It’s restricted stock and unit week here at the NASPP. For today’s blog, I have five trends in the usage of restricted stock and units, from the 2016 Domestic Stock Plan Design Survey, co-sponsored by the NASPP and Deloitte Consulting.
Trend #1: Use of time-based stock grants and awards is still on the rise.
The percentage of companies issuing stock grants and awards increased by 10 percent since our last survey (up from 81 percent in our 2013 survey to 89 percent in 2016). In addition, among those companies that use restricted stock and unit awards, close to 40 percent of respondents report that their usage of these vehicles has increased at some level of their organization over the past three years, while only 18 percent report decreased usage over the same time period. Overall, that nets out to greater usage of restricted stock and units by more companies than in past surveys.
Trend #2: Time-based stock grants and awards are the equity vehicle most frequently granted to lower-ranking employees.
Stock grants and awards are the equity vehicles most commonly granted to lower-ranking employees, with 77 percent of respondents granting awards to middle management (approximately three times the percentage of respondents that grant either stock options or performance awards at this employee rank). Fifty-two percent of respondents grant restricted stock/units to other exempt employees (compared to 13 percent for stock options and 11 percent for performance awards) and 19 percent grant these awards to nonexempt employees (compared to 7 percent for stock options and 3 percent for performance awards).
Trend #3: Time-based stock grants and awards are also common at the top of the house.
Stock grants and awards are even more common for senior-level employees with 79 percent of respondents granting awards to the CEO, CFO, and named executives, and 84 percent granting awards to other senior management. The five-point drop in usage of restricted stock/units at the CEO, CFO, and NEO level as compared to other senior management is likely due to the increased usage of performance awards in the C-suite.
Trend #4: Restricted stock units are the vehicle of choice among various types of time-based full-value awards.
The 2016 survey saw a continuation in the shift away from restricted stock awards toward restricted stock units. Respondents reporting that they currently grant restricted stock awards* dropped from 44 percent in 2013 to 31 percent in 2016, while respondents currently granting restricted stock units* increased from 77 percent in 2013 to 83 percent in 2016.
* Awards not in lieu of cash.
Trend #5: Awards are most commonly granted on an annual frequency.
The overwhelming majority of companies that make grants of stock and units do so on an annual basis (ranging from 95 percent of respondents for CEOs, CFOs, and named executives to 75 percent of respondents for nonexempt employees). In addition to annual grants, stock/units are most frequently awarded upon hire, promotion, and for retention purposes.
For today’s blog, I feature five trends in tax withholding practices for restricted stock and units, from the 2016 Domestic Stock Plan Design Survey (co-sponsored by the NASPP and Deloitte Consulting):
Share Withholding Dominates; Sell-to-Cover Is a Distant Second. The majority (79% of respondents for executive transactions, 77% for non-executive transactions) report that share withholding is used to fund the tax payments the majority (greater than 75%) of award transactions. Most of the remaining respondents (17% of respondents for executive transactions, 18% for non-executive transactions) report that sell-to-cover is used to pay the taxes due on the majority of award transactions.
Rounding Up Is the Way to Go. Where shares are withheld to cover taxes, 75% of respondents report that the shares withheld are rounded up to the nearest whole share. Most respondents (62% overall) include the excess with employees’ tax payments; only 13% refund the excess to employees.
FMV Is Usually the Close or Average. The overwhelming majority (87%) of respondents use the close or average stock price on the vesting date to determine taxable income. Only 12% look to the prior day’s value to determine taxable income, despite the fact that this approach provides an additional 24 hours to determine, collect, and deposit the tax withholding due as a result of the vesting event (see “Need More Time? Consider Using Prior Day Close“).
Form 1099-B Is Rare for Share Withholding. Although share withholding can be considered the equivalent of a sale of stock to the company, only 21% of respondents issue a Form 1099-B to employees for the shares withheld.
Companies Are Split on Collecting FICA from Retirement Eligible Employees. Where awards provide for accelerated or continued vesting upon retirement, practices with respect to the collection of FICA taxes are largely split between share withholding and collecting the tax from employees’ other compensation (41% of respondents in each case).
For today’s blog, we have a special guest entry from Emily Cervino of Fidelity Stock Plan Services on a subject near and dear to my heart: defining FMV as the prior day close for purposes of determining taxable gain on award vesting events and the price of shares purchased under your ESPP.
