A Sensible Approach to Stock Ownership Guidelines By Doreen Lilienfeld of Shearman and Sterling
In recent years, there has been significant discussion concerning the terms of stock ownership guidelines and stock retention requirements for directors and executive officers. Shareholders want to know that directors and executive officers adhere to a philosophy of investing in the company for the long-term.
With the passage of mandatory say-on-pay, companies have become even more attuned to the views of shareholder activists on these issues. ISS considers three categories relating to stock options guidelines and stock retention requirements in its Governance Risk Indicators (“GRId”) score. Up to three points can be added and five points can be subtracted from a company’s GRId score in each category. These points can make the difference between a positive or negative vote on say-on-pay, director elections and other proposals.
There is standard approach to ownership and retention guidelines. For boards that are designing or revising director and executive stock ownership programs, the myriad of possible design structures can be daunting. It is not always clear what is the most effective means to ensure that the company’s decision makers build and retain a substantial stake in the company at a level sufficient to properly align their interests with those shareholders.
With preparations for the 2012 proxy season underway at many companies, now is the time to begin thinking about your guidelines and retention requirements. In our panel, we will walk you through the decision process analyzing the important design features and let you know what other companies are doing now. Drilling down, we will explore the questions:
Should you adopt ownership guidelines, retention requirements or both? How will they interact with each other?
How deep in the ranks should these programs go?
What will be the consequences for noncompliance?
For Ownership Guidelines
What are the ownership requirements? A percentage of base salary/annual retainer? A fixed dollar amount? A fixed number of shares?
How high should you set the ownership requirements? Do they differ by position?
How much time should directors and executives be given to reach the guidelines?
Which holdings should count towards satisfying the guidelines–vested vs. unvested awards, stock options, 401(k) and deferred compensation holdings?
What happens if there is a change in the stock price leading to falling out of compliance with the guidelines?
For Retention Requirements
How many shares should be retained–50% or more of “net shares”, all equity awards?
How long should they last? Until ownership guidelines are satisfied? A specified number of years following vesting or exercise? Until retirement? Following retirement?
For answers to these questions and more, please Doreen Lilienfeld, John Cannon, and Kenneth Laverriere of Shearman & Sterling for their session, “A Sensible Approach to Stock Ownership Guidelines,” at the 19th Annual NASPP Conference.
The Deja View: Game-Changing Technologies for Stock Plan Administration By Kim Kovacs of OptionEase
Recent technological advancements have propelled equity compensation administration and participation to new levels of convenience and effectiveness. Firms are now using “software as a service” to integrate brokerage platforms with equity compensation administration and financial reporting software. The growth in utilization of web-based software has improved results while reducing administrative hours.
Cloud computing, or the use of web-based software to access shared data, has long been a hot topic in the IT world. This model of network access eliminates the need for locally installed software while providing easier access to information. Recently, the focus of the “cloud computing” discussion has shifted from discussing the cloud itself to the utility and implications of moving to the cloud. In the context of equity compensation, the utility of the cloud includes ease of access for both participants and administrators to an always up-to-date, more cost effective online system. The questions become: at what pace should the equity compensation industry move to the cloud, and what model should it use? The debate over the pace of moving to the cloud stems from the perceived need to compromise between access and control. Companies want to give users the most flexible, user-friendly experience possible while maintaining data in a secure and controlled manner. Some firms are using a hybrid model combining locally installed systems with cloud computing, while others have been able to leverage the cloud fully to give participants and administrators the most convenient usage possible while maintaining data security.
Participants are rapidly increasing their use of tablet PCs and smartphones in a business context. As IT is increasingly “consumerized,” participants demand access via the device of their choosing, and expect connection on the go. The synergies between the consumerization of IT and the movement to software as a service are numerous: participants are able to view their award information in real time through participant portals and are able to take action in accepting grants and exercising awards. The end result is that participants have a greater sense of ownership over their awards, which enhances the effectiveness of the company’s equity compensation plan.
The user interface for equity compensation administration and compliance systems is changing along with the movement to a software as a service platform. Administrators expect customizable dashboard views that allow for quick and effective actions. Participants and administrators are increasingly intolerant of multiple sign-ons or dealing with separate interfaces for their equity compensation needs. Participants expect to initiate exercises via portal and to have access to tax withholding and scenario modeling information.
Our industry is poised to take advantage of these new developments to better communicate the value of equity compensation plans to participants. A more streamlined, accessible, and actionable system increases participant motivation, improves administrative accuracy and efficiency, and reduces expense.
