Members sometimes ask me whether it is common for companies to adjust equity grants when employees go out on leave. The short answer is no; according to the NASPP’s surveys, this practice is rare.
I understand why this question comes up. Awards are earned by working and employees who are on leave aren’t working, so it seems reasonable to adjust vesting in their awards. It might even feel unfair to employees who aren’t on leave if vesting isn’t adjusted for employees who are on leave. But there’s more to this question than meets the eye. There are both practical and philosophical reasons to think twice about these adjustments. For today’s blog entry, I have four reasons why you should not adjust vesting for leaves of absence.
1. You can’t get the data. Let’s face it, sometimes it’s best to know your own limitations and this is one of those times. It’s hard enough to get HR and payroll to forward timely reports of terminated employees, getting accurate updates as to leaves of absence is an uphill struggle. If you can’t get the data, you aren’t going to be able to enter the adjustments on a timely basis. This will inevitably result in transactions that later have to be unwound.
2. No one else does it. In most cases, over 90% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey report that they do not adjust options or awards for leaves of absence. We ask about statutory leaves and nonstatutory leaves (both paid and unpaid) separately for options and awards. In all but one situation, less than 10% of respondents adjust vesting for a leave. The one exception is vesting in awards (restricted stock and units) for an unpaid leave, but even there, 86% of respondents don’t adjust vesting.
3. It’s a hot mess globally. If your stock plan is multinational, you have to worry about compliance with the laws in all countries where stock plan participants are located. At the Philadelphia chapter half-day meeting, Brian Wydajewski of Baker McKenzie presented on the challenges of implementing a global leave policy. He noted that many countries are more protective of employee rights than the United States and this includes restricting the adjustments that can be made to their compensation and benefits while on leave. I can think of more productive ways to spend your time than trying keep track of all these laws.
4. Women are more likely to be impacted than men. Probably the most common leave of absence is maternity leave. Thus, tolling or adjusting vesting during leaves is likely to apply to more women than men and arguably penalizes women for being caretakers. This policy also discourages men from taking paternity leave, further encouraging women to take on more childcare responsibilities than their partners.
– Barbara
Tags: Leave of Absence
Most companies have a policy that suspends vesting during certain types of leaves of absence (LOAs). Now is a good time to make sure your company’s policy is being managed correctly as it relates to equity compensation.
Review Your Policy
Locate and review the wording of your company’s leave of absence policy. It should be worded in a way that accommodates the flexibly needed to conform to labor laws and legislation, even if there is new legislation that comes up after the policy was created. You will also want to know when the policy was created and how (or if) it was approved. There are two ways in which an LOA may impact stock grants: vesting suspension and cancellation. There may or may not be a grace period before vesting is suspended, and there may be a period of suspension before the grant is cancelled. Once you have reviewed your company’s policy, review your employee education documents to be sure that they accurately reflect the parameters of your policy.
Types of LOAs
There are two basic types of leaves of absence, those that are protected by the government and those that are not. Pay very special attention to LOAs that offer protection to the employee. Typically, a paid leave (where employees receive part or all of their salary from the company, the government, or through a disability plan) is also a protected leave. These protections may require that stock grants continue to vest, or that they resume vesting upon the employee’s return to work. Maternity, disability, and military leaves of absence may all have a period of time during which the employee’s grants must continue to vest or during which the employee’s grants may not be cancelled. There may also be special local regulations that offer additional provisions for employees who need to take time off.
Now, you don’t need to become a labor law expert, but you do need to make sure that you have a way of identifying when an LOA will impact equity compensation and when it will not. Meet with you HR managers to review your internal list of LOA types. Ask them to identify the LOAs that should result in suspended vesting as well as the length of time an employee may be out on those leaves and still resume vesting upon a return to work. You should also get your legal, benefits, and payroll departments in on this process. Ideally, the end result will be a list of LOA types and their respective impacts to salary, stock compensation, and benefits that can serve as a reference for all stakeholders. Also, don’t forget to build in a regular review of this list and identify who will be responsible for incorporating and disseminating updates.
LOA Notification
You’ve read your company’s policy. You’ve got your list of leaves of absence and know how they should impact equity compensation. Now, how do you know you’re tracking all your LOAs correctly? You need to be sure that you are being informed of leaves in a way that allows you to suspend or cancel the grant appropriately, equally to all participants, and in a timely matter.
Review how you are being notified when an employee begins an LOA that will impact stock grants and when that employee returns to work or is terminated. If notification is coming from different sources, strive for uniformity in the delivery format. For example, some locations may enter the LOA record into your central HRIS database while others deliver the records to you directly. Regardless, work to get the data into the same format so that you can create accurate LOA records in your stock plan administration database. Once you know how you should be receiving notice regarding LOAs, review that process to make sure it allows you to record the LOA and suspend vesting or cancel a grant before any transactions take place on shares to which the employee should not have access.
Audit Your Existing LOA Records
You need to be able to confirm that all grants that should be suspended or cancelled due to an LOA are no longer vesting. Conversely, you do not want anyone who is no longer on leave to have a grant with suspended vesting. Building uniformity into the notification process aids auditability. Confirm the date the LOA should begin, the date vesting is suspended, and the date the leave ends (either by cancellation or a resumed vesting).
-Rachel
Tags: Leave of Absence, LOA