What a Difference a Day Makes! Considering Prior Day Close
By Emily Cervino of Fidelity Stock Plan Services
At the recent NASPP Annual Conference in Houston, I had the opportunity to present “This Ain’t My First Rodeo: Lessons Learned about Equity Compensation.” I took advantage of the new format introduced at the conference: laser-focused, 20-minute sessions during breaks—as an alternative to the traditional, more in-depth breakout panels. I love this format. Short sessions appeal to conference-goers who are looking to cram in as much learning as possible, as well as those whose shorter attention spans make an hour-long, detailed session a hard sell.
I broke this micro-session into even smaller bits and used it as an opportunity to talk about four concepts that can make equity professionals’ lives easier. One concept, which I’d like to review here, is reconsidering the fair market value (FMV) definitions used for equity awards. FMV is an important concept used to set the price on stock options, calculate the taxable income on cash exercise and restricted releases, and determine the purchase price for ESPP.
Back when I started out, things were simpler. FMV was used for grant pricing, and, when it came to calculating taxable income on stock option exercises, where the vast majority of transactions were same-day sales, the actual sale price was utilized. Today, the equity landscape has changed dramatically. The majority of grants now come in the form of restricted stock, which doesn’t include an exercise. Rather, as a time-based vehicle, restricted stock releases (creating a taxable event) are based on a preset schedule.
According to the NASPP Stock Plan Design Survey, 87% of companies use close or average as the FMV to calculate taxable income on restricted stock.(1) Among clients of Fidelity Stock Plan Services, we see very similar results, with 85% of companies using close or average.(2) Which means, for most companies, taxable income can’t be calculated until the market closes on vest date. The exceptions (12% of NASPP responses, 13% of Fidelity clients) are using prior day close (or average), a better option that provides them with a full additional day for calculations! That means on the day before vest date, the FMV is determined as of market close, and the restricted release process can begin, allowing shares to be delivered to participants sooner.
And the benefits don’t end there. This is also a great strategy for ESPP. NASPP doesn’t specifically ask about FMV for ESPP, but in the Fidelity client base, while close and average still rule, we see 5% using prior day close, and a full 20% using current day open price as FMV, providing the benefit of extra hours to one-in-four companies processing their ESPP.
So why do most companies stick with close or average? This may be one of those things that falls into the “we’ve always done it this way” category. While many companies have changed the award types they grant, their FMV definition hasn’t yet evolved.
Plan Sponsors should check out their plan documents. It may be that FMV is only defined for grant pricing, where close or average is a great strategy. The plan document may provide flexibility with respect to the FMV used for tax purposes and/or ESPP. Even if the plan prescribes close or average FMV for tax and/or ESPP, a switch to prior day close (or current day open price) could be effected at the board or committee level and would not require shareholder approval.
Check it out! The gift of time is priceless.
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[1] 2016 NASPP Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
2 Fidelity client base, as of 9/30/2016
Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.
Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, a member of NASPP, GEO, and NCEO, and a 2015 recipient of the NASPP’s Individual Achievement Award. Emily is a Certified Equity Professional (CEP) and she holds Series 7 and 63 securities registrations.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments.
Links to third-party websites may be shared on this page. Those sites are unaffiliated with Fidelity. Fidelity has not been involved in the preparation of the content supplied at the unaffiliated site and does not guarantee or assume any responsibility for its content.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. 780300.1.0
The full results from the 2016 Domestic Stock Plan Design Survey, which the NASPP co-sponsors with Deloitte Consulting LLP, are now available. Companies that participated in the survey (and service providers who weren’t eligible to participate) have access to the full results. And all NASPP members can hear highlights from the survey results by listening to the archive of the webcast “Top Trends in Equity Plan Design,” which we presented in early November.
For today’s blog entry, I highlight ten data points from the survey results that I think are worth noting:
Full Value Awards Still Rising. This survey saw yet another increase in the usage of full value awards at all employee levels. Overall, companies granting time-based restricted stock or units increased to 89% of respondents in 2016 (up from 81% in 2013). Most full value awards are now in the form of units; use of restricted stock has been declining over the past several survey cycles.
Performance Awards Are for Execs. We are continuing to see a lot of growth in the usage of performance awards for high-ranking employees. Companies granting performance awards to CEOs and NEOs increased to 80% in 2016 (up from 70% in 2013) and companies granting to other senior management increased to 69% (from 58% in 2013). But for middle management and below, use of performance award largely stagnated.
