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!
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.
Important Reminder This is the last week to participate in the NASPP-PwC Global Equity Incentives Survey. Issuers must participate to access the full survey results; you’re going to be sorry if you miss out. You must complete the survey by May 25; I would not count on this date being extended.
My $.02 on Facebook Facebook’s IPO is all over my Google alerts these days, so it feels like I ought to say something about it. Earlier this year, Jenn covered the painting contractor that was paid in Facebook stock and stands to make a bundle in the IPO (see “Tax Cuts and IPOs: Part II,” February 16, 2012). And he’s not the only one. Based on what I’ve been reading, many Facebook employees are going to do quite well–but not for another six months, when the lock-up ends.
Here are a few interesting tidbits about Facebook that I’ve read:
Facebook has a broad-based RSU plan. While RSUs have been commonly used at public companies for years now, they are relatively new for Silicon Valley start-ups, which have traditionally offered only stock options. Facebook is definitely a groundbreaker here–other start-ups have followed suit (e.g., Twitter).
Even more unusual, the RSUs won’t pay out until six months after the IPO (typically RSUs pay out upon vesting). From an administrative standpoint, the delayed payout makes a lot of sense. You wouldn’t want the RSUs to pay out while the company was still private because then employees would have a taxable event before the shares were liquid–I could write a whole blog entry on why this is something to avoid. Plus, in the pre-JOBS era, the employees would have counted as shareholders, which could have forced Facebook into registration with the SEC earlier than they wanted.
Here in the US, Facebook is looking at a pretty hefty tax deposit–Facebook estimates the deposit liability at over $4 billion–that will most likely have to be made within one business day after the awards pay out. Facebook is planning to use share withholding to cover employee tax liabilities, making cash flow an important consideration. Facebook’s S-1 states that they intend to sell shares to raise the capital to make this deposit, but may use some of the IPO proceeds or may draw on a credit arrangement that they have in place. If Facebook sells stock to raise the capital, the stock that is sold would have to be registered and could, of course, impact their stock price.
Facebook estimates the tax withholding rate to be 45%. I’m not completely sure how they are arriving at this rate. It’s possible they are going to withhold using W-4 rates or, perhaps, the payouts will be so large that most employees will be receiving more than $1,000,000 in supplemental payments for the year and they are going to have to withhold Federal income tax at 35%. Where a payment, such as payout of an RSU, straddles the $1 million threshold, the company can choose to apply the 35% rate to the entire payment (35% + the applicable CA tax rate = about 45%).
All of these employees making lots of money creates problems beyond the tax considerations. As other highly successful high-tech IPOs have experienced, employees may decide they don’t need to work anymore and end up leaving. Those that do stick around, may not be so motivated anymore–maybe I’m wrong but it seems like a millionaire employee is an attitude problem waiting to happen. And there will be the pay disparity to deal with as well; employees that were hired more recently may not do so well in the IPO (and those that are hired after the IPO will really be at a disadvantage).
More at the NASPP Conference
Facebook is presenting on a panel at the 20th Annual NASPP Conference (“Liking Global Equity: Learning from Facebook’s Successful Communication and Compliance Strategies”); while none of the problems I’ve described here are new, Facebook is a company known for innovation and I’m excited to hear their approaches, as well as new ideas they have to offer in other areas of stock plan administration. Register for the Conference by May 31 for the early-bird rate.
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.
Register for the 20th Annual NASPP Conference in New Orleans. Don’t wait, the early-bird rate is only available until May 31.
It seems like just yesterday I was blogging about the SEC exempting stock options from the 500-holder limit for private companies, but it turns out that I never blogged about that because it happened back in 2007, before we had The NASPP Blog. Time flies and here we are almost five years later and the SEC has provided broad no-action relief from the same limit for RSUs.
What the Heck?
For those of you that aren’t sure what I’m talking about, let’s take a step back. Under U.S. securities laws, private companies that have more than $10 million in assets and more than 500 holders in any company security are required to register with the SEC under the 1934 Act. Most private companies are loath to exceed this threshold because registration causes them to be subject to pretty much all the same public reporting requirements as public companies–Forms 10-Q and 10-K., Form 8-K, Section 16, the whole shebang. It’s all the onerous parts of being a public company but without the upside of raising a bunch of money in an IPO and having publicly traded securities.
Stock options are a type of security, as are RSUs. Now the rule is that the company can’t have more than 500 holders in a single class of securities, so a company could have 499 shareholders and 499 option holders and 499 RSU holders without triggering the registration requirement (so long as none of the optionees exercised their options and none of the RSUs were paid out). But if a company had, say, 501 option holders, the company could be required to register with the SEC. This is a problem for private companies with, say, more than 500 employees that want to grant stock options to all their employees.
