Today’s blog features guest author Thierry Vo of UBS Equity Plan Advisory Services, writing about the factors that correlate to participants placing greater value on their equity awards.
Three Steps That Can Increase the Value Employees Place on Equity Awards
By Thierry Vo, UBS Equity Plan Advisory Services
How do employees view their equity awards? Would employees value these awards more if they had advice that helped them integrate equity compensation with their broader financial plans? What tangible steps can employees take to recognize the value of equity awards?
These are just several of the questions UBS Participant Voice, an industry wide survey of equity plan participants, sought to answer using the UBS Equity Award Value Index, which measures the value employees place on their awards on a scale of 0-100. With companies granting more than $110 billion in equity to their employees each year*, understanding their participants’ attitudes toward these awards is critical.
The research found that while 32% of participants from a cross-section of industries and service providers see their awards as having high or considerable value (80-100 on the Index), 45% perceive little or no value in their equity (0-40 on the Index)—a concerning figure.
The UBS Participant Voice took the research one step further, conducting an industry-wide survey of more than 1,000 participants that sought to answer the question: What do employees who value their equity awards do differently?
Using the UBS Equity Award Value Index, UBS identified three key steps taken by employees who place high value on their equity awards:
Planning—Those who incorporate equity compensation into an overall financial plan have a more optimistic outlook toward the importance of equity awards than those who do not.
Advice—Those who discussed their equity with a financial advisor value their equity compensation holdings more than those who have not.
Diversification—Participants who diversify their company stock holdings value their awards more than those who do not.
The real impact for participants comes from combining all three: planning, advice and diversification. The survey found that participants who have taken all three steps place twice as much value on their equity awards and have greater confidence about reaching their goals.
This survey shows that advice can prove instrumental in helping participants appreciate their equity awards. It clearly highlights that participants who practice these three steps place higher value on their equity compensation awards.
To learn more about how equity plan participants perceive more value from their awards, visit the UBS website or contact UBS by e-mailing EPAScommunications@ubs.com or calling 866-706-2727.
* Equilar, Inc. Based on 2,885 companies in the Russell 3000 that have fiscal year-ends of July 31, 2012, or more recent, and valued the grant-date fair value of options, stock appreciation rights, restricted stock and stock unit awards granted by companies during the most recent fiscal year. All information was pulled from the 10-K and was calculated using company-disclosed figures for grant-date fair value.
Thierry is the Head of Product for UBS Equity Plan Advisory Services (“EPAS”), leading the creation and execution of the product vision for UBS’ stock plan business that supports both corporate clients and their participants.
With over 15 years of experience in financial services—12 of them directly in equity compensation—Thierry possesses a keen understanding of the complex issues facing the industry’s key constituencies. He has extensive experience designing flexible solutions to meet the industry’s evolving needs. Through his roles at several major service providers, he has had the opportunity to collaborate directly with many leaders in the field. These experiences have allowed him to develop a unique perspective on how to address the diverse challenges confronting issuers and recipients of equity compensation.
Thierry has spoken nationally and internationally on a variety of industry topics. As an active member of both the National Association of Stock Plan Professionals (NASPP) and the Global Equity Organization (GEO), where he has also served as a Board member, Thierry has consistently kept his finger on the pulse of the industry to prepare for what’s next.
There’s been a theme emerging in some of my recent blogs, covering a wave of companies finding creative ways to expand their equity compensation pool. Last week I talked about the move of Twitter’s CEO to give his own stock back to the company for use in the equity plans. Shortly before that, Apple announced it was giving RSUs to all employees. It seems more and more companies are trying to find ways to expand the equity offering to employees. It seems the Wall Street Journal has also taken notice of some of these efforts. In a recent article (Do Workers Want Shares or Cash?, October 27, 2015), the WSJ explored what do workers really want – stock or cash? The conclusion of the article seemed to be that stock is a tough sell. I’m not sure I fully agree. So in today’s blog, we’ll explore what’s on top? Shares or cash?