Stock Options Are Still in Decline. Usage of stock options dropped slightly at all employee levels and overall to 51% of respondents (down from 54% in 2013).
TSR Is Hot. As a performance metric, TSR has been on an upwards trajectory for the last several survey cycles. In 2016, 52% of respondents report using this metric (up from 43% in 2013). This is first time in the history of the NASPP’s survey that a single performance metric has been used by more than half of the respondents.
The Typical TSR Award. Most companies that grant TSR awards, use relative performance (92% of respondents that grant TSR awards), pay out the awards even when TSR is negative if the company outperformed its peers (81%), and cap the payout (69%).
Clawbacks on the Rise. Not surprisingly, implementation of clawback provisions is also increasing, with 68% of respondents indicating that their grants are subject to one (up from 60% in 2013). Enforcement of clawbacks remains spotty, however: 5% of respondents haven’t enforced their clawback for any violations, 8% have enforced it for only some violations, and only 3% of respondents have enforced their clawback for all violations (84% of respondents haven’t had a violation occur).
Dividend Trends. Payment of dividend equivalents in RSUs is increasing: 78% of respondents in 2016, up from 71% in 2013, 64% in 2010, and 61% in 2007. Payment of dividends on restricted stock increased slightly (75% of respondents, up from 73% in 2013) but the overall trend over the past four surveys (going back to 2007) appears to be a slight decline. For both restricted stock and RSUs, companies are moving away from paying dividends/equivalents on a current basis and are instead paying them out with the underlying award.
Payouts to Retirees Are Common. Around two-thirds of companies provide some type of automated accelerated or continued vesting upon retirement (60% of respondents for stock grants/awards; 68% for performance awards, and 60% for stock options). This is up slightly in all cases from 2013.
Post-Vesting Holding Periods are Still Catching On. This was the first year that we asked about post-vesting holding periods: usage is relatively low, with only 18% of companies implementing them for stock grants/awards and only 13% for performance awards.
ISOs, Your Days May be Numbered. Of the respondents that grant stock options, only 18% grant ISOs. This works out to about 10% of the total survey respondents, down from 62% back in 2000. In fact, to further demonstrate the amount by which option usage has declined, let me point out that the percentage of respondents granting stock options in 2016 (51%) is less than the percentage of respondents granting ISOs in 2000 (and 100% of respondents granted options in 2000—an achievement no other award has accomplished).
Next year, we will conduct the Domestic Stock Plan Administration Survey, which covers administration and communication of stock plans, ESPPs, insider trading compliance, stock ownership guidelines, and outside director plans. Look for the survey announcement in March and make sure you participate to have access to the full results!
With the FASB and the SEC issuing significant announcements impacting stock and executive compensation, it only seems right that we should also be dealing with changes to the tax regs impacting stock compensation. Luckily the IRS has obliged with a proposed amendment to the procedures for filing Section 83(b) elections.
Background
I’m going to assume that you all know what a Section 83(b) election is and when it would be filed. If not, read the discussion of “Early Exercise” in the NQSO Portal and the discussion of “Section 83(b) Elections for Restricted Stock Awards” in the article “Taxation of Restricted Stock Awards,” available in the Restricted Stock Portal.
Previously, award and option holders wishing to file a Section 83(b) election had to mail the election to their IRS service center within thirty days of the triggering transfer (a grant of restricted stock or exercise of an unvested option) and also include a copy of their election with their tax return for that year. With the IRS now encouraging taxpayers to file their returns electronically, the requirement to include a copy with your tax return has turned out to be problematic. Many (dare I say all?) of the systems used to electronically file returns with the IRS simply don’t have the capability of including a copy of a Section 83(b) election, forcing taxpayers to file on paper—a situation in which everyone, both the IRS and the taxpayer, loses.
Recent Developments
Last year, in PLR 201438006, the IRS ruled that a Section 83(b) election is valid even if the taxpayer fails to include a copy of the election with his/her tax return for the year (see my February 3, 2015 blog entry, “Grab Bag“). This ruling was to avoid giving taxpayers an opportunity to rescind their election by simply failing to include the copy with their tax return but it also steered us on a course for the recently proposed amendment (if the election is valid without including a copy with your return, why is the copy necessary).
Proposed Amendments
The proposed amendment would simply eliminate this requirement altogether. There’s really no need for it; as the IRS notes in the preamble to the proposed regs, they already have the original and they scan that for their records upon receipt of it. The requirement to file the copy with your tax return is an anachronism, harkening back to a day before electronic forms and scanners were commonplace.
