What would you do if you got an email from your CEO, asking you to provide a report of taxable stock plan transactions, including employee IDs—stat? A) Respond with the requested information as quickly as possible or B) forward the email to your IT department for investigation?
As it turns out, B might be the correct answer.
Phishing Scheme Targets Payroll and HR
If you are on the IRS’s mailing list, you know that it’s once again that time of year when the IRS sends out alert after alert about tax phishing schemes. Most have nothing to do with stock compensation, but a recent alert hits a little close to home. A new tax phishing scheme targets payroll and HR personnel. In a phishing scheme, a scammer masquerades as a representative of a legitimate business to trick people into giving out personal information that the scammer can use for illicit purposes.
This phishing scheme involves an email that purports to be from the company’s CEO or other executives and requests that the recipient provide employee data, including personal and W-2 information.
According to the IRS, the email may include the following (or similar) requests:
Kindly send me the individual 2015 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review
Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary) as at 2/2/2016.
I want you to send me the list of W-2 copy of employees wage and tax statement for 2015, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.
Kindly?
It seems to me that the big giveaway here is the use of the word “kindly” in the above requests. What executive ever used that word when asking for a report ASAP?
Let’s Be Careful Out There
While the schemes don’t yet seem to involve stock compensation, payroll and HR aren’t that far removed from stock plan administration. Some of my readers probably wear both hats. It’s always a good idea to verify any unusual requests from executives and to make sure that any personal data for employees, including compensation data, is transmitted in a secure manner, especially if that data includes employee identifiers, such as names and ID numbers.
The PCAOB has proposed standards requiring auditors to assess whether compensatory arrangements held by executive officers create risks of material misstatements. According to Steve Seelig in Towers Watson’s Executive Pay Matters blog (“Does New PCAOB Proposal Really Eliminate the Risk of Auditor Involvement in Executive Compensation Design?,” May 30, 2013), the focus is on “the potential for incentive compensation program structures to create incentives for executive officers to exaggerate gains or minimize losses.”
This a re-proposal of a proposal from 2012. According to the PCAOB, the redraft is designed to make it clear that the auditor isn’t required to assess the reasonableness of the compensation. Steve, however, doesn’t see much difference between the two proposals and based on the comparison he includes in his blog, I don’t see much difference either. To be honest, they both seem fairly inscrutable to me.
Are You Going to Get to Know Your Auditor Even Better?
While there’s the potential for any type of compensation to incent executives to make the company’s financial condition look better than it is, this is particularly a concern with stock compensation, where the value delivered to the exec is driven by the stock price, which, in turn, is driven by the company’s financial performance. Thus, this is potentially something new that auditors will be focusing on when they review your stock compensation programs. The PCAOB proposal calls for auditors to read the related compensation contracts (this would be the grant agreements and any other related documentation for stock awards) and also to read the disclosures in the company’s proxy statement and other public filings.
My first thought is “aren’t the auditors already reading those things?” Probably they are (aren’t they?), but maybe not with a focus on whether the arrangements create risk that execs will be incented to misstate the company’s financials.
But given what many stock plan administrators have told me about their auditors–i.e., their auditors are often fresh from the CPA exam with little to no understanding of stock compensation–I also have to wonder whether the auditors are really capable of making this assessment. It seems unlikely that someone who doesn’t understand what the exercise price of an option is will understand the nuances in financial risk inherent in, say, an option vs. restricted stock, and how clawback provisions and holding requirements might be used to mitigate that risk. Steve is concerned that auditors “may develop bright-line rules on what compensation programs are risky or not,” which seems like a reasonable concern to me.
Light Reading
If you are looking for some light summer beach reading, well, this PCAOB proposal sure isn’t it (however, I do recommend “Let’s Pretend This Never Happened” by Jenny Lawson–perfect summer reading and nothing to do with stock compensation). The whole thing (the PCAOB proposal, not the Jenny Lawson book) clocks in at 203 pages and includes sentences like “In the fourth bullet, delete the period (.) and add a semicolon (;) at the end of the bullet.” Seriously?
On the other hand, if you can wade through the proposal, (1) you are a better person than me, and (2) you have until July 8 to submit your comments to the PCAOB.
Oh No! Equity-Related Mistakes and How to Prevent and Fix Them (When You Can) By Matthew E. Johnson, Sidley Austin
We all know the feeling–your heart starts beating fast, and you feel dizzy and become short of breath. From out of nowhere, it has dawned on you that a mistake has been under your company’s equity plan. The error was something that could have been prevented, and might be blamed on you and your colleagues. To make matters worse, the error might relate to an equity award held by one of the company’s most senior executives!