Value is in the Eye of the Beholder
Before I answer the question, we need to revisit the concept of perceived value. This, in my opinion, remains a widely underestimated component of truly comparing the merits of receiving cash over stock or vice versa. From the WSJ article, I gleaned some phrases that tell me that there is work to be done in elevating the perceived value of the equity plan. I read things like: [Employee X] “says his shares didn’t make him more likely to stay in his $60,000-a-year job, in part because he was unsure what his stake was worth.” Or, “‘Is this money real and am I really going to get it?’”
On the flip side, and I don’t have data to support it (someone should look into this!), there seem to be companies that have established, on a broad basis, that equity compensation has value – to the point where employees at all levels are requesting more of it. Interestingly, many of these companies offered broad based grants from the point of new hire. Do companies that offer broad based equity from hire do better at upping the perceived value of stock compensation? It’s hard to tell. Perhaps those companies are also more engaged in education and communication, two critical factors in raising the perceived value of equity awards.
From the WSJ article:
At MediaMath, a marketing software company, all employees—including customer-service reps and receptionists—are given stock options designed to equal the amount of their starting salary at the time the shares fully vest. Employees at all levels have requested more equity, and the company recently rolled out new performance incentives that include options.
“We would rather not have the haves and the have-nots,” chief people officer Peter Phelan says. The company is considering an IPO at some point in the future, a move that could bring windfalls for workers.
Online lender Avant Inc. is in the process of implementing policies giving hourly employees the chance to receive equity when they join the company as well as additional grants as part of an annual incentive program. Before, hourly employees were excluded from equity compensation. CEO Al Goldstein says he thinks it will take time before employees trust the perk is meaningful.
“I don’t think it’s a magical thing that happens right away,” he says. Of Avant employees who currently get equity, just 1% have left the company, according to Mr. Goldstein.
Which Wins? Cash or Stock?
Not all companies are valued the same, not all companies have the same stock growth potential, and stock compensation is not necessarily easy to understand if left to the employee to figure it out. For employees who are muddling through those considerations, stock can be a tough sell. Most people don’t want to give up cash to take on something they don’t understand. I think that’s where the key to answering the cash vs. stock question lies – it’s not necessarily that employees want only cash; I think in many cases they want both: cash and incentive compensation that they can understand and value.
Certainly cash may not be the top choice for every scenario. The same goes for stock. I think stock can absolutely be an easy sell to employees…if they are given the tools to appreciate what it means. Ultimately, companies need to pursue what works best for their employee demographics. For companies that are considering more broadly expanding equity programs in lieu of cash incentives, a key focus in mapping a strategic plan should include how to educate employees and raise the perception of the value of the award. And, to the point of one CEO mentioned above, if a company is expanding equity to a broader base of employees, it may take time for the employees to build up that perception of value. It may not magically happen overnight, but with a focus on supporting employees in their understanding and lots of persistence, companies can get there. So in my biased opinion, stock wins. After all, didn’t the turtle win the race?
Towers Watson recently highlighted an observed correlation between communication efforts and both employee engagement and financial performance that outperforms peers in their Executive Pay newsletter (“Communicating Incentive Plans Better” – August 14, 2015). That motivated me to jump on my once-in-a-while bandwagon about effective employee communications. In today’s blog, I’ll explore some tips to think about, as well as highlight more opportunities for you to advance your education in this area.
5 Ways to Communicate Better
Towers Watson shared 5 tips to better communications. I am going to borrow those “tips” and expand on them with my own thoughts. Before I do, I want to throw out a couple of things. First, I think stock plan administrators are not often marketing people by training or trade. Some of us become effective communicators, but it’s important to remember that communicating about stock plans to employees is very much about marketing. Yes, we need to communicate the specifics, but we also need to deliver the intended incentive or value proposition to the participant, and that’s the marketing piece. Second, stock plan administrators should not necessarily need to wear the communication hat alone. I often hear administrators say that they feel responsible for driving plan communications. That may be true, but there can be tremendous value in engaging marketing expertise – not only as a fresh set of eyes on the communication strategy, but also because that marketing resource could bring a whole new set of tools to your employee education.
1. Treat employees like consumers. Companies spend thousands, even millions of dollars trying to figure out how to resonate with their consumers in the shortest amount of time. Capturing attention is valuable, and attracting the attention of your employee is not different than what is wanted from the consumer. Messages should be quick and designed to draw in their attention.