The IRS does note that taxpayers should keep a copy of the election in their records until the statute of limitations expires for the return on which the sale of the shares subject to the election is reported.
The proposed regulations would apply to all stock transferred (grants of restricted stock and exercises of unvested stock options) on or after January 1, 2016 but taxpayers can rely on them for stock transferred in 2015.
In today’s entry I highlight a few articles that are available on the NASPP website that I think are particularly valuable. Many of these articles are updated on an annual basis; together they comprise the core foundational knowledge necessary to be proficient in stock compensation.
Restricted Stock and Units: The article “Restricted Stock Plans” covers just about anything you could want to know about restricted stock and unit awards and is updated annually.
ESPPs: “Designing and Implementing an Employee Stock Purchase Plan” takes an in-depth look at the regulatory and design considerations that apply to ESPPs, particularly Section 423 plans. This is a reprint of my chapter in the NCEO’s book “Selected Issues in Equity Compensation” so it is updated annually.
Securities Law: Alan Dye and Peter Romeo’s outlines of Rule 144 and Section 16 provide great overviews of these areas of law and are also updated annually.
The IRS has been busy on projects related to stock compensation lately (see “Dividends and Section 162(m),” July 10, 2012, and “Section 83 Update,” June 12, 2012). Their latest project is a sample Section 83(b) filing, something Stephen Tackney and Thomas Scholz, both of the IRS, had alluded to being in the works at last year’s NASPP Conference.
Rev. Proc 2012-29 provides a sample Section 83(b) election, along with examples clarifying the tax treatment that applies when the election is filed. See the NASPP alert “IRS Issues Sample 83(b) Election Form” for more information.
A Quick Review
Section 83(b) elections can be filed by employees when they receive stock that is subject to forfeiture and transferability restrictions. The most common arrangement in which employees would receive stock like this is a restricted stock award. A less common arrangement is an early-exercise stock option, under which employees are allowed and choose to exercise prior to vesting. Normally stock acquired under these arrangements is taxed at vest; filing a Section 83(b) election accelerates the taxable event to the grant/exercise date.
The election has to be made relatively quickly–within 30 days of when the stock is transferred to the employee–and must contain specific details about the transaction for which it is made. There’s not a lot of room for error here–miss the 30-day deadline and you are out of luck.
Incomplete Filings?
I was surprised at last year’s Conference to hear that the IRS was working on a sample 83(b) election. I had assumed most companies assisted employees wishing to make the election, ensuring that their elections are complete. But, given the Rev. Proc, now I’m not so sure.
I don’t know this for a fact, but I have to believe that the IRS issued the sample election because they receive a high number of incomplete filings and this is an effort to mitigate the problem. This is an area where you may want to take action to protect your employees. I think it’s a best practice for companies to provide a form that employees can use to make the election and to review their elections before they file them, just to make sure they’ve completed the form correctly. An incomplete or incorrect filing could be a mess if the error isn’t caught before the 30-day deadline. In a worst case scenario, the entire election could be considered invalid.
Note, however, that I never recommend that companies make the election on behalf of employees. Leave the responsibility for actually submitting the election in employees’ hands so that you don’t bear any responsibility if (or should I say “when”) elections aren’t mailed on time.
I’ll never forget a stock plan administrator telling me about starting a new job and opening a drawer in the prior stock plan administrator’s desk only to find a folder filled with Section 83(b) elections that the company had promised to file on behalf of employees over the past year and that had never been mailed. It was a private company and the elections were for early-exercise options that had been exercised at grant. If they had been filed on time as the company had promised, the employees would not have recognized any compensation income on their options. It still makes me a little sick to my stomach to think about it. Don’t do that! Make the employees mail their own elections.
More at the NASPP Conference
Attend the panel, “The IRS Speaks,” at the 20th Annual NASPP Conference to hear more about this Rev. Proc. as well as other rule-making activity that the IRS has completed this year–and hear what’s on tap for next year.
In the category of “really, doesn’t the IRS have anything better to do,” the IRS has proposed revisions to existing regulations under Section 83 of the Internal Revenue Code. The proposed changes are designed to clarify when a substantial risk of forfeiture exists with respect to shares that are subject to restrictions on transferability.
Was Anyone Confused About This?