Equity plans and other executive compensation arrangements are subject to increasingly complex regulatory requirements and shareholder scrutiny. We wrestle daily with securities law requirements, complicated tax rules, ISS scrutiny, accounting implications, stock exchange listing requirements and ambiguities in plans and award agreements.
In addition, we are all expected to operate consistently with the speed of email, and we depend on communication from a number of sources, which is often far from clear. It is no surprise that mistakes are made routinely in the administration of equity plans and awards.
We must remember that everyone makes mistakes and that, regardless of the consequences, we must focus on the best path of resolving the problem. Criminal and other serious sanctions are imposed on employees who commit fraud, not on those who make innocent mistakes and do their best to remedy them.
At the 19th Annual NASPP Conference in November, I will join John Kelsh (Partner, Sidley Austin LLP) and Rich Robbins (General Counsel and Corporate Secretary, Morningstar, Inc.) in discussing specific, real-life scenarios that seem to plague plan administrators with some regularity. However, there are certain guiding principles that apply generally when addressing a mistake under an equity plan or award:
Once you have gathered all the facts and determined the scope of the problem, talk to legal counsel (internal, then external) to develop a correction plan.
Be realistic about the potential consequences–your superiors would rather be disappointed now than surprised later.
With the help of legal counsel, determine whether the company has a reasonable position to take that in fact there was not an error–weigh the strength of the arguments, the potential exposure and the correction alternatives.
Be sure that communications relating to the issue are confidential–communication with counsel will be privileged, but keep in mind that other external communications may be discoverable in the event of litigation.
If corrective action is necessary, consider all legal and ethical alternatives, taking into account SEC disclosure, tax consequences, accounting consequences, investor reaction and corporate expense.
More importantly, invest the time now to establish policies, procedures and systems that will allow your company to avoid or reduce the likelihood of error.
Don’t Miss the 19th Annual NASPP Conference The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.
Today’s blog looks at a couple of random topics that showed up in my recent Google alerts: 1) options backdating and lawsuits against auditors and 2) yet another study on stock options and employee performance.
Are Your Auditors Going to Get Fussier? Option backdating stories are few and far between these days, but a new development showed up in my Google alert this week. A federal appeals court has ruled that investors can move forward with a lawsuit against Ernst & Young over Broadcom’s option backdating scheme. The ruling reverses a lower court decision dismissing the case.
The lawsuit alleges that Ernst & Young should have investigated deficient and missing documentation relating to Broadcom’s option grants. At this point, the lawsuit has a long way to go–the ruling just allows the suit to proceed, there has been no finding or judgment against E&Y and perhaps there won’t ever be. Nevertheless, I think it’s intriguing that the lawsuits over option backdating have now extended to auditors. I’ve talked to many a stock plan administrator who has felt a bit put upon with respect to the documentation requested by their auditors, and that was before the options backdating scandal. I imagine the documentation requests have already gotten more onerous and, if this lawsuit goes much further, I can only anticipate that auditors will tighten up the documentation requirements even further.
Stock Options=Lottery Tickets=Grateful, Hardworking Employees The debate over whether stock options incent employee performance slogs on. The latest rebuttal is the paper, “Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large US Company” by management professor Peter Cappelli and Martin J. Conyon, senior fellow at Wharton’s Center for Human Resources.
The study posits that stock options motivate employees to work harder, but not in the way employers most likely hope. Instead of working harder to increase the stock price before they exercise, employees view options more like lottery tickets. But, if they get “lucky” and are able to exercise for a profit, employees will work harder in the period following their exercise–often for over a year–in gratitude to the company for the payout they received.
The study examined exercise patterns and job performance of 4,500 managers at a large U.S. public company (unnamed). While the sample size of employees certainly seems large enough, the results would be more interesting to me if the study had looked at more than one company. The authors don’t seem to acknowledge the differences that education (both in terms of the stock plan and company financials) and corporate culture might have on how employees view their stock options and how that influences their performance. It would also be interesting to know if the results translate to restricted stock or RSUs, which guarantee a payout to employees.
It’s Not Too Late for the Online Fundamentals The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” began last Thursday, April 14, but it’s not too late to participate. All course webcasts have been recorded and archived for you to listen to at your convenience. This is a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.
Online Financial Reporting Course–Only Two Weeks Left for Early-Bird Rate There are only two weeks left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles. Register by April 29 for the early-bird rate.