2. Ensure communications highlight the key messages and behaviours the plan is trying to drive. In summarizing this point, Towers raises a critical piece – it’s not enough to just communicate about things like performance metrics. Yes, employees need to know what the measurements will be, but just as importantly, they have to know what it takes to achieve them. In crafting communications about performance metrics (or even simple time based vesting), make sure the content includes not just the end goal, but identifies the path necessary to get there!
3. Show “what’s in it for me?” I’ve been guilty myself of not doing this part. Sometimes we focus on getting factual information out, and overlook or omit the value proposition to the participant. The ESPP has a 15% discount – so what? A great communication takes the “fact” that there is a 15% discount in the ESPP and expands the communication to explain why the participant should care about that (without crossing some of the fine lines I identify in the last paragraph of this section). Remember, your stock plan is only as valuable as your participant thinks it is.
4. Keep it simple. It’s easy to mistake a more advanced audience (like executives) as good targets for an overload of information. Towers Watson shared that discussions with top executives revealed, in some cases, little understanding about how the plans actually work. The reality is that matter who the audience is, keep the communications simple. The communications should not get more complex just because the audience is deemed to be more intellectual or higher ranking in an organization. Be sure to add in graphics, charts, or other visual information that reduces texts and illustrates a concept.
5. Segment. Not everyone learns the same way – some people need to see an example on paper, others can just read about it and understand. It’s imperative that any communication takes into account the recipient demographics. Once you know who is going to be on the receiving end, you can use different modes of communications – and even wording within a communication – to best connect with your audience. With so many tools available (videos, in person meetings, email, text, and more), you should have several choices in delivering your message.
Although I have introduced the word “marketing” to the communication mix, I also want to reiterate that there are some fine lines that need to be considered. It’s important that any marketing (or communication) message be reviewed by counsel to ensure there are no financial or luring promises, over education, or tricky guidance (for example, a marketing message of “The ESPP Can Save You Money on Taxes” is likely not going to fly. Although there could be tax advantages to participating in a qualified ESPP, the company cannot guarantee or represent specific tax savings and it could be risky to suggest such.) It’s time to take communications beyond simple facts and create an overall “marketing” campaign that captures participant attention and delivers on highlighting the value or incentive the stock plan was designed to achieve.
Exciting Education Opportunities
The NASPP’s 23rd Annual NASPP Conference kicks off in less than 3 weeks! We have an entire track at the Conference dedicated to “Administration and Communication,” so check out the list of those sessions to identify your must-attend panels.
For today’s blog, we feature a guest entry from Bryan Wells of OptionEase on encouraging participants to value their stock compensation more.
Perception VS Expense Reality: Increasing Perceived Value via Participant Access By Bryan Wells of OptionEase
The disconnect between the fair value of awards from an accounting perspective and the perceived value of awards from a participant’s perspective has complicated equity compensation plan success since the introduction of FAS 123(R) (now ASC 718). While companies must take expense based on the accounting fair value of awards, it is the value that participants “perceive” their awards to be worth that actually drives behavior. There are many factors that contribute to the gap between accounting fair value and perceived fair value, but most will agree that communication is a major one. In many cases, participants either don’t fully understand their awards, or feel alienated from them due to a lack of real-time information and set of actionable interpretive tools. Thus, participants attribute a lower perceived value to the awards, making the awards expensive from an accounting perspective relative to the level of attraction, motivation, and retention that they create.
Most service providers offer actionable, real-time participant portals that help narrow this value gap.
These portals typically can be configured to communicate the specific information that administrators wish to show participants, as well as allow participants to actively manage their awards. Administrators are finding that providing plan-related documents, explanatory materials and alerts within their system to participants in a controlled environment increases participant understanding and involvement while decreasing administrative burden.
The intuitive dashboard-style user interface that some service providers are using allows participants to accept, exercise, and set tax elections for their awards with ease.
Participants leverage portal payout modeling tools to create a more concrete connection between their awards and the participant’s potential gain. This is particularly important due to the rise of performance grants with complex payout structures.
