Delaware recently amended its general corporation law to allow boards to delegate authority to approve restricted stock grants to officers (or other people) who aren’t directors. Just to clarify: it isn’t that the restricted stock is being granted to people who aren’t directors, it’s that non-directors can now approve restricted stock grants.
Background
For well over a decade (ten points if you remember when this law changed), Delaware has permitted boards to delegate authority for approving stock option grants and other rights (generally interpreted to include RSUs) to officers, even if those officers are not board members. Now the law has been amended to also allow this for restricted stock.
Hold On—Don’t Go Crazy Now
The resolution delegating approval authority must include the following restrictions:
- The maximum number of shares that can be issued
- The time period over which the shares can be issued
- The minimum consideration that must be received for the shares (if the shares are subject to par value, this minimum cannot be less than that amount)
Just as for stock options and other rights, the delegation of authority is solely for determining who receives the awards and the number of shares issued to each person. Vesting requirements and other terms and provisions still must be determined by the board.
Plan Must Allow Delegation
Also, before your board delegates authority to approve restricted stock grants to anyone other than a board member (or committee thereof), the plan must allow this. Maybe your plan anticipated Delaware eventually changing their laws and already allows this, but there’s probably a pretty good chance it doesn’t. Luckily, plans can always be amended, oftentimes without shareholder approval. Amending the plan to allow this delegation of authority should be something that can be accomplished by board action alone. Thus the board could amend the plan to allow this delegation of authority and then delegate authority under the amended plan at the same meeting; but to safe, make sure they do it in that order.
See the NASPP alert “Delaware Allows Non-Directors to Approve Restricted Stock Grants” for more information.
– Barbara
Tags: Delaware law, grant approval, restricted stock, state corporate law
I think it’s safe to generalize that in many companies, the level of compensation decision making made by the rank and file is limited, if they are involved at all. Those of us in stock compensation are used to grant approval processes involving managers, executives and board committees, and this has been a long-standing practice. A handful of companies, however, are taking a different approach to granting stock options, one that allocates decision making to the core of the organization.
Peer to Peer Grants
A recent article in the Wall Street Journal profiled companies who are taking new approaches to making determinations in employee compensation. These companies are creating internal programs that allow a broad base of employees to allocate stock options and/or cash to their peers who they feel deserve to be rewarded. The idea behind this concept is that the rank and file often have the most insight into how their peers perform. There are various shapes and flavors to how companies have approached this type of program. One company allocated 1,200 stock options to each of its employees with the idea that each employee would distribute their options to colleagues. Employees had control over who received the stock options – it could be a single allocation to one colleague, or divided among multiple targeted colleagues. There were a few ground rules, including that workers couldn’t reward themselves or company founders (who already presumably have significant grants or shares). It seems the companies are also keeping the details of these decisions confidential, releasing only general statistics and end results to participants. Employees will know they were rewarded, by not by whom.
Other varieties to these programs include internal virtual markets comprised of cash or stock options, where workers can allocate or transfer funds. Some companies have allocated imaginary dollars or shares that employees can use to recognize their colleagues. These programs may not be exchanging actual shares or cash, but management is able to see results, which may reveal some interesting perceptions coming out of the main street of the organization.
Pros and Cons
Supporters of these programs suggest that peer influence over compensation will inspire more accountability and ensure everyone contributes. Management may also gain better visibility into which employees seem to be the best performers, casting a spotlight on stars that may have otherwise flown under the radar. Skeptics warn that too much peer say in pay decisions may create resentment and fuel hard feelings for those who receive little or no rewards. Could it become a popularity contest? Those who have implemented these programs appear to remain firmly in support of them, but caution that this may not be the right approach for every company. As one business professor put it: “You need management that is comfortable giving up some say, and let’s face it, human nature isn’t all programmed that way.”
What do you think? I’d love to capture your reaction in the poll below.
-Jennifer
Tags: compensation, grant approval, stock options
What do you do when someone has inadvertently been omitted from the grant approval process? You really can’t just slip the grant into the approval documentation, fully disclosed or clandestinely, and write it off to an “administrative error.” The bad news is that each situation has the potential to be unique, which makes it unlikely that you can create a standard response to a missed grant. For this reason, your grant policy probably can’t (even shouldn’t) attempt to address every potential circumstance surrounding a missed grant. The good news is that you can prepare yourself to evaluate the responses available to you in the event you do find a missed grant. These are my top five considerations:
Vesting
If a grant is left out of the approval process and needs to be approved at a later date, you need to know if the delay in approval will impact vesting. If your plan or grant policy already bases the vesting off a date other than the approval date or is flexible on the issue, it is possible that the grant can maintain the intended vesting dates.
Approval
It’s important to have a solid understanding of your plan and approval process under any circumstance, but when it comes to a missed grant, there are additional considerations. If the delayed approval will result in a grant that is different from your typical grants either in size or vesting schedule, you need to know who has the authority to approve the grant. If standard grants are approved by an officer, such as the CEO, it’s likely that a modification to standard terms will cause the grant to fall outside the parameters of the officer’s approval authority and may need to be referred to the compensation committee for approval.
Stock Price
If the grant in question is an option, then the stock price has likely moved on since the original approval date. If the price has dropped, it is easy to sell your employee on a grant of equal size and vesting with a better exercise price, but it may not be advisable to provide a disproportionately advantageous position to just one employee. Provided your plan permits it, it is possible to approve the option with the intended (i.e., higher) grant price.
If the stock price has increased, you have the opposite issue to contend with–the employee really shouldn’t be penalized for an administrative error. However, approving the grant at the lower exercise price would most likely result in a discounted option, making it subject to 409A. You can, however, develop a policy on how the company may compensate for this change in FMV such as increasing the number of shares or providing a cash payment to make up the difference.
If an RSU has slipped through the cracks in your approval process, making up for lost time can be less of a burden provided you have the flexibility in your plan to keep the intended vesting schedule. But, make sure that if your grant policy doesn’t lock in grant size based on the date of approval (e.g.; a value of $1,000 based on the FVM on date of approval).
Timing
Ideally, you never have to deal with a missed grant. Hopefully, if you do encounter one, the error is discovered virtually immediately. However, it is a good idea to think about what the company can do if a significant amount of time has passed between the date the grant should have been approved and the discovery.
One possible issue is vesting; if the grant should have already vested by the time the error is discovered. Like compensating for a higher exercise price, the company could choose to increase the number of shares or provide a cash payment to compensate for a missed sale opportunity. This is risky business because you are using counterfactual history–there is no way to know at what point the employee would have sold the shares.
Another issue comes up for companies that use a “total rewards” type compensation standard and one or more annual grants have been approved before the original missed grant is discovered. In a total rewards model, annual grant size would typically be based on a target total equity value or total compensation level. If the missed grant is not included in the calculations, then an annual grant approved after the error is likely to be larger to accommodate the value “missing” from that employee’s total equity value or compensation level.
Communication
Regardless of the circumstances leading up to a missed grant, communication is going to be key. No matter how you cut it, employees don’t appreciate being left out and bristle at the idea of being penalized for an administrative error, whether that idea is well-founded or not. This might sound a little like running a customer service call center, but it’s not a bad idea to have some apology verbiage ready that can fit most administrative issues; something that can help to reassure the employee that the company will “make it right” without actually obligating the company to provide recompense it isn’t prepared or able to accommodate. Whatever your response is to a missed grant, keep the employee abreast of the process as much as possible. Also, it’s probably best to avoid detailing the circumstances of the oversight even if you are trying to reassure the employee.
-Rachel
Tags: communication, correction, exercise price, FMV, grant approval, option, RSU, vesting