Specifically, the regulations clarify that a substantial risk of forfeiture is established only with a service condition or a condition related to the purposes of the transfer. I have no idea what this means or why the IRS thinks it needs to be clarified. The extent of this change was to add the word “only” to the sentence:
A substantial risk of forfeiture exists [only] where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial.
Gosh, that is so much clearer now.
More Changes That Don’t Really Change Anything
The proposed changes are also designed to clarify that the likelihood of forfeiture must be considered when assessing whether a substantial risk of forfeiture exists. The preamble to the proposed regulations cites an example involving shares that are non-transferable and subject to forfeiture if specified performance conditions are not achieved. In the example, it is highly probable that the conditions will be achieved. As a result, the award is not considered to be subject to a substantial risk of forfeiture.
Finally, the proposed changes clarify that transfer restrictions in and of themselves don’t create a risk of forfeiture even if violation of the restriction carries the potential for disgorgement or forfeiture of the stock. The only exception is for stock that must be held to avoid triggering short-swing profits recovery under Section 16(b) (and this is only an exception because it is baked into the tax code). This clarification codifies a prior IRS Rev. Rul. (see the NASPP alert “Section 83 Treatment of Sale Restrictions Imposed for Securities Law Purposes“).
The last two clarifications seem to be intended to mitigate the results of a First Circuit Court decision. The case involved an employee who was required to sell stock he acquired upon exercise of an option back to the company at cost if he sold the stock within one year of his exercise. The court ruled that this requirement delayed taxation under Section 83, even though the likelihood that the employee would try to sell the stock during this one-year period was very small. See the Akin Gump memo included with our alert for a great summary of the case and its relevance to the IRS proposal.
And while these changes seem a little more substantive, given the fact that we’ve had a Rev. Rul. on this matter since 2005, I’m not sure this changes how any practitioners interpret Section 83.
Taxation of Clawbacks?
I wonder if the IRS is targeting clawback provisions here. With all the recent hubbub over clawbacks (for example, see last week’s guest blog entry by Mike Melbinger) and the fact that regulations for mandated clawbacks under Dodd-Frank are expected from the SEC this year, I think the IRS might be trying to get out ahead of any ideas anyone might have that clawback provisions somehow delay taxation under Section 83.
More at the NASPP Conference
I’m sure rule change will be discussed during the session “The IRS and Treasury Speak” at the 20th Annual NASPP Conference. It will be interesting to hear what the IRS and Treasury staffers have to say about it.
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 we keep an ongoing “to do” list for you here in our blog.
Don’t miss your local NASPP chapter meetings in Chicago, San Francisco, and Wisconsin. I will be at the San Francisco chapter meeting–I hope to see you there.
I recently attended a San Francisco NASPP chapter meeting that featured a presentation by Yana Plotkin of Towers Watson on trends in equity compensation. Yana included some data from the Towers Watson “2010/2011 Report on Long-Term Incentives, Policies and Practices.” Here are a few highlights:
Portfolio Approach
More companies are granting at least two types of awards–73% of respondents indicated this practice, an increase of 10% from 2009. Larger companies are more likely to utilize three types of awards than smaller companies.
Pay for Performance
Towers Watson is seeing a strong trend towards performance awards, which are now the second most common type of long-term incentive offered by survey respondents, ahead of stock options. Full value shares (RS/RSUs) were the most common type of LTI offered. In the NASPP’s 2010 Stock Plan Design and Administration Survey (co-sponsored by Deloitte), we also saw a strong trend towards performance awards, although we did not see them outpace the usage of stock options.
Full Value Awards
Towers Watson reports that full value awards have outpaced stock options for grants to employees at the manager/individual contributor level. In the NASPP survey, we also saw an increase in full value awards and even performance awards to employees at these levels, but many respondents were still granting stock options.
Award Sizes
For employees earning under $200,000, award sizes (as a percentage of salary) remained flat from 2009 to 2010 in the Towers Watson survey. But for employees at higher salary levels, award sizes increased, although not quite to 2008 levels.
Award Design
In terms of performance award design, Yana mentioned that they are seeing interest in awards with shorter performance periods, e.g., two years, and some sort of trailing service requirement after the performance goals have been met. I am a proponent of this design; for executives, it helps facilitate compliance with ownership requirements and clawback provisions and, for everyone, it can simplify tax withholding procedures.
