Counting the shares underlying time-based awards is usually straightforward: one share granted equals one share issued. Performance awards, on the other hand, usually provide for a spectrum of possible payouts: one share granted might mean two shares issued, or .5 shares issued, or no shares issued. Given the many possible payout levels, how many shares should be considered granted for the various administrative and reporting purposes that are relevant to performance awards?
The last two issues of The Corporate Executive (January-February and May-June) took a look at this question and came up with 16 different purposes for which shares under performance awards are counted. In almost all cases the shares are counted differently. I thought it would be interesting to take a look a few of these purposes in the NASPP Blog. Now, 16 purposes is far too many to go through in one blog entry, so I’ll start with just one purpose and I’ll look at more in future entries. For today’s entry, we’ll look at counting the number of shares available in the plan.
Counting Performance Awards Against the Shares Available for Future Grants
There are no legal requirements that govern how performance awards must be counted against a plan’s reserve (other than those contained within the plan itself). Thus, for purposes of reducing the number of shares available in the plan as a result of performance awards, companies can make a policy decision as to whether to count the threshold, target, or maximum shares against the reserve.
Survey Says …
According to the NASPP’s Domestic Stock Plan Design Survey (cosponsored by Deloitte Consulting), practices in this area are split:
- 48% of respondents tracking awards against the plan reserve at the maximum payout
- 43% tracking them at the target payout
- 7% track awards at the expected payout
- 1% use some other approach
Best Practice (IMHO)
I feel pretty strongly that the best practice is to count performance awards against the plan reserve at the maximum possible payout. Where awards are counted at the target payout (or, worse, at the threshold payout), there is a risk that the company will not be able to meet its obligations should a higher level of performance be achieved. Once the performance period has closed, failing to have sufficient shares in the plan to cover the payout is problematic. At a minimum, allocating additional shares to the plan would require shareholder approval, which is not accomplished at the drop of a hat. There are likely to be accounting and securities law implications, as well.
Drawbacks
But this approach has its drawbacks. As evidenced by the NASPP survey, many companies are reluctant to earmark shares for a payout that isn’t expected (in some cases, not even remotely) to be achieved. In the current environment, where share usage by public companies is heavily scrutinized and restricted by proxy advisors and institutional investors, reducing the plan reserve by the maximum possible payout could prevent the company from making subsequent grants at the desired level or force the company to request shareholder approval for additional allocations to the plan earlier than would otherwise be necessary.
– Barbara
Tags: performance awards, performance plans, share counting
I’m sure all of my readers know that Form S-8 is used by public companies to register shares that will be issued under an employee stock plan with the SEC. In it’s January-February 2015 issue, The Corporate Counsel took a closer a look at some of the technical requirements of Form S-8. Here are a few things I learned from the article.
Fee Offsets Are Complicated
Companies wishing to register shares on a Form S-8 must pay a registration fee to the SEC. This fee is based on the value of the stock to be issued under the plan and the total number of shares to be issued. Where shares registered under prior S-8 filings will not be issued, companies can use the fees associated with these unissued shares to offset the fees to file a new Form S-8. But there’s a catch: the offering covered by the S-8 that the fees will be transferred from has to be completed, terminated or withdrawn and the new S-8 has to be filed within five years of when the original S-8 was filed. Because most stock plans have a term of ten years (and the offering isn’t viewed as completed until there are no further outstanding options/awards under the plan), this means that this offset often available. This is covered in the Securities Act Rules CDI Question 240.11.
No Share Offsets
Shares cannot be carried forward from one form S-8 to another. Thus, if shares from an expiring plan (and covered under the Form S-8 filed for that plan) will be transferred to a new plan, the shares have be registered again on the Form S-8 filed for the new plan (and are included in the calculation of the registration fee for the new plan).
New Form S-8 Must Be Filed to Register New Share Allocation
Where shares are newly allocated to an existing plan, a new Form S-8 must be filed to register those shares. They cannot be registered by amending the prior Form S-8 filed for the plan. But, the good news is that a abbreviated format can be used for the new Form S-8. The Corporate Counsel says:
In this scenario, General Instruction E to Form S-8 provides that, for the registration of additional securities of the same class covered by an existing Form S-8 relating to an employee benefit plan, the issuer may file an abbreviated registration statement containing only a cover page, a statement that the contents of the earlier registration statement—identified by file number—are incorporated by reference, the signature page, any required opinions and consents, and any information required in the new registration statement that is not in the earlier registration statement.
Share Counting
I was surprised to learn that it may be not permissible to count share usage for Form S-8 purposes the same way shares are counted against the share reserve. According to the article:
A recommended approach for dealing with forfeited shares is to treat the original restricted stock grant and the subsequent re-grant as two separate issuances for purposes of counting the amount of shares remaining on the Form S-8. But be aware that when counting shares this way, an issuer can deplete shares registered on Form S-8 faster than it depletes the plan capacity shares, so the issuer should keep a separate ledger for both the Form S-8 and the plan share counting. Also note that this approach might be overly conservative for some practitioners who do not believe that the issuer needs to count the forfeited shares as having been issued against the total, particularly with respect to options. There is also a concern that this approach can lead to problems in determining the real share reserve for other purposes, such as for accounting purposes.
