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Tag Archives: RSUs

June 27, 2017

RSUs Where You Least Expect Them

As part of its IPO last month, manufacturer Gardner Denver granted RSUs worth $100 million to its 6,000 employees, including hourly workers, customer service, and sales staff. According to Bloomberg, “As its executives rang the bell at the New York Stock Exchange, workers learned they would each get shares equal to about 40 percent of their annual salaries” (“KKR Gives Industrial Workers a Piece of the Action“).

There are three things that I find interesting/encouraging about this announcement.

Manufacturing

Broad-based stock awards are common in the high-tech space. According to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey, 66% of high tech companies grant RSUs to exempt workers below middle management and 35% grant RSUs to nonexempt employees. In Silicon Valley, the numbers are even higher—77% grant RSUs to non-management exempt employees and 57% grant RSUs to nonexempt employees.

But outside of high-tech, grants of RSUs below middle management are a lot less common. Garner Denver makes gas compressors and vacuum systems and is headquartered in Wisconsin, putting it squarely outside of high-tech and about 2,000 miles from Silicon Valley. This makes their announcement blog-worthy in my book.

Private Equity

Even more surprising is that Gardner Denver is 75% owned by private equity firm KKR. After the grant, employees will own about 10% of the company. Private equity firms are not known for their generosity when it comes to stock compensation programs.

More Than a Token

What I find most interesting about this story, however, is the amount of stock delivered to employees. $100 million worth of stock to 6,000 employees works out to be an average of over $16,000 in stock delivered to each employee. At Gardner’s IPO price of $20, this is an average of over 800 shares per employee. As noted in the Bloomberg article, grants are 40% of employees’ annual salaries, making this more than just a ham sandwich. Each grant is likely to be meaningful to the employee who receives it.

This kind of investment positions an equity plan for success. If (and this is a big “if”) Gardner Denver can execute on the education necessary to help employees value the awards and understand how their efforts can improve the company’s stock price, this plan could be a win-win: improved results for the company and wealth creation for employees. The impetus for the plan came from the head of KKR’s industrials team, Pete Stavros, who is also the chairman of Gardner Denver. Bloomberg notes:

To Stavros, who wrote a paper while a student at Harvard Business School about employee ­share-ownership plans, manufacturers can make good prospects for employee ownership. In tech, for example, success often comes from betting on the right trend or on a single founder or chief executive officer, he says. By contrast, most manufacturers operate in a low-growth environment where they must do “a million things a little better” to excel, such as reduce scrap rates and improve plant productivity. Front-line workers know best where operational inefficiencies exist and how to fix them, and equity ownership lets them share in the fruits of their efforts.

Contrast Gardner Denver’s plan to Apple’s announcement of broad-based RSUs back in October 2015 (“Apple to Offer Broad Based RSUs“). Apple awarded grants of only $1,000 to $2,000 to employees, which, given Apple’s stock price at the time, likely worked out to be less than 10 to 20 shares per employee. Of course, Apple is subject to constraints that Gardner Denver isn’t: a lot more employees, proxy advisors, institutional investors, not 75%-owned by the investment firm that holds the chairman position on their board (who believes in employee ownership), over $100 million granted to their execs alone in 2016 and a history of mega-grants to execs. All of these things limit the number of shares available for grants to employees. But I still have to wonder how those RSUs are working out for them.

– Barbara

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December 20, 2016

Top Ten Trends in Stock Plan Design

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:

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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%).
  6. 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).
  7. 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.
  8. 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.
  9. 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.
  10. 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!

– Barbara

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March 24, 2015

Slow News Day

It’s a slow news day here at the NASPP. I don’t have anything pressing to blog about so I thought it would be a good time for a poll.  Below are a few questions that were recently posted to the NASPP Q&A Discussion Forum that are largely unanswered at the moment.  If they apply to you, please take a moment to indicate your answers so we can help these folks out. Thanks for indulging me!

If you can’t see the poll below, click here to participate in it. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll).

– Barbara

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March 3, 2015

Silicon Valley vs. the Nation

Free lunches (not too mention breakfasts, dinners, and snacks), open offices, games and nap rooms, shuttle services for commuting employees—we all know Silicon Valley operates a little differently than the rest of corporate America.  But just how different is the Valley when it comes to stock compensation?