Register for the 19th Annual NASPP Conference The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. The last time we were in San Francisco, the Conference sold out and this year promises to be just as exciting (but a lot roomier–we’ll be in a much bigger space). Register for the Conference today!
Today we feature another guest blog entry, this time from Marlene Zobayan of Rutlen Associates, who will present on the panel “The Buck Stops Here (Unless, of Course, It Stops Somewhere Else)” at the 19th Annual NASPP Conference in November. The panel will use a case-study approach to define an effective strategy for addressing the taxation of globally mobile employees. Marlene’s co-panelists are Jim McBride of AST Equity Plan Solutions, Kate Forsyth of Deloitte, and Kimberly Kovacs of OptionEase.
The Buck Stops Here (Unless, of Course, It Stops Somewhere Else) by Marlene Zobayan, Rutlen Associates
These days, no discussion on the taxation of equity compensation seems complete without addressing the topic of mobile employees. For any one company, the numbers of mobile employees are usually small compared to the entire workforce, yet the administrative work caused by this small group of employees far exceed those of the fixed population.
The difficulties fall into three categories:
There is the administration burden of identifying and tracking who the mobile employees are.
Then there is calculating the correct taxes to apply. Of course, jurisdictions differ widely on what they determine to be their taxable portion resulting in a complicated tax calculation for each set of facts.
Finally there is the difficulty of getting the payroll and administration systems to administer what has been calculated, especially where the amount of income being taxed does not sum to 100%.
For the more advanced company, the impact of mobile employees carries through to the corporate tax deductions, which impacts deferred tax assets and ultimately the accounting expense of the equity compensation.
Although the technologies supporting these categories have come a long way, often manual intervention is still required to make sure the systems properly handle mobile employees.
To demonstrate these issues, the panel will focus on three specific examples of mobile employees who all receive similar equity grants. The examples follow common real-life mobility patterns, if there is such a thing. The audience will see how a mobile employee’s circumstances impact the taxation, employer withholding and reporting compliance, accounting, expense allocation and corporate deduction based on the countries involved and the type of mobility, e.g., whether someone is a temporary assignee, permanent transfer or a business traveler.
Today’s blog entry is guest authored by Jon Burg of Radford, who will be moderating a discussion on designing performance-based equity programs using market conditions at the 19th Annual NASPP Conference in November. The panel will include Gloria Estrada of Agilent Technologies, Susan Stemper of Biogen Idec, and Kathryn Neel of Frederic W. Cook & Co. We asked Jon to give us a sneak peak at what the panel will cover.
Taking the Difficulty Out of Setting Performance Goals By Jon Burg of Radford
Designing a performance-based equity plan can be one of the bigger compensation challenges companies face. Limited line of sight and unforeseen obstacles impacting financial results make choosing a metric and determining the appropriate target an uphill struggle.
With increased pressure to align shareholder and executive interests, I anticipate that market-based plans will continue to be implemented for the following reasons:
They do not depend on the ability to set long-term operational or financial goals;
The payouts are directly linked to stock price performance (absolute or relative) which allows for higher perceived alignment between shareholders and award recipients;
The accounting treatment is more predictable since the expense accrual is fixed at the time of grant and not adjusted, regardless of eventual outcome; and,
They are simpler to administer than plans with other internal performance conditions, and they are measurable at any time for regular and frequent communication to plan participants and the Board
Agilent Technologies was one of the early adopters of a relative total shareholder return program in 2004. In fact after a brief two-year experiment of using a combination of relative TSR and SAGE (must be present to understand) metrics, Agilent has since focused solely on relative TSR. Relative TSR plans come in many shapes and sizes, but the basic premise is the same–award holders receive a higher (or lower) level of payout for excess (or under) performance in TSR as compared to a peer group or benchmark. Gloria will share with us Agilent’s plan design, the continued evolution, and lessons learned over the past seven years.
But relative TSR is not necessarily the answer for all companies. Biogen Idec considered relative TSR as a primary metric for their performance-based plan before opting for a Market Stock Unit (“MSU”). An MSU is a unique equity instrument that effectively combines the upside opportunity of a stock option with a limited downside protection of a restricted stock. Given Biogen Idec’s business model and market position, MSUs were considered a more appropriate replacement of stock options, which are not viewed as performance-based by ISS. Susan will take us inside the compensation committee discussions as well as share a wealth of experience she has gained over the years from literally hundreds of one-on-one executive meetings about equity awards.