So, in 2007, after issuing numerous no-action letters on the matter, the SEC carved out an exception providing that compensatory employee stock options don’t count for purposes of the 500-holder limit, provided the options meet certain requirements. (See the NASPP alert, “SEC Exempts Stock Options from Registration for Private Companies,” December 15, 2007).
Now RSUs, Too
The 2007 exemption, however, didn’t extend to RSUs. So, where a private company wanted to grant RSUs to more than 500 employees, the company had to either register with the SEC or request relief from the registration requirement via a no-action letter–even if the RSUs, by their terms, could not possibly ever be paid out before the IPO.
Earlier this month, however, the SEC granted no-action relief for RSUs to the law firm Fenwick & West. By granting relief to a law firm, rather than a specific company, this no-action letter serves as broad relief for all private companies that wish to offer RSUs to their employees.
The RSUs must meet certain conditions to be eligible for relief–the awards must be granted by a private company, granted to individuals providing service to the company as defined under Rule 701, and transferable under only limited circumstances. In addition, the company must disclose information relating to its financials and risk factors to employees.
But Not Stock Acquired Under RSUs and Options
The relief described above extends only to options and RSUs themselves; it doesn’t cover stock employees acquire under options or RSUs. That stock still counts towards the 500-holder limit.
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.
Indecent Disclosures: Polishing and Perfecting Disclosures under ASC 718 By Elizabeth Dodge, Stock & Option Solutions
Disclosures under ASC 718 are a dreaded topic for nearly all my clients. The standard is unclear in some areas and flouts common sense in others, so what is a company to do? The answer? Do your best and try not to sweat the small stuff, unless your auditors force you to do so. In this entry, I’ll review one confusing part of the standard relating to disclosures and suggest ‘the right’ approach to take.
What Are “Shares of Nonvested Stock”?
In FAS 123(R), pre-codification, paragraph 240(b)(2) required the disclosure of:
The number and weighted-average grant date fair value…of equity instruments not specified in paragraph A240(b)(1) (for example, shares of nonvested stock), for each of the following groups of equity instruments: (a) those nonvested at the beginning of the year, (b) those nonvested at the end of the year, and those (c) granted, (d) vested, or (e) forfeited during the year. [emphasis added]
Paragraph 240(b)(1) asked for the number and weighted-average exercise price of options (or share units) outstanding. So what the standard seemed to require in the paragragh I quote above is the number and grant-date fair value for instruments other than options and share units, such as “shares of nonvested stock.” Clear as mud, so far? What is a share of nonvested stock, you ask? See footnote 11 on page 7 of the standard which reads:
Nonvested shares granted to employees usually are referred to as restricted shares, but this Statement reserves that term for fully vested and outstanding shares whose sale is contractually or governmentally prohibited for a specified period of time.
As if the standard wasn’t complicated enough, the FASB needed to define their own terms and use terms we thought we understood to refer to something else. Great idea. So a share of nonvested stock is therefore a restricted stock award (not a unit, but the kind of award on which you can file a Section 83(b) election). Here the FASB is lumping options and units (RSUs) together and separating out RSAs into a separate category. Perfectly logical, because RSUs are much more like options than RSAs, wouldn’t you agree? (And if you’re not getting the depth of my sarcasm, try re-reading the text above.)
Okay. So what do we use for weighted average exercise price for an RSU? Most RSUs that I’ve encountered don’t have an exercise price (and in fact, aren’t even exercised!). So obviously you should report zero here?
And most audit partners are unfamiliar with this issue all together. The good news is that most of them seem to ignore the actual language of the standard and, instead, require the same disclosures for RSUs and RSAs, which honestly does make a lot more sense, but isn’t what the standard calls for.
Unfortunately many systems/software providers were reading the standard carefully when they designed their disclosure reports, so often the RSU disclosures have “exercise price” but lack grant date fair value, so you’re often forced to calculate some of these numbers manually.
So now you’re thinking, but the Codification cleared all this confusion right up, didn’t it? Well, no… it did change the language just slightly. It removed “(for example, shares of nonvested stock).” It also added a link to the definition of “Share Units,” which reads: “A contract under which the holder has the right to convert each unit into a specified number of shares of the issuing entity.” Sounds like an RSU to me.
So where does all this leave us? My conclusion: Listen to your auditor, follow their guidance, which may not follow the standard to the letter, but makes more sense. Other folks are unlikely to notice the issue in the first place, but your auditors will.
Don’t Miss the 19th Annual NASPP Conference The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.
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!