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 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Register for the NASPP’s online Stock Plan Fundamentals program. Don’t wait–the course started last Thursday, but all webcasts are archived for you to listen to at your convenience.
With the year-end quickly approaching, I thought that the final versions of Forms 3921 and 3922 would surely be waiting upon my return from my vacation last week, providing foddor for the NASPP blog (the IRS, along with the SEC and FASB, seem to have a knack for releasing stuff when I’m on vacation). But, to my surprise, the final forms still aren’t available. So instead, this week I blog about a recent case in the Maryland Court of Appeals relating to a company’s right to cancel options upon an executive’s resignation, which reminded me of a few best practices to ensure that, when employees terminate, stock awards receive the treatment the company intends.
Forfeiture of Awards Upon Termination of Employment: Not Always As Clear Cut As You Think The case involved an executive who voluntarily resigned but continued to work while severance negotiations were ongoing. The negotiations failed and the company terminated the executive–just eleven days prior to when his options would have vested. The county court (where the case was initially tried) assigned a value of around $850,000 to the options, presumably based on the spread on the vesting date or the date the executive tried to exercise the options. Given the sum involved, I can only imagine that the eleven days ate at the executive–resulting in his lawsuit claiming that the options were “wages” owed to him under Maryland’s Wage Payment and Collection Law.
To those of us in the business, this might seem like a no-brainer in favor of the company, but the court in which the case was initially tried found in favor of the executive. It all worked out in the end, at least from the company’s perspective, because the appellate court decided against the executive. Even so, lawsuits are expensive, especially those that end up in appeals, so this wasn’t exactly a landslide for the company. The case brings to mind a few best practices.
Dot the I’s and Cross the T’s
Proper documentation is key. This lawsuit is exactly why your attorneys want you to require employees to sign their grant agreements–so that, if necessary, the company can prove that employees knew the terms and conditions of their grants. I’ve read about numerous lawsuits relating to the treatment of stock compensation upon termination and a large percentage of them hinge on whether or not the employee was informed of the vesting and forfeiture conditions.
In addition to having a signed grant agreement, retain copies of any communications to employees that notify them of the terms of their grants and, in particular, any communications relating to their stock compensation that are provided at the time of termination. I’ve read about one case disputing termination provisions where there wasn’t a signed grant agreement on file, but where the subsequent communications that the company was able to produce were sufficient to decide the case in the company’s favor.
Proper documentation is especially important in sensitive circumstances, such as when an executive is leaving on bad terms (as in this case), an employee is terminated for cause, or a reduction in force.
Don’t Be Late
It is critical that stock plan administration receive timely notice of terminations. In this case, the executive actually tried to exercise his options and wasn’t able to because a block had been placed on his account. If the notice of termination had been received just a couple of weeks late, the exercise might have been permitted. Trying to unwind that transaction and force the executive to disgorge the amounts realized on it would have made things infinitely more complicated (and that much more expensive for the company).
Be Prepared
When a reduction in force is planned, it’s a good idea to check for vesting dates that occur shortly after the expected last date of employment. In this case, the employee was voluntarily resigning, so this wasn’t as much of an issue. But where employees are involuntarily terminated, forfeiture of awards that would have vested shortly after their termination date can be problematic. At best, it leaves everyone feeling even worse than they already do. At worst, it can look like the company purposely terminated employees to avoid having to pay out the awards–especially if a large group of the terminated employees had awards vesting on the same date. It might be best to accelerate vesting of the awards in question.
It’s Renewal Time All NASPP memberships expire on a calendar-year basis. Renew your membership today and avoid the last minute rush on December 31.
Join Now and Get Three Months Free! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. Tell all your friends!
Don’t Miss Out–Conference Audio Available If you weren’t able to attend the Conference or did attend but couldn’t get to all the sessions you wanted to (and with over 40 sessions, who could?), you can download the audio from any and all sessions in MP3 format. Purchase just the sessions you want or save by purchasing a package of sessions.
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.
Night of the Living Dead: Equity Compensation Horror Stories–The Sequel! By Emily Cervino, CEP Institute
The NASPP Conference agenda is full of best practices, emerging trends, and successful case studies. But, don’t forget about the darker side of equity compensation. At the 2009 Conference, the “Night of the Living Dead” panel was a huge hit…and 2010 will bring back the same concept, with a completely new slate of horror stories!
Why are we dwelling on epic failures, monumental disasters, and crippling catastrophes? Because we can learn just as much (if not more) from these fiascos as we can from stunning successes. Hearing these horror stories will help attendees avoid a similar fate, stockpile their ammunition for making a case to management, and sleep easier knowing that even with these calamities, not a single panelist has had to enter the witness protection program. A major problem doesn’t end your career…if you know how to handle the problem and ensure it doesn’t happen again.