Brokerage integrations give further control to participants by allowing them to view detailed transaction scenarios before executing an exercise order, calculated with real-time data provided by the broker. Participant access transforms the equity compensation experience by empowering participants to take control over their award information.
The increase in retention and productivity that equity compensation provides is directly correlated with how participants, not valuation models, value the awards. Empowerment via participant access increases perceived value by giving participants both a greater understanding and sense of control. With many service providers offering robust, actionable, and easy to use participant portals, now is the time to consider opening your system up to your employees.
This time of the year always puts me in a state of reflection, thinking about what was accomplished and looking forward to next year. Contemplating next year means setting goals and objectives, both professionally and personally. Have you completed your 2012 planning?
I’m always in favor making things as fun as possible. Setting professional goals and objectives doesn’t have to be a chore! For this week’s blog, I offer three ways to spice up your stock programs in 2012.
1, 2, 3 Ideas
1. Work the Concept of “Perceived Value” into your Stock Plan Communication Strategy. One thing I learned from the session on Maximizing the Perceived Value of Equity Compensation at this year’s Annual Conference, is that the act of giving an employee a stock option is not what motivates them. What motivates the employee is their own perception of what the grant is worth. If the value of that stock option goes up and there’s gain, the employee then feels grateful to the company and works harder. This is called reciprocal behavior, and is a key to how recognizing the role of perceived value can help achieve the intended value proposition. To better align with this concept, companies need to lessen efforts focused on trying to “explain” the value to the employee, and focus on strategies that address the employee’s perception that “it’s worth what I think it’s worth”. Key drivers in achieving plan effectiveness are employee perceptions, behaviors and culture.
2. Bridge the Generation Gap. Most of today’s workforce populations are diverse. Not just culturally and geographically, but age-wise as well. It’s been said before, but I’ll say it again: there is no one-stop method to communications that is guaranteed to meet your employee population’s needs. Using multiple mediums targeted to your company’s various demographics is a must. One generation may be starting to embrace email, while others (think Generation Y) view email as a tool of yesterday! Email blasts alone to your stock plan participants are likely not going to cut it in 2012 and beyond. Start thinking about adding new modes of communication, such as text messaging, social media, and a focus on short, concise messages.
3. Implement a New Technology. We may not be in a position to create an iPhone or Android app for stock plan management (now that would be cool!), but there are many other ways to demonstrate that we’re hip and cutting edge. One idea would be to find a technology to implement in 2012. A great way to generate ideas in this area would be to talk with your IT group to see what technologies they’re implementing in the coming months; there may be an opportunity for you to tap in to something already on the road map. One idea I recently heard about was a company that is exploring implementing a secret Facebook group for their ESPP participants. Employees could receive Facebook updates and information real-time, accessible via multiple technologies (computer, phone, etc.). Competitive concerns were alleviated by making the group secret, such that no-one else could view it or have access.
I’m sure there are many other interesting ways to enhance stock programs in the coming year. Take our poll below to see what others are contemplating for 2012!
On Another Note: A Follow Up
Last month I blogged about the question of whether or not insider trading should be legal. In mid-November, CBS aired a segment on the show 60 Minutes about stock trades made by congressmen/women using inside information. I was surprised to learn that their trades were not in violation of any laws. If you’re interested, view the story here.
I recently attended a great presentation on perceived value at the Silicon Valley NASPP Chapter All-Day. The panel was moderated by Emily Cervino of the CEP Institute and included Fred Whittlesey of Compensation Venture Group, Keith Pearce of Intel, and Jason LeBovidge of Fidelity Investments. In today’s blog entry, I summarize some of the points they discussed.
Perceived Value ≠ Fair Value Perceived value is the value employees assign to the grants they receive. This value is often completely different than the fair value of the award or even the cash value of it. For example, employees often have a higher perceived value of at-the-money stock options with a low exercise price than those with a high exercise price–the exact opposite of how the fair values for those options would come out.
Perceived value is different than fair value because, as Keith explained during the presentation, the formulas for the two values are different:
Perceived value = signal value + cash value
Fair value = time value + intrinsic value
At-the-money stock options have no intrinsic, or cash, value, so all of their fair value is derived from time value. Yet when employees consider their stock options, they don’t include any time value in the equation.