Interestingly, Towers Watson reports that 35% of respondents to their survey measure performance relative to peers or a market index. For the NASPP survey, this was about the same (41% of respondents). Both surveys also agree on how commonly TSR is used as a performance metric (25% of respondents in the Towers Watson survey, 29% of respondents in the NASPP Survey). Yana indicated that Towers Watson is seeing more companies use TSR than in the past and that certainly aligns with the buzz I am hearing from compensation consultants, etc.
Performance Awards Are the Future
The biggest takeaway I got from Yana’s presentation is that the Say-on-Pay, the disclosures required under the Dodd-Frank Act, and shareholder expectations are making performance awards the hottest thing going today in terms of equity compensation. If you aren’t fully up to speed on them, don’t miss the pre-conference session, “Practical Guide to Performance-Based Awards,” to be held on November 1 in San Francisco, in advance of the NASPP Conference. Register by May 13 for the early-bird discount!
Online Fundamentals Starts in Two Weeks–Don’t Miss It! The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins on April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation; it’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.
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 early-bird rate is only available until May 13.
We have seen increasing interest in the use of restricted stock over the past few years; RSU grants in particular. In our 2007 Domestic Stock Plan Design and Administration Survey, co-sponsored by Deloitte, 58% of the companies responded that they had increased restricted stock or RSU usage. For many companies, restricted stock awards and units are seen as having more retention power than options because they will continue to retain real value through market volatility. Additionally, restricted stock grants typcially require fewer shares than option grants, which helps reduce a company’s burn rate and overhang.
The latest in this trend are companies that are exchanging underwater options for RSUs. In Radford’s underwater exchanges research, 33% of the companies exchanged options for restricted stock or RSUs, making this the second most popular exchange approach. Recently, we’ve seen Marvell Technology wrap up their exchange of underwater options for restricted stock units. Just yesterday, eBay shareholders approved an exchange of options for restricted stock units. EBay proposes to exchange underwater options for an RSU grant that is 90% of the fair value of the exchanged option. In June, Zoran shareholders will be asked to vote on an options-for-RSUs exchange, and we can expect to see more companies with similar proposals. For more information on option exchanges, visit our Underwater Options portal.
Administering a plan with restricted stock and/or restricted stock units can be tricky. If your company has a restricted stock program, or will be implementing one in the future, I highly recommend registering for the NASPP Restricted Stock Essentials that will be offered November 9th immediately preceding our 17th Annual NASPP Conference. We’ve updated our Restricted Stock Essentials course to include performance-based restricted stock as well as global plan considerations. So, even if you participated last year, you should consider updating your expertise at this year’s program. Take advantage of our special pricing that will be available through May 22nd on both the Conference and the RS Essentials.
Perhaps the most talked-about issue surrounding restricted stock programs is the tax withholding obligation. Each company situation is different, and there is no ‘perfect’ approach that will work across the board. Here are some of the issues to consider.
Cash: Coordinating cash tax payments can be onerous, especially if you have a broad-based grant process, because the exact tax withholding in most arrangements can’t be known in advance of the vesting event. Implement a process on how to handle vests when the employee has not delivered the tax payment.
Payroll deductions: Consider the timing of vesting events vs. payroll dates as well as how to handle situations where the taxes due may be a large percentage of, or even more than, the employee’s paycheck.
Selling shares from a restricted stock vest to cover the taxes: This may not be compliant in all situations, and ties you to ensuring that each participant has a current brokerage account from which to sell the shares. You will also need to have a process in place to accomodate timely tax deposits when the cash from the sale may not be available until after settlement.
Withholding shares: Aside from the need to have the cash flow prepared to cover employee tax withholding, the most difficult issue with share withholding is how to handle the fractional share difference between the tax amount and the closest whole-share value. Additionally, withholding shares to cover the taxes due means that you must have accurate tax rates; withholding shares in excess of the statutory rate triggers liability accounting under FAS123(R).
Whichever approach, or combination of approaches, your company uses to fulfill tax withholding obligations on restricted stock, it does mean diligent coordination with your payroll department. You will need to ensure accurate tax rates, which can be particularly complicated internationally or with mobile employees. Additionally, coordinating timely tax deposits can be a challenge, especially in the U.S. in situations where the vesting creates a cumulative tax liability in excess of $100,000. We recently posted a white paper from Barbara Baksa’s Computershare FreeSMARTS presentation, Tax Reporting and Withholding on Restricted Stock and Unit Transactions, to the site that provides some fantastic tips and considerations. Check it out today!