For example, take the humble ESPP…these plans may not have the allure or status of other equity programs, but with broad participation, infrequent processing, and the final regulations for Section 423 plans providing for the possible inadvertent disqualification of the plan, the risks for ESPP are at an all time high.
One of the horror stories starts as many horrors do… as a new employee, quickly flung into the frenzy of processing an ESPP. The ESPP had been run on “autopilot” and on the date of the purchase, the fearless new stock plan administrator received the report of payroll contributions for the plan participants. Noticing that there were suspiciously high amounts for many employees, a frantic red flag was raised. The “investigative work” resulted in a shocking revelation–the company had been allowing employees who hit the $25,000 limit following a purchase to carry over those leftover funds to the next offering period. Just to be clear…the company was carrying forward the contributions, not the limit. So, if an employee hit the $25,000 limit, the company did not refund the excess contributions, but added those contributions to the payroll contributions for the next offering. This was clearly not permitted under the plan. Other employees weren’t permitted to make a lump sum contribution. So, what we have here is the dreaded violation of the equal right and privileges provision of Section 423.
The end result was a frantic scramble on the day of the purchase to recalculate, notify the impacted (and now unhappy) employees about sizeable refunds, and determine what those refunds were. Lessons learned? Read your plan. Don’t accept the status quo when you are in a new position. Get ESPP contributions (or, at a minimum, estimated contributions) at least a week in advance of the purchase. Educate and befriend Payroll. And, in case you missed that first one…it bears repeating–read your plan.
Join us as we frighten you with nightmare stories and set you on the path to safety with recommendations on how to avoid similar misfortune. Due to the popularity of last year’s premier, our panel is offered twice, during Session III on Tuesday at 1:45 PM and again during Session V on Wednesday at 9:00 AM.
Got your own horror story to share? The NCEO is soliciting stories for an edition of the book “Don’t Do That” focused on equity compensation. This is a great way for others to learn from the challenges you have overcome. Submit your story today!
NASPP Members Eligible for Discount on CEP Exam If you’ve been thinking about enrolling for the Certified Equity Professional exam, now is the time to do it. Because the NASPP serves on the CEP Institute Advisory Board, we are able to offer NASPP members a $200 discount on the November 6, 2010 exam.*
The CEP program is the certification standard for the equity compensation industry, comprised of a three-level, self-study program in the technical regulatory issues affecting equity compensation.
Visit the CEPI website for more information on the program. To take advantage of the NASPP member discount, contact the CEPI at (408) 554-2187.
* The Fine Print: Eligible registrations include new Level 1, Level 2 or Level 3 registrations for individuals who are involved in administering or managing their own company’s equity programs. Deferrals and re-tests are not eligible for a discount. Individuals already registered are not eligible for a retroactive discount. Candidates from service providers do not qualify. Questions regarding eligibility can be directed to the CEPI at (408) 554-2187.
I know that many of you are eagerly anticipating the 18th Annual NASPP Conference (I certainly am). To give you a taste of the topics that will be presented at the Conference, this week we begin a series of guest blog entries by Conference speakers. For our inaugural entry in this series, we feature Jennifer Namazi of Stock & Option Solutions on Finding and Foiling Fraud in Equity Compensation Plans.
Finding and Foiling Fraud in Equity Compensation Plans By Jennifer Namazi, Stock & Option Solutions
I’m really excited about our “Foiling Fraud” panel at the NASPP Conference because the issue of potential fraud is an interesting complexity, and let’s admit it, a mysteriously scandalous topic in the world of administering equity plans. While I’m sure we’d all like to believe the best about everyone, let’s be realistic–fraud does exist.
In recent years, we’ve been privy to several high profile fraud cases around equity plans as they played out in the media, some of which will be presented as case studies in our panel presentation. The great part is that we’re going to talk not only about what went wrong in these cases and how to detect and foil fraud, but we’ll also discuss how to prevent ever getting there in the first place.
When I first explored the various fraud cases, I was surprised to find out that most fraud is NOT planned carefully in advance, but rather the seizing of an opportunity at hand. I guess I envisioned fraud as something committed by shady characters that somehow slip through the hiring screening process. I changed my perspective when I read or watched several interviews from various people who got caught in the act–the vast majority appeared to be solid citizens living everyday lives and said they didn’t set out with the intention to commit fraud–it was that the situation presented a set of circumstances and they either eased themselves or jumped in. Hmmm, something to think about–note to self: “not all fraud starts out as a single blatant act.”
