options) in northern California aligns with the national data, practices vary with respect to the type of award granted. Just over 90% of northern California respondents grant RSUs but, nationally, RSUs are granted by only 77% of respondents. Restricted stock is granted by only 26% of northern California respondents but 44% of national respondents.
Vesting Schedules
For full value awards, graded vesting is more common in northern California (88% of respondents) than it is nationally (65% of respondents). But vesting schedules for full value awards appear to be slightly longer in Silicon Valley. 57% of northern California respondents report a four-year schedule and 37% report a three-year schedule, whereas this trend is flipped at the national level. There, 60% of respondent report a three-year schedule and 30% report a four-year schedule.
For stock options, monthly vesting is far more common in Silicon Valley than nationally. 53% of northern California companies report that options vesting with a one-year cliff and monthly thereafter; only 11% of respondents report this in the national data (27% for high-tech companies).
ESPP Participation
When it comes to ESPP participation, Silicon Valley comes out on top. Close to 60% of northern California companies report that their participation rate is between 61% to 90% of employees; nationally only 20% of companies were able to achieve this. ESPPs are also more generous in northern California, with more companies reporting that their plans offer a look-back and 24-month offering than nationally. This may account for some of the increase in participation but I’m not sure it accounts for all of it (note to self: must do quick survey on this).
To start off the new year, I have a few reminders for Section 6039 filings for ISO and ESPP transactions.
Deadlines
Participant statements need to be furnished by February 2, 2015 (normally the deadline is January 31, but that’s a Saturday). Paper returns need to be filed with the IRS by March 2 (February 28, the normal deadline, is a Saturday) and electronic returns need to be filed by March 31 (this deadline applies regardless of whether electronic filing is on a mandatory or voluntary basis).
Extensions
It’s easy to get an extension for filing the returns with the IRS; log into the IRS Fire system and complete Form 8809. So long as you do this by the deadline, you get an automatic 30-day extension—no questions asked. It is harder to get an extension for the participant statements. You can’t use Form 8809 for this; you have to write a polite letter to the IRS explaining why you need the extension and hope that they grant it to you. See pg 13 of the “General Instructions for Certain Information Returns” for details of what you need to say in the letter and where to send it. The extension is not automatic, so you’d best get on this right away if you think you’ll need one.
Substitute Participant Statements
You can create a substitute statement for participants that lists all their transactions on one page, rather than a separate form for each transaction. You still have to use the IRS terminology, but you can include your own statement that explains what all the words mean (or even annotate the statement itself). But you can’t include any slogans or taglines on the form and if you are going to include your company logo, you have to comply with specific guidelines explained in IRS Publication 1179 (see pg 6). The IRS is serious about this—they are worried your logo might make the form look like junk mail—so it might be best to skip the logo.
Rounding
Shares and dollar amounts have to be rounded in electronic filings (to the nearest whole share or penny, respectively). The IRS says to use a true round for share amounts (that’s rounding down for .4 and under, up for .5 and above). They don’t specify how dollar values should be rounded but since they recommend a true round for share amounts, it’s probably reasonable to use the same approach for dollar values (that’s also how dollar values are rounded on other tax forms (e.g., tax returns). But other approaches might be reasonable as well; I’m fairly certain the IRS isn’t that concerned about how you round. Just be consistent.
Employee ID Number
This needs to be the employee’s tax ID number. Also, you can’t truncate it or mask it on the participant statements. The IRS eventually checks to make sure the number is correct and you’ll have to pay a fine if it is wrong. But they won’t get around to checking until you are in the maximum penalty period. So be smart and run a TIN matching program on your returns before you file them with the IRS.
Account Number
For our purposes, think of this as a transaction number. You can use any system you want to come up with the number (and it can include letters as well as numbers), but you need to assign a unique number to every transaction reported. If you later have to file a correction, this number is how you will identify the transaction being corrected.
Names
Don’t include any special characters in employee names other than hyphens and ampersands.
Just a Few Filings?
Even though you only have a handful of filings, you cannot download the form from the IRS website and fill it out or gin up a form that looks similar in Word and use that to file your returns. The IRS has all sorts of fussy requirements for returns filed on paper, including that they be printed on special paper with special ink. If you don’t want to pay a third party to help with this, you have to order the paper forms from the IRS and wait for them to send them to you. Then you need to scare up a typewriter or print very very neatly. There are tools that are quite affordable that can be used to file even just a handful of forms—personally, I think this approach would be easier than finding a typewriter. Email me and I can send you a list.
The NASPP’s 2014 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte Consulting LLP) is now open for participation. This is the industry’s most comprehensive survey on stock plan administration, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 25 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
The Latest Trends in ESPPs: Rumor has it that companies have been implementing new ESPPs and have been enhancing the benefits (discount, lookback, etc.) in their existing ESPPs. We saw a decline in both the number of ESPPs and the benefits offered under ESPPs in the last survey, so I’m very excited to see if this trend really has turned around.
Automatic Exercise on Expiration: For the first time ever, the survey collects data on this emerging practice. I think it makes a lot of sense so I’m very interested to see what percentage of respondents have implemented this program.
Rule 10b51 Plans: Has the recent negative attention that Rule 10b5-1 plans have received from academics and the media impacted the use of these plans? My money says no; if anything, I expect usage to have increased a bit; we’ll see if I’m right when the survey results are published.
Stock Ownership Guidelines: The 2011 Stock Plan Administration survey saw a 35% increase in the percentage of companies that have stock ownership guidelines, a remarkable increase–far higher than we expected based on responses to the 2007 survey. If everyone that said they were considering implementing stock ownership guidelines in 2011 survey did actually implement them, close to 80% of all respondents will now have these guidelines in place.
Social Media: The topic du jour when it comes to educating employees these days is the use of social media (Facebook, Twitter, LinkedIn, etc.) I think these tools have significant potential for reaching younger employees. I look forward to finding out what percentage of respondents use them now and setting a baseline that we can use for comparison purposes in future years.
April 25 will be here before you know it and you are definitely going to want to have access to the full survey results. If you are an issuer, register to participate today. (Service providers that are not eligible to complete the survey can access the full survey results at no cost, provided they are members of the NASPP. This access is available to service providers only; issuer companies must complete the survey to access the full survey results.)