Last week, I attended a presentation hosted by the Silicon Valley NASPP chapter on how Silicon Valley differs from the rest of the United States when it comes to stock compensation. Tara Tays of Deloitte Consulting ran special northern California cuts of the results of the NASPP’s 2013 and 2014 Domestic Stock Plan Design and Administration Surveys and compared them to the national results.  She was joined by Sue Berry of Infoblox and Patti Hoffman-Friedes of Seagate Technology, who provided color commentary.

As it turns out, not as different as you might think.  In many areas, the northern CA data aligned fairly closely with the national data. These areas included the use of full value and performance awards, overhang levels, timing of grants, termination and forfeiture provisions, and performance metrics. But here are five areas where Silicon Valley does its own thing:

Burn Rates

This probably isn’t a big surprise to anyone, but burn rates are higher in Silicon Valley.  Nationally, 77% of respondents report a burn rate of less than 2.5%. In northern California, only 56% of respondents report burn rates below this level. Interestingly, however, the higher burn rates did not translate to higher overhang; in this area the northern California numbers align closely with the national data.

Clawbacks

In the national data, 60% of respondents report that equity awards are subject to a clawback provisions, representing an almost 90% increase in the use of these provisions since our 2010 survey.  But this trend doesn’t appear to have taken hold yet in Silicon Valley; only 34% of companies in northern California report that their awards are subject to clawbacks.

RSUs

While usage of full value awards (vs. stock options) in northern California aligns with the national data, practices vary with respect to the type of award granted.  Just over 90% of northern California respondents grant RSUs but, nationally, RSUs are granted by only 77% of respondents.  Restricted stock is granted by only 26% of northern California respondents but 44% of national respondents.

Vesting Schedules

For full value awards, graded vesting is more common in northern California (88% of respondents) than it is nationally (65% of respondents).  But vesting schedules for full value awards appear to be slightly longer in Silicon Valley.   57% of northern California respondents report a four-year schedule and 37% report a three-year schedule, whereas this trend is flipped at the national level.  There, 60% of respondent report a three-year schedule and 30% report a four-year schedule.

For stock options, monthly vesting is far more common in Silicon Valley than nationally.  53% of northern California companies report that options vesting with a one-year cliff and monthly thereafter; only 11% of respondents report this in the national data (27% for high-tech companies).

ESPP Participation

When it comes to ESPP participation, Silicon Valley comes out on top.  Close to 60% of northern California companies report that their participation rate is between 61% to 90% of employees; nationally only 20% of companies were able to achieve this.  ESPPs are also more generous in northern California, with more companies reporting that their plans offer a look-back and 24-month offering than nationally.  This may account for some of the increase in participation but I’m not sure it accounts for all of it (note to self: must do quick survey on this).

– Barbara

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December 16, 2014

Dividend Equivalents and Retirement Eligibility

For today’s blog entry, I cover yet another challenge in the ongoing saga of awards that provide for accelerated or continued vesting upon retirement.

A recent Chief Counsel Advice memorandum casts doubt on the treatment of dividend equivalents paid on vested but unpaid RSUs.  This comes up when dividend equivalents are paid on RSUs that allow for deferred payout on either a mandatory basis or at the election of the award holder. This arrangement is relatively rare, however, and probably only impacts a few of my readers.  More commonly, however, this is also an issue where dividend equivalents are paid on awards that provide for accelerated or continued vesting upon retirement and the award holder is eligible to retire.

Background

In either of the above situations, the RSU is subject to FICA when no longer subject to a substantial risk of forfeiture. For traditional deferral arrangements, risk of forfeiture lapses when the award vests.  In the case of awards that provide for accelerated or continued vesting upon retirement, the risk of forfeiture substantively lapses when the award holder is eligible to retire.

Any dividend equivalents accrued on the award prior to when the award is subject to FICA will be subject to FICA at the time paid (if they are paid out to award holders at the same time they are paid to shareholders) or when the award is subject to FICA (if they will be paid out with the underlying award). But what about the dividend equivalents paid after the award has been subject to FICA?  Does the company need to collect FICA on those equivalents when they are accrued/paid?

The Non-Duplication Rule

Under, Treas. Reg. §31.3121(v)(2)-1(a)(2)(iii), referred to as the “non-duplication rule,” once an RSU has been taken into income for FICA purposes, any future earnings on the underlying stock are not subject to FICA. So the answer to FICA treatment of the dividends depends on whether the dividends paid after this point are considered a form of earnings, akin to appreciation in value in the underlying stock (in which case, they would not be subject to FICA), or additional compensation (in which case, they would still be subject to FICA).

