It feels like the holidays were just here; then year-end (for calendar year companies) and tax season moved in with a flurry. What’s next? For many: proxy season. This week I was thinking about all of the associated proxy “to-dos”. In anticipation of proxy season, I want to highlight some tips for managing one important aspect of stock plan management: plan reserves.

Plan reserves are the lifeblood of an equity plan. Without adequate shares to issue to employees, stock compensation programs will fall short. As proxy season approaches for a company, usually consideration is given to whether or not there are sufficient reserves available in the company’s stock plans to satisfy future anticipated grants and awards. If not, then shareholder approval may be necessary in order to procure additional shares. If your plan is set up such that shareholder approval is not necessary, this may create some backlash from shareholders since they will not be consulted in the matter. Nobody wants to run out of shares in their stock plans. Sadly, I’ve seen it happen several times – it’s not as unique a situation as one might envision. Here are some ideas to help ensure best practice management of your share reserves:

Forecast, Forecast, Forecast

Work with Human Resources and other interested parties to ensure proper planning includes some conservative assumptions in predicting an adequate reserve. Sometimes a couple of events can put an otherwise healthy share reserve in jeopardy of running out. For example, if the CEO resigns and vesting of his unvested stock options is accelerated (rather than being cancelled and returned to the share reserve pool for future issuance), there won’t be any shares to “return” to the share pool. Furthering the challenge: what if the company now hires a new CEO and grants that CEO a sizable award? Those two events alone could monopolize a large portion of the share reserve pool. While these events don’t happen every day, sometimes it only takes a single occurrence to create a problem. Careful attention should be given to ensuring a buffer of reserved shares that can cover unforeseen events. Proper forecasting could be the difference between asking shareholders to approve additional shares this year rather than next year.

Remember to Track Fungible Share Pools

Fungible share pools are gaining popularity, in part because shareholders are demanding more depth in managing plan reserves. The concept is that not all share issuances from a plan are created equal. For example, a single share of a full value award may be perceived as more ‘valuable’ (and costly from an accounting perspective) than a single stock option share. As a result, a ratio is established to give more weight to the shares that seemingly have more cost/value. A 2:1 ratio for a full value award means that for every full value share actually awarded, two shares are deducted from the plan reserve. When forecasting plan issuances and future balances, remember to take into account any such ratios that have been established for the plan.

Shareholder Opinions Do Matter

Many companies dread approaching shareholders for plan reserve increases. In fact, companies often take great care to ensure several years pass between such requests. Since the most common way for a public company to obtain shareholder approval for plan reserve increases is via the proxy statement/annual meeting process, it’s important to remember that such requests are only a small part of a company’s overall interaction with its shareholders. If shareholders are unhappy about other aspects of a company’s practices, such as executive compensation, then there is always the possibility that they may voice their objections by rejecting certain proposals in the proxy. Additionally, they may not like certain aspects of the plan itself, and may wish to see some changes before they will consider approving additional shares. Shareholders are becoming more vocal. If you have a large institutional investor population, you may want to communicate with them early on, prior to the distribution of the proxy, to gauge their feedback on the proposal and establish any potentially problematic concerns.

While there are never guarantees, the above steps will help minimize unexpected hurdles in managing your equity plan reserves.

– Jennifer