After digging into the case studies, I made my own conclusion that fraud occurs most often in cases where (let’s use the cliché here) you’d least expect it. When I say least expect it, I mean the type of fraud AND the characteristics of the person committing the fraud. As far as I can tell, there is no single “profile” that one could use to proactively screen and identify potential fraud artists. Even really benign and seemingly routine process areas, such as issuing control numbers at the time of a DWAC (as you’ll learn from one of our case studies), can present opportunity for fraud. I was amazed to learn how many times the immediate supervisor of the person who committed the fraud was simply astounded. It was implausible, right?
This is a point I think will apply to many of us–we have decent controls and checks and balances. The question is do we have enough of the right ones? Are we monitoring them at the right frequency and with the appropriate level of oversight? Do we have loopholes in areas we’ve never thought about? Is the segregation of duties structure conducive to fraud?
Make sure you join us at the NASPP Conference as we talk about types of fraud, case studies (mistakes leading to fraud and lessons learned), how to detect and unravel fraud, and–perhaps most importantly–how to shore up your practices to ensure that circumstances don’t present an opportunity for temptation. I’m looking forward to seeing everyone at the Conference! Enjoy a safe and relaxing summer (while keeping up with the NASPP blog, of course!).
Who doesn’t love a good mystery? Filled with intrigue and suspicious characters, Jennifer’s session, “Finding and Foiling Fraud in Equity Compensation Plans,” promises to be one of the most suspenseful panels at the 18th Annual NASPP Conference–don’t miss it! The Conference will be held from September 20-23 in Chicago. Register today!
With this being the week after a holiday (and, for many, the first day back after a long weekend), I thought something a little lighter might be in order for the blog. So today I feature another entry from John Hammond of AST Equity Plan Solutions and poet laureate of the NASPP blog.
The Email By John Hammond
The email hit my inbox and I wept a tiny tear The email that I knew would come had confirmed my greatest fears The age of innocence long forgot – the days were simpler then Back when I set foot in this place in 1997.
I was a stock vet of two years plus, hired on the spot Seemed like a great deal at the time with the options that I got The stock went nuts at first, but you know how it ends I stuck it out when times got tough, me and several friends
When I started, I cleaned up shop–of the basics they were remiss My stock plan shelves are sure to have a bobble-headed Elvis And next to Elvis on that shelf in a spot almost as great Is my stock plan procedure manual, a beacon strong and straight
And this manual has been wonderful, it helped through thick and thin The three splits in two years were huge–the one stock swap that I did It’s been exterminator–desk de-wobbler–I am so glad I penned it A procedure manual’s a wonderful thing, I highly recommend it
Back to the beginning of my poem–that email that made me cry Was from a woman in IA who’d like to watch me die We have a history outside of work, a few years back we dated Who knew a break up over fax would be so ill-fated
The email started innocent–“Hello John, How are you?” But the subject line had told it all: “Procedural Review” She knew I ran a loose ship, but she never seemed to catch me And she’s tried a lot since getting the “it’s not you…it’s me” facsimile
In the past, IA looked at transactions and events My captive broker dollars had been wonderfully spent I showed them a SAS-70, though I know they never read it I made that mistake a few years back and thoroughly regret it
She copied nine people on the email–of sarcasm I am a fan (That’s how many people saw that fax before it hit her hands) Of course she knew I’d get the jab–she even went one better She wrote, “I really respect what you do”–a sentence from my letter
So each procedure she’ll review controls on how we do stuff “The scandals have brought a greater need–no measure seems enough” She’s been studying for a while to find my Achilles heel She figured out procedures and I think my fate is sealed
See, that manual that I use so much…I am exaggerating It was desk de-wobbler for 18 months, if I’m not mistaken So she has me where she wants me–internal audit heaven I must confess the last time they were changed was ’97
My excuses for not updating is like it is for many We changed the way we did things just far too frequently It always seemed best to wait until projects had finished But then I’d start a bigger one and its importance would diminish
We’ve had 14 acquisitions, and sold five units in that time We’ve had two broker changes and those projects were all mine I’m making no excuses, you all know how I feel It’s just my procedures have never been a very squeaky wheel
So the chess game has begun, but she already has my queen The bishops, rooks and pawns and that little horsy thing The meeting is in two days–checkmate’s what it’s about Just trying to come up with any way… that I could ask her out.
18th Annual NASPP Conference Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
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.