The article further notes:
Options and stock-settled SARs should be counted when exercised for the full gross amount exercised (i.e., unreduced for any net exercise or withholding), while stock awards should be counted when granted. For performance stock awards, the conservative approach is that they should be counted at grant for the target number of shares—with any shares actually issued in excess of target counted at the time of issuance.
– Barbara
Tags: Form S-8, registration, SEC, share counting
I hope you all tuned in for last week’s excellent webcast, “Knowing When to Let Go: Practical Advice on Amending vs. Replacing Your Equity Compensation Plan,” which was presented by Danielle Benderly of Perkins Coie, Amy Muecke of Cooley, and Scott Witz of W.W. Grainger. Today I highlight a few things I learned while listening to the webcast.
Liberal Share Counting
I often hear that liberal share counting–i.e., allowing shares tendered to the company for net exercises and tax withholding–is a deal-breaker with ISS. Turns out, this isn’t always the case. For full value awards, allowing shares tendered for taxes to return to the plan is okay. Moreover, if you don’t have a flexible share reserve (or a cap on the number of shares that can be issued as full value awards), liberal share counting is also okay.
This is because the only impact of a liberal share counting provision is that ISS will treat all options and SARs as full value awards in their shareholder value transfer analysis. But full value awards are already treated as full value awards in that analysis, so there’s no reason not to use liberal share counting for these awards. And without a flexible share reserve or a cap on the number of shares that can be issued as full value awards, ISS assumes that all shares under the plan will be issued as full value awards.
Black-Out Periods and Post-Exercise Grace Periods
It is possible for stock plans to provide that, where a black-out period occurs during the post-termination exercise period for stock options, the exercise period is automatically extended. This ensures that all former employees have the same amount of time to exercise their options without having to modify the options (and perhaps take an accounting hit) at the time of termination. I imagine it also might head off lawsuits that might be filed if former employees aren’t able to exercise due to a company-imposed blackout. (Of course, in no event, should the extension allow the option to be exercised beyond the original contractual term of the option.)
Shareholder Voting Bias
One consideration in the decision to amend vs. adopt a new plan is that shareholders might have a slight bias for new plans. Just a slight bias–when considering this decision, W.W. Grainger was advised that approval rates for new plans were maybe 1% to 2% higher than for plan amendments–but still, every little advantage helps.
Majority for NYSE Companies
For stock plan proposals, NYSE companies need a majority not just of the votes cast but of their total votes outstanding. That’s a much higher bar to acheive and, since brokers can’t vote on stock plan proposals without receiving direction from shareholders, could be a challenge for companies with high levels of lackadaisical shareholders, e.g., retail investors and probably even employees. When stock plan proposals are in your proxy statement, make sure employees are aware of them and vote.
You’re Not Getting Away With Anything
You may have some older plans with a lot of unused shares still available for grant–maybe even an non-shareholder approved plan that you slipped in before Nasdaq and the NSYE tightened up those requirements–and you (or your execs) may think those plans are flying below the radar. Not so. Your shareholders, particularly institutional investors, and their advisors, are aware of those plans (after all, you are disclosing these plans under Item 201(d) in the proxy statement) and these plans are likely to impact how shareholders will vote on current stock plan proposals. If you aren’t using these plans, maybe it’s time to get rid of them.
The Early-Bird Gets the Vote
You might have been thinking that this webcast was timed oddly–really too late to do anything about stock plan proposals for this year’s proxy season. But, in fact, the webcast was timed just about right for getting started on next year’s proposals. If you expect to go out to shareholders with a proposal that is significant enough that it warrants consideration of amending an existing plan vs. adopting a new plan, you want to start that process about a year ahead of time. Even better would be to start two years ahead of time and get the proposal into your proxy statement a year early, so you have another chance if the proposal fails.
These were just a tiny portion of the many great practical tips presented during the webcast. If you missed it, the audio archive is now available and the transcript will be posted in a couple of weeks.
Online Financial Reporting Course–Only a Few Days Left for Early-Bird Rate
There are only a few days left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles. Register by this Friday, April 29, for the early-bird rate.
2011 Domestic Stock Plan Administration Survey
The NASPP is excited to announce the launch of our 2011 Domestic Stock Plan Administration Survey, covering administration and communication of stock plans, ESPPs, insider trading compliance, outside director plans, and ownership guidelines. You must participate in the survey to receive the full survey results. Register to complete the survey today–you only have until May 20 to complete 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 I keep an ongoing “to do” list for you here in my blog.
– Barbara
Tags: grace period, liberal share counting, majority vote, net exercise, new plan, plan amendment, post-termination exercise period, proposal, proxy, share counting, share withholding, shareholder approval, shareholder vote