I’ve spoken with a number of practitioners about this.  Most believe that an argument can be made that the dividend equivalent payments are a form of earnings and, thus, are not subject to FICA.

The CCA

In Chief Counsel Advice 201414018, issued earlier this year, the IRS argued that dividends paid after the award is subject to FICA are still subject to FICA.  The situation the memorandum addresses, however, involved a number of facts not typically characteristic of RSUs that receive dividend equivalents:

  • The RSUs were granted by a private company
  • The awards were paid out only in cash
  • The dividend equivalents were paid out to award holders at the same time dividends were paid to shareholders, rather than with the underlying award

While concerning, the memorandum doesn’t necessary dictate a change in practice with respect to the FICA treatment of dividend equivalents, especially if your company is public, your RSUs are paid out in stock, and your dividend equivalents are paid out with the underlying award.  It may, however, be worth reviewing the ruling with your tax advisors to ensure they are comfortable with your procedures (especially if any of the conditions in the memorandum also apply to your RSUs and dividend equivalents).

– Barbara

 

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December 17, 2013

Mishandled FICA and RSUs

Today I discuss recent litigation over mishandled FICA taxes on a nonqualified deferred compensation plan that could also have implications for RSUs.

The Lawsuit

The case involved a company that failed to collect FICA taxes on benefits paid under a nonqualified deferred compensation when the taxes were due.  Because of this, and because the applicable statute of limitations during which the company could go back and amend the return for the year in which FICA should have been paid had elapsed, the company was obligated under IRS regulations to collect FICA when the benefits under the plan were paid out.  The payouts occurred after the employees had retired.

The plan provided for payouts to occur in increments over a period of years, and, because the retirees were no longer actively employed, they had no other wages subject to FICA.  As a result, the payouts were subject to Social Security.  If the company had collected FICA when it should have, the payouts might not have been subject to Social Security because 1) the retirees would have still been employed and would have possibly met the wage cap for Social Security in those years; 2) the wage cap would have been lower; and 3) the entire amount would have been subject to Social Security in the same year, rather than in small increments over many years.  A retiree brought suit against the company essentially claiming that because this was the company’s error and the error increased the amount of FICA tax that he has to pay, the company should have to pay his FICA tax for him.

This situation could also come up in the context of RSUs.  Certainly it could apply where RSUs are subject to deferred payout, but more commonly it is likely to be a concern where RSUs provide for accelerated/continued vesting upon retirement and are granted to or held by employees that are eligible to retire. In that circumstance, the RSUs are substantially vested and are subject to FICA before they are paid out. 

I learned a couple of important things from this that are applicable to RSUs.

There Is a Statute of Limitations

Who knew?  If you screw up on FICA withholding for RSUs, you have a limited period of time in which to go back and fix this. That time is approximately three years (although the actual calculation of the statute of limitations is a little more complicated so if this applies to you, talk to your tax advisors).

FICA Taxes Revert Back to Payout

Even more interesting, if you don’t find the error and correct it before the statute of limitations runs out, your only choice is to collect FICA when the awards are paid out.  Again, I say, who knew?

No Need to Panic, Yet

All this is interesting, but, of course, our primary interest is whether companies could be liable to participants for mishandled FICA taxes on RSUs. At this point, it’s hard to tell. Although there has been one decision in favor of the retiree, this case is far from over (that decision just allows the case to proceed), so who knows if the retire will prevail. And even if he does, the situation in this case isn’t fully analogous to RSUs.  For one thing, the retiree is claiming a violation of ERISA, which typically doesn’t apply to RSUs. 

Moreover, RSUs typically pay out at the time of retirement, not over a period of years after retirement. Thus, in the case of RSUs, there wouldn’t be a question of the payments being subject to Social Security when they otherwise wouldn’t have if FICA had been collected on time. The error would only increase FICA taxes through an increase in the stock price (which would mostly apply only to Medicare since Social Security is capped), an increase in the Social Security wage cap, and maybe differences in compensation levels (but only for employees that don’t otherwise normally earn enough to max out on Social Security).  Even where employees are subject to tax at the higher 2.35% Medicare rate, it seems unlikely that any of those things would be worth suing over.

