Full value awards have been a commonplace in our world of stock compensation for a while now. Yet, it seems there is always something new to learn when it comes to administering these vehicles. In fact, navigating the complexities of restricted stock units and awards is still such a hot issue that we’ve dedicated a Pre-Conference session this year, Advanced Issues in Restricted Stock, to the topic. One thing in particular that I’ve always found particularly annoying in administering restricted stock awards is something small in size and, if not approached thoughtfully, big on headaches: par value.

Par Value, Defined

The par value of a stock has no relation to a stock’s market value and, frankly, is a fairly outdated concept — initially introduced back when the markets were highly unregulated. In essence, the par value of a stock is the nominal value, which is determined by the issuing company to be its minimum price. Par value also has accounting purposes. It allows the company to put a de minimis value for the stock on the company’s financial statement.

In today’s world, many common stocks don’t have par values. Yet, there are still many that do (usually only in jurisdictions where par values are required by law). A typical par value is representative of the smallest quantity of money available, or a fraction thereof (e.g. 1 cent, or a fraction of a cent). Many states do not allow a company to issue stock below par value.

Par Value and Restricted Stock Awards

In administering restricted stock plans, there are a number of considerations around this pesky par value. Since the par value is the minimum acceptable price for shares of the company’s common stock (for companies subject to par value requirements), then, in theory, payment of par value must be collected from the employee when the company issues a restricted stock award.

1. Establish a collection method for par value: how will the company satisfy the obligation to collect the par value? The two most common methods today (at the discretion of the company and the language incorporated into the stock plans) are issuing treasury shares, and use of “past services”. The most common method is use of treasury shares. I’m guessing this is because since treasury shares have been previously issued into the market place (before the company bought them back on the open market); the idea is that the par value requirement has already been satisfied. By the time the company uses these shares to fund the restricted stock plan, they are not subject to the par value requirement. The second most popular choice is to use past services. Note that if you plan to use this method, you’ll need to ensure you use this for current employees who have a service history and not for new hires (since a newly hired employee wouldn’t have any history of service with the company). A small minority of companies use “future” service in satisfaction of par value, and an even tinier number collect cash.

2. Be sure to calculate the proper gain for income tax reporting purposes: depending upon with method you use to collect par value, you’ll calculate the “income” to be reported on the employee’s W-2 slightly different. If the employee paid the par value in cash, then it’s deemed to be a literal “payment” for the shares and the cost basis for the shares would be equal to the par value per share.

EXAMPLE: Par value is $.01 per share and an employee vests in 1,000 shares
Fair market value at vest is $25

$25 – $.01 = $24.99 per share of income
Total income on W-2: $24,990

If the employee satisfies the par value obligation using “past services”, then no cost basis is applied to the shares. One rationale I heard for this is that since the entire award has been issued as consideration for past services, you don’t make a distinction between the portion of services attributable to the par value and the balance of the award value. In the example above, if par value had been satisfied using past services, then the full $25 per share would be considered income.

3. In some cases, refund par value: If the employee has paid the par value in cash, you’ll need to remember to refund the par value payment if the shares are forfeited. Ideally it would be nice to include the refund in the employee’s last paycheck in order to avoid having to issue a check for such a small amount of money.

The Survey Says…

The NASPP does have data on what companies are doing with respect to par value. According to our 2010 Domestic Stock Plan Design survey, 93% of responding companies do have a par value associated with their common stock. Of those companies, when it comes to restricted stock, 43% issue only treasury shares (which are not subject to par value requirements), 36% utilize past services as payment, 12% use future services as payment, and only 6% collect cash (the remaining 3% replied “other”.)

As you can see, there are lots of considerations for such a seemingly small piece of the restricted stock pie. This topic and more advanced issues will be covered in the Advanced Issues for Restricted Stock Pre-Conference session, and it’s not too late to register!

-Jennifer