Kathryn has worked with numerous companies to perform an assessment of business strategies and performance in order to identify optimal performance metrics that drive sustainable performance. This often involves a balancing act of setting goals that are fair to executives and shareholders. While not always the end result, market-based performance metrics are always a central component of the discussion and the fastest growing area. Kathryn will share her perspective on why she believes the pace has quickened the past few years and possibly even prognosticate on where we are headed.
Collectively, this panel will demonstrate that a well-designed market-based program can both mitigate the most troublesome flaws with traditional equity vehicles, and provide better compensation delivery.
Learn Even More About Performance Awards Round out your knowledge of performance based awards by attending the pre-Conference program, “Practical Guide to Performance-Based Awards,” offered on Nov 1, in advance of the NASPP Conference. This intensive one-day program will cover everything you need to know to implement and administer this complex emerging form of compensation.
I’m excited to announce that the program for the NASPP Conference is now available–view the agenda or read the full Conference brochure (PDF). The proposals we received this year were by far the best I’ve ever seen–due, in part, to our new Proposal Assistance Program for Conference Exhibitors–and this is surely our best program ever. Check out the program today and register by June 24 for the early-bird discount–this deadline will not be extended.
SEC Chair to Present Keynote
SEC Chair Mary Schapiro will headline the Conference with a keynote presentation on November 2. We believe this will be the first time ever that an SEC Chair has made public remarks about executive compensation–it will be a landmark occasion.
Plenary Featuring Institutional Investors
After Schapiro’s keynote, the plenary session on November 2 will feature institutional investors–AFL-CIO, T. Rowe Price Associates, Cap Re, BlackRock, CalSTRS. These are the folks that are voting on your (or your clients’) Say-on-Pay and stock plan proposals. You’re going to want to hear what they have to say.
“Must-See” Sessions
We have over 50 sessions planned for this year’s event, and, frankly, I think they are all “must-see” sessions, but, since blog entries are supposed to be brief, I’ll limit myself to highlighting just a few of the sessions I’m most excited about:
Extreme Makeover: Equity Plan Edition:Take your stock plans from drab and outdated to simpler, sleeker, and easier to administrator, not to mention more share-holder friendly.
Taking the Difficulty Out of Setting Performance Goals: Performance awards are one of the hottest trends we’re seeing in stock compensation and we expect market-based awards to be even hotter. Find out if they can work for your company with this session.
So You Think You Can RSU? Prove it: Based on the number of questions we received for our recent Ask the Experts Webcast on Restricted Stock and Units, this is going to be a very popular session.
Did It Pass? Understanding Shareholder Voting Issues:This is a topic I’ve long been mystified about and I’m excited to finally have a chance to learn the difference between a no vote and an abstention and what cumulative voting is all about.
Another Chance to Qualify for Survey Results Due to overwhelming demand, we have extended the deadline to participate in NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) to June 10. Issuers must complete the survey to qualify to receive the full survey results. Register to complete the survey today–there won’t be any more extensions!
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 new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
Check out the NASPP’s Facebook and Twitter pages. Come on; just do it already so I don’t have to keep bugging you about this!
What happens when an employee moves to another state while holding an equity award (e.g., stock option, restricted stock, restricted stock unit, etc.)? In many cases both states, (the state the employee moved from and the state the employee moved to) will tax all or part of the income related to the award.
Historically companies have not tracked employees moving from state to state. Companies have merely reported the equity compensation in the state of residency when the taxable event occurs (e.g., exercise of an option or vest of a restricted stock/restricted stock unit). Rutlen Associates recently conducted a survey of how companies track employee movement and report equity awards for employees that move from state to state. (Approximately 150 companies participated in the survey.) The survey results indicated about 20% of survey respondents meet the withholding and reporting requirements for reporting equity awards for mobile employees. Compliance varies depending on the type of mobile employee. Compliance is higher for employees on temporary assignment and employees permanently transferring to a new state. Compliance for business travelers is significantly lower.
In the Rutlen Associates’ survey the reasons for noncompliance vary:
50% could not allocate the income to more than one state because of limited system functionality and/or manual resources.
38% determined the amounts were insignificant.
35% didn’t know the compliance requirements for each state.
27% didn’t have information about employee movement.
Information about employee location/movement is more readily available for permanent transfers than temporary assignments and business travelers. Frequently the change of address when an employee permanently moves to a new state provides better documentation of employee movement.
