Tag Archives: expiration

October 11, 2011

Trends in Stock Plan Administration

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.

Register for the 19th Annual NASPP Conference (November 1-4 in San Francisco).
Make your hotel reservations for the NASPP Conference–don’t wait, the hotel is almost out of rooms!
Check out the NASPP’s Facebook and Twitter pages.
Complete the Compliance-O-Meter quiz on Insider Trading Compliance Policies.
Take the “Question of the Week” challenge.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today).
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!

– Barbara

Tags: digital signature, electronic signature, employee communication, employee education, expiration, grant acceptance, grant agreement, option expiration, Stock Plan Design and Administration Survey, Survey

March 17, 2011

Expiring Options

How does your company approach the issue of in-the-money options that are nearing their expiration date? This has always been a potential issue for terminated employees whose vested shares are no longer exercisable for the full term of the option. We now also see more companies with options that are actually nearing full term, especially when the options have remained underwater for an extended period of time.

Communications

The first decision on expiring options is whether or not the company will endeavor to notify participants of the impending expiration. At face value, this appears to be a fantastic idea, but there are still issues to consider. Ideally, these communications would be automated to some degree to avoid the administrative burden of manual distribution.
Identifying the grants and employees who should receive a notice regarding expiring in-the-money options may not be easy. Even if your stock plan administration software has a report that generates a list, you could be faced with a daily verification depending on the vesting schedules for your employee options. Most brokers have the ability to alert employees of upcoming option expirations through the employee accounts and some may even be able to send out automated email notification.

Another important consideration is how to ensure that the communication is universal. It is reasonable to exclude specific groups of employees (e.g., employees holding underwater options), but it is important that the exclusion is consistent to avoid even the appearance of discrimination. When considering the timing of communications, keep your termination parameters and typical administrative delays in processing terminations in mind. As with any communication, you run the risk of an employee relying on the notification, not receiving it due to an administrative anomaly, and find yourself in the middle of a lawsuit.

Automatic Exercise

More brokers are now willing and able to support a company’s policy to have expiring in-the-money options automatically exercised on the day before they expire. Automatic exercise has existed for many years for publicly traded options, so it’s not a stretch to apply the same logic to an employee plan. However, there are more considerations for employee stock options.

Exercise Type

When instituting an automatic exercise policy, careful consideration should be given to how the employee will pay the exercise price and tax withholding associated with the transaction. It is possible to initiate a same-day sale on an expiring option on behalf of the employee providing you have the appropriate permissions to do so and your broker is willing to execute the transaction. However, my opinion is that the best fit for an automatic exercise is some form on net share settlement. The key advantage is that employees would simply receive the net shares in their account, which could be held or sold at their discretion. You won’t have to ensure that brokerage accounts are open and unrestricted and you don’t have to worry about coordinating a market transaction. Regardless of the exercise type you choose, there should be a way for employees to opt out of the automatic exercise.

How Much is Enough?

Another consideration for automatic exercise is just how in the money options need to be for an exercise, especially if you are doing a net share settlement. Even with a sell-to-cover transaction, it is better if the employee receives more than a fraction of a share in value for the transaction. For non-qualified stock options, you have to account for not only the exercise price, but also the tax withholding, which could dramatically reduce the value returned to the employee. Although in general some value is better than nothing, there are many situations where the exercise of an option that is barely in the money could actually do more harm than good. If you set a minimum value, be sure that it can be consistently administered and is clearly communicated to employees.

Documentation

If you are instituting a new automatic exercise policy, confirm with your legal team on how to handle both existing options and new grants. Does your plan accommodate and will your company feel comfortable simply making it a policy and notifying employees, or will you need to have some kind of agreement from employees. For future grants, will you need to include specific language for an automatic exercise in the grant agreement?

Early Bird Special for the 19th Annual NASPP Conference

Speaking of expiring options, don’t miss out on your option to register for the 19th Annual NASPP Conference at a reduced price! Now through May 13th, NASPP members will receive a special discount on Conference registrations. Register today!

-Rachel

Tags: cancellation, communication, exercise, expiration, option, policy