Signal Value
The good news, however, is that employees will consider the signal value of their options and awards and, unlike time value, this value is something that you can influence.
Signal value is what the option/award signifies to the employee. It’s an intangible quantity that represents how valued the grant makes the employee feel and how meaningful the grant is to the employee. The information you provide to employees about their grants and how you deliver the message can increase signal value.
A Few Ways to Increase Signal Value
Make a big deal out of the grant. For example,you might include a letter from the CEO in the grant package and have the CEO discuss the stock program at company meetings.
Promote the stock program using a variety of media: email, company intranet, HR blog, employee newsletter, posters around the office, benefits statements, etc.
Make things personal. Meet with employees in person about their grants. If your company is too large for you to do this, have managers or local HR reps hold these meetings.
Have employees provide testimonials about what the program means to them.
Make sure employees understand the stock program.
Don’t oversell the program; disappointment has a devastating impact on perceived value.
It’s Not Too Late to Enroll in the NASPP’s Financial Reporting Course The NASPP’s newest online program, “Financial Reporting for Equity Compensation” started on Thursday, July 14, but it’s not too late to get into the course. All webcasts have been archived for you to listen to at your convenience.
Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS and tax accounting. Register today so you don’t miss any more webcasts.
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.
Last Thursday, I attended the Silicon Valley NASPP Chapter All-Day Conference. For something a little lighter as we head into the holiday weekend, I thought I would provide some illustrated highlights of the event (click on the pictures to enlarge).
But first, a little humor…
A Stock Plan Administrator and a Chicken Walk into a Bar The day concluded with a lovely cocktail reception sponsored by AST Equity Plan Solutions. Cocktails and hors d’oeuvres were served with napkins featuring the following joke:
A stock plan administrator and a chicken walk into a bar and each orders a shot of whiskey. Bartender says, “Looks like you had a tough day.” The chicken says, “When I get back to the farm tomorrow, pretty sure the farmer’s going to whack me and I’ll be on the dinner table this time tomorrow night.” The stunned bartender says, “That’s awful–next round’s on me.” After a few more rounds, the bartender places the check in front of the plan admin and the chicken quickly grabs it and says, “I’ve got this… you’ve got that big vesting tomorrow.”
Ten points to anyone who can guess who penned this witticism (tune in next week for the answer).
Barbara Richley, Madori Playford, and Jacobin Zorin cheerfully greet attendees at the registration desk.
A panorama of the afternoon general session. As you can see, the chapter had a great turnout for this year’s program.
Keith Pearce of Intel, Fred Whittlesey, Jason LeBovidge of Fidelity, and Emily Cervino of the CEP Institute present on perceived value and stock compensation. I learned why perceived value differs from fair value; the formulas are different. Perceived value = signal value (more on this in a future blog) + cash value; fair value = time value + intrinsic (cash) value. For at-the-money stock options, time value is the largest component of fair value, yet employees don’t even consider this when they value options.
The Equity Methods and AST Stock Plan Solutions booths in the exhibit hall. Equity Methods sponsored lunch and AST sponsored the closing cocktail reception.
The afternoon included a game show presented by Joe Purdy of Solium Transcentive, Angel Toussaint of Oclaro, Rachel Murillo, and Christine Zwerling: “It’s Time to Play: Stock Plan Checkup–Is Yours in Good Health?” Here the audience races to respond to a question as they compete for prizes.
Sinead Kelly and Barbara Klementz of Baker & McKenzie and Jon Burg of Radford listen intently to a question from the audience in their session, “Claw-Back Provisions in the US and Around the Globe”
Members of the Silicon Valley Chapter Board and Program Committee, who did such a great job with this event: Jean Wong, Lydia Terrill, Inta Abele, Karen Hertz, Britta Puschendorf, Madori Playford, Elizabeth Dodge, John McCann, and Jacobin Zorin.
Board members not pictured: Barbara Richley, Jon Burg, and Carol Rose-Guerin.
Thierry is the Head of Product for UBS Equity Plan Advisory Services (“EPAS”), leading the creation and execution of the product vision for UBS’ stock plan business that supports both corporate clients and their participants.