Despite the challenges associated with compliance, more companies are reassessing the way they track and report state-to-state moves. Increased attention from the tax authorities in various states is encouraging companies to reevaluate their processes. Many states, especially New York and California, are focusing on enforcement of the withholding and reporting requirements for individuals moving into and out of the state. For example, New York is targeting high-level executives. During a recent audit New York State revenue agents reviewed payroll and expense reports for all executives–even executives with no ties to New York. Any company doing business in New York may be selected for this additional scrutiny. For many companies the potential tax assessment may not be significant, but the administrative cost of complying with the requested documents may be onerous.
Many software vendors are adding functionality in the stock plan database to track the historic location of the employee and employee mobility. Of course, adding functionality to track employee movement is a double-edged sword. The improved functionality makes compliance easier–knowing which employees are moving and the move date is the first step to complying with the reporting and withholding requirements. Once you have information on employee movement, however, the tax authorities are less likely to tolerate noncompliance and more likely to assess penalties for ignoring the compliance requirements.
The moral of this story is that it is an excellent time to reevaluate your handling of the issues surrounding state mobility.
It’s the moment we’ve all been waiting for! Our program for the 18th Annual NASPP Conference has been finalized and was posted yesterday. With so many fantastic proposals to choose from in our selection process this year, I know that you’ll be as excited as I am to see which workshops have made it to our final offering!
One of the special perks of being Editorial Director here at the NASPP is that the Conference workshops remain a total mystery to me until the final vetted program is ready to be announced. It’s like having a big birthday present sitting in front of me waiting to be opened! Once I get my hands on the line-up, though, I do have to start my own selection process. Even though I know that I’ll be able to catch the audio of any workshop I miss, it’s still such a struggle to decide which presentations I will have the pleasure of attending live. So, today I’d like to let you in on the top five workshops that I’m looking forward to this September.
This double session is a one-two punch on mobility. Because employee mobility is an increasingly visible issue that many companies are still struggling to reach an acceptable level of compliance in, it’s one of my favorite topics.
The first half of this double session is all about state-to-state mobility. This is an important issue that I think a lot of companies still haven’t faced. I’m especially interested in digging into recent legislative updates impacting multijurisdictional tax considerations and the details that will be provided by the panelists on legislation for the largest states. What really are the trends and best practices for state-to-state mobility? Come to this workshop with me and find out!
The second half of this double session dissects operational compliance for tax withholding and reporting obligations in the U.S. for globally mobile employees. The truly exciting facet of this workshop is that it really does have the inside scoop on preparing for an IRS audit–one of the panelists is the IRS executive who is leading the enforcement action on this specific issue. It doesn’t get much better than this!
This workshop exemplifies what makes the NASPP Conference so essential. What better way to stay on top of the hottest issues in equity compensation? These three panelists have their work cut out for them because this workshop will be adjusted to encompass any late-breaking developments that stock plan professionals will need to be in touch with! Not only will they cover today’s top issues, they’ll also provide specific recommendations on language companies can include in plan or grant documents to address them.
I’m always excited to learn more about cutting-edge equity compensation strategies! This workshop will walk us through practical guidance on implementing and administering some truly creative stock plan programs. The panelists will also delve into the strategic motivation behind moving to these equity vehicles and why traditional equity awards may not be serving their intended purpose.
The recent focus on executive compensation coupled with the new disclosure requirements intensifies the importance of understanding the process of drafting proxy statements. The panelists will provide a detailed review of the equity compensation items and potential disclosures that stock plan professions should be aware of. This is a workshop that I expect to walk away from with some really valuable materials!
Truth be told, I’m a real fan of Excel spreadsheets. The more I know about Excel, the more I realize I’m barely scratching the surface of its potential. Unfortunately, relying on manual manipulation of spreadsheets for crucial calculations also carries with it a heavy potential for costly and embarrassing errors. This workshop will walk us through the top alternatives though relevant scenarios that we can all relate to. These panelists will be tackling some solutions that go beyond the basics, including using Crystal Reports, Microsoft Access, and even spreadsheet macros.
Registration and Workshop Selection
If you haven’t already done so, don’t wait a moment longer to register for this year’s Conference. Now that our agenda is out, workshop selection is automatically incorporated into the registration process. For those of you who are already signed up for our power-packed offering, read over the Workshop Descriptions and let us know which workshops you plan on attending by completing this online form. This is a critical part of our planning because it makes it possible for us to accommodate seating in our most popular workshops!