For a more complete summary of the case, see the Towers Watson alert “Case Highlights the Risk of Employer Liability for Mishandling FICA Tax.”  Thanks to Russ Hall at Towers Watson for helping me sort through how this applies to RSUs.

– Barbara

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May 22, 2012

My Two Cents on Facebook

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. 

– Barbara 

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February 28, 2012

No Action on RSUs

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.

More Information

See the NASPP’s alert, SEC Issues No-Action Letter on RSUs at Private Companies.

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. 

– Barbara

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September 1, 2011

Indecent Disclosures

Are your stock plan disclosures too much, not enough, or just right? Find out with the 19th Annual NASPP Conference session “Indecent Disclosures: Polishing and Perfecting Disclosures under ASC 718.” Today’s blog entry is guest authored by Elizabeth Dodge of Stock & Option Solutions, leader of this panel at the Conference. Elizabeth discusses one vexing aspect of the disclosures that the panel will cover at the Conference.

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 Elizabeth’s session, “Indecent Disclosures: Polishing and Perfecting Disclosures under ASC 718,” at the 19th Annual NASPP Conference.

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. 

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August 11, 2011

Mastering ESPP and RSU Withholding Outside the United States

Tax withholding can be a challenge in the United States, but the challenges increase exponentially for stock compensation issues to non-U.S. employees. Today we feature a guest blog entry by Jennifer Kirk and Narendra Acharya of Baker & McKenzie, on the nuts and bolts (not to mention hammers and wrenches) of withholding taxes for ESPPs and RSUs for non-U.S. employees. Jennifer and Narendra will lead the session “Mastering ESPP and RSU Withholding Outside the United States” at the 19th Annual NASPP Conference.

Mastering ESPP and RSU Withholding Outside the United States
By Jennifer Kirk and Narendra Acharya of Baker & McKenzie

In today’s world, your company cannot afford to be noncompliant with its global stock plan withholding and reporting obligations. On a daily basis, we hear about the fiscal challenges affecting governments around the world. In addition to the cutbacks of programs and increased taxes and fees, governments remain focused on greater enforcement of existing tax obligations. In a number of countries, revenue collected from employer tax withholding (including employer and employee contributions to social taxes) is often the largest source of tax revenue–but still not sufficient. Whether through increased frequency of payroll audits, hiring more specialized teams of auditors, and/or more robust or extra reporting requirements, it is reasonable to expect that stock plan withholding practices will be facing increased scrutiny on a global basis.

As a general example, in December 2010, the UK tax authorities (HMRC) published a discussion document aptly titled “Improving the Operation of PAYE – Collecting Real-Time Information.” Not content to rely on payroll filings, which may only be made annually, and the periodic audit, HMRC in the discussion document envisions a process where it is electronically notified whenever payment is made to an employee and would confirm that the appropriate income tax and social taxes (National Insurance Contributions) have been deducted. The latest version of the discussion document no longer contains the more controversial proposal of having the compensation funds flow from the employer to HMRC (as a “central calculator” and disbursement agent) and then to the employee. Regardless of the outcome of the proposals, they are a great example of government’s focus on getting the money sooner and greater review of payroll calculations.

While a “central calculator” may not be imminent in the UK, even the current employer withholding and reporting requirements in the UK, as an example, can be challenging. First, there are additional reporting requirements beyond traditional payroll reporting that apply to equity compensation plans. This includes the annual share schemes return (Form 42) where the details of equity grants need to be specifically reported. The HMRC is then better able to cross-check the annual payroll reporting done by the UK employer to confirm that the taxable amount of equity compensation is indeed reported (and withheld upon) correctly. Second, there are timing requirements such that if the appropriate UK tax is not collected within 90 days, the employee is deemed to receive an additional benefit from the employer equal to the tax that should have been withheld, but on a grossed up basis. In short, noncompliance in the UK can be quite expensive.

During the 19th Annual NASPP Conference, the session “Mastering ESPP and RSU Withholding Outside the United States” will answer the key questions: the who, what, where, why and how of withholding for global stock plans. Don’t allow your company to be an easy target for foreign governments seeking tax revenue, as the penalties (and unwelcome scrutiny from foreign tax agencies) will be a much greater burden than ensuring that it gets done correctly in the first place.

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