Defining Fair Market Value
There isn’t a U.S. rule or regulation that gives a specific definition for the fair market value, either for creating an option exercise price or for calculating income on transactions, even though fair market value (FMV) is a fundamental measure for all awards. Section 409A regulations require that a consistent and reasonable valuation method be applied to stock grants. For private companies, coming up with a reasonable method for valuing company stock is complex, but for public companies it is generally accepted that the FMV for stock plans is based off the open market trading value of the stock.
Not so Definite
All stock plans should define the fair market value, but should also give the Plan Administrator the authority to determine FMV as needed. This is particularly crucial for companies whose stock becomes very thinly traded, but can also be an important piece of flexibility for other stock transactions.
The grant date fair value should, if at all possible, follow the plan definition. For transactions, however, there may be a need to have more than one definition for FMV. Most of applicable tax code (e.g., Section 409A, 422, or 83) focuses on the method used for determining grant date fair value. Section 409A is the most specific, permitting the use of an average sale price provided that the period used does not exceed (and is both set and irrevocable) 30 days prior to the grant date. However, 409A does permit the company to use more than one FMV, provided each application of FMV is consistent.
There may be situations where ESPP purchase or restricted stock vesting event dates fall on a non-market day and the plan defines FMV based on current day trading values. Alternatively, many companies prefer to define the FMV for transactions with a sale (e.g., broker assisted cashless exercise or immediate sale on vesting of restricted stock) as the sale price. There are also situations where the company has a unique need that justifies defining the transaction date fair value as something other than the plan definition. All of these are reasons why a company may choose to use more than one definition for fair market value.
Make it Official
Even if your company doesn’t plan on ever diverging from the plan definition of fair market value, you should still consider the possibility of a non-market day transaction and create an official definition of FMV for that circumstance. If you are currently using or considering using an different FMV definition than the one in the plan, assuming you have confirmed that the plan gives the plan administrator that authority, best practice would be to have that policy made official. In addition, even if you have created an official policy or procedure, the best way to show that the company is being reasonable and consistent with its definition of FMV is to have the Board or the Board’s designated compensation committee ratify the policy in a resolution.
What Other Companies Are Doing
Curious about how other companies define FMV? In the NASPP’s 2010 Domestic Stock Plan Design Survey, 78% of respondents use grant date closing price for option grants, but only 60% use closing price as the FMV for exercises. In addition, 80% use the actual sale price for broker-assisted cashless exercises.
-Rachel
Tags: 409A, fair market value, FMV, stock plans
Stock plan professionals are often tasked with far more than managing equity compensation programs. In many companies, one responsibility that the stock plan team is responsible for is the design or content of the equity compensation portion of the company’s intranet. You don’t necessarily need to be tech savvy or a web design guru to put together a set of stellar intranet pages.
Navigation System
Regardless of where on your intranet the links to your stock plan information is housed, navigation is the key to success. Try to think like a first-time visitor to your intranet and make the stock plan information accessible from any location that participants might navigate to when attempting to locate your stock plans pages. It’s a great idea for links to be in multiple locations such as where HR, compensation, and benefits information is available.
When designing a navigation system for your stock plan services information, consider how many “clicks” an employee will need to make to reach the most important information. If it’s more than three clicks away, you are likely to lose your audience. When employees can’t find the information they are looking for easily on their own, they’ll resort to asking for answers from their peers, HR, their managers, or you.
Location, Location, Location!
Real estate on your intranet home page is precious and priority must be given to the features and topics that should be most important to your employees. If your company has a broad-based equity offering, then stock plan services should be accessible from the intranet landing page. On the other hand, if you only offer equity compensation to only a segment of your employee population, it may not be appropriate.
Once participants do navigate to the stock plan services landing page, the focal points of the page will influence the accessibility of the information. A simple design with a clear hierarchy of importance on topics will help direct your participants to the information you think should be the most crucial. For example, if you want to have a high participation rate on your ESPP, information on how to enroll should be a key focal point. You can even keep a prime location on your landing page open for featured items so that periodically relevant information is regularly available in a prominent space without modifying navigation that participants have already become accustomed to.
Branding Your Product
Internal branding works in two ways. First, it’s important for the stock plan services pages to represent the company brand. This means upholding the image and culture of your company as well as staying cohesive with the rest of the intranet site. This is true for both the general visual impact of your pages as well as the tone and manner in which information is presented.
Second, maintaining the stock plan services branding throughout the intranet boosts the clarity of your equity compensation program. This can be done by keeping consistent verbiage anywhere stock plans are discussed and repeating key phrases. Remember that stock plans may be discussed on pages that are created and maintained by other departments. To ensure your branding is on target, know where you are mentioned within the intranet site and stay in the loop on any changes that are made.
Usability Testing
One of the best ways to know how your intranet site measures up is to do usability testing. Of course, there are people and companies that you can pay to get professional quality testing on your web design, but there isn’t necessarily a need to do that. You can get real useful feedback by getting your employees involved. Get employee groups on a stock plan services scavenger hunt, navigating the intranet to find specific pieces of information. To get some great numbers on your usability, survey new employees on the ease of use and then resurvey them after one year. Last, test all the links periodically to make sure they still work.
18th Annual NASPP Conference
Want to see some real examples of clever ways to leverage your intranet? Then, don’t miss this year’s session, QUALCOMM and Microsoft: Gold Standards in Employee Communication.
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-Rachel
Tags: intranet, navigation, stock plans, usability