The NASPP Blog

April 25, 2017

IBM’s Premium Priced Options

I was recently asked to comment on a premium priced option granted to IBM’s CEO for an article in Bloomberg (“IBM Says CEO Pay Is $33 Million. Others Say It Is Far Higher“). There are a number of things that I find interesting about the grant.

The Option Grant

The option was granted to IBM’s CEO and is for a total of 1.5 million shares, granted in four tranches. Each tranche cliff vests in three years and has a different exercise price, ranging from $129.08 to $153.66 (premiums ranging from 5% to 25% of FMV).

The option was granted in January of last year, about a month before IBM’s stock price hit its five-year low. IBM’s stock price recovered to the point where all four tranches were in the money around mid-July and the option has mostly been in-the-money since then. IBM’s stock is now trading at around $160 (down from a three-month high of around $180). Either the options were very effective at motivating IBM’s CEO or IBM didn’t set the premiums high enough (or both).

The option doesn’t vest until January 2019 and we all know what can happen to any company’s stock price in that period of time, so there’s no guarantee that the option will still be in-the-money when it vests. The option has a term of ten-years, however, so if it isn’t in-the-money, there’s still plenty of time for the stock price to recover before it expires.

A History of Premium-Priced Options

This isn’t IBM’s first foray into premium priced options. From 2004 to 2006, IBM granted a series of stock options to its executives that were priced at a 10% premium to the grant date market value. In 2007 they dropped the practice and granted at-the-money options, then they ceased granting options altogether. This is the first option IBM has granted since 2007.

The Valuation Mystery

The reason I was asked to comment on the option is that the value IBM reported for the option (which is also the expense IBM will recognize for it) is significantly less than amount that ISS determined the option was worth. IBM reported that the option has a grant date fair value of $12 million but, according to the Bloomberg article, ISS puts the value at $29 million.

It’s not unusual for there to be variations in option value from one calculation to the next, even when all calculations are using the same model and the same assumptions. But a variation this large is surprising. Both IBM and ISS say they are using the Black-Scholes model, so the difference must be attributable to their assumptions. If I were to guess which assumption is causing the discrepancy, my guess would be expected term. The dividend yield and interest rate aren’t likely to have that much of an impact and it seems unlikely that there would be significant disagreement as to the volatility of IBM’s stock.

Why Price Options at a Premium?

The idea behind premium-priced options is to require execs to deliver some minimum amount of return to investors (e.g., 10%) before they can benefit from their stock options. It’s an idea that never really caught on: only 3% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant them.

I’ve never been a fan of premium-priced options. I suspect that most employees, including execs, assign a very low perceived value to them (or assign no value to them at all), so I doubt they are the incentive they are supposed to be. And the reduction in fair value for the premium is less than the amount by which the options are out-of-the money at grant and far less than the reduction to perceived value, which makes them a costly and inefficient form of compensation.

– Barbara

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April 20, 2017

When Is a Benefit Not a Benefit?

Riddle me this: when is a benefit not a benefit? The answer: when that benefit results in a change to the terms and conditions of an ISO. Making changes to ISO can have the unfortunate effect of disqualifying the options from ISO treatment, which might make the optionees less than enthusiastic about the new “benefit.”

The Uber Case

This was highlighted in a recent class-action lawsuit brought by an Uber employee (McElrath v. Uber Technologies). McElrath, an employee of Uber and the plaintiff in the suit, was promised an ISO that vested over four years in his offer letter.  But, when the ISO was granted, the vesting schedule was shortened to just six months. This caused a much greater portion of the ISO to exceed the $100,000 limitation. The plaintiff contends that Uber changed the vesting schedule to ensure a corporate tax deduction for the option.

There could be any number of legitimate reasons for Uber to grant the options with a shorter vesting schedule than stated in the offer letter.  Additionally, shorter vesting periods certainly offer benefits to employees. I suspect that many companies consider acceleration of vesting to be a change they can make without an award holder’s consent. But this illustrates that, when it comes to ISOs, it is important to consider the tax consequences to the optionee before making any changes.

Modifications, Too

The Uber case doesn’t involve a modification, just a discrepancy between what was granted and what was promised in the offer letter. But this concept also applies any time an ISO is modified. Any change that confers additional benefits on the optionee (other than acceleration of exercisability and conversion of the option in the event of a change-in-control) is consider to be the cancellation of the existing ISO and the grant of a new option. If the new option doesn’t meet all of the ISO requirements (option price at least equal to the current FMV, granted to an employee, $100,000 limitation, etc.), the option is disqualified from ISO treatment.

And, while acceleration of exercisability (which most practitioners interpret to mean vesting) doesn’t result in a new grant, there is still the pesky $100,000 limitation to worry about.  In many cases, acceleration of exercisability will cause an ISO to exceed this limitation.

Where a modification disqualifies all or a portion of an option from ISO treatment, it is important to consider whether it is necessary for the optionee to consent to the modification. Most option agreements stipulate that any changes that adversely impact the optionee cannot be executed without the optionee’s consent. Keep this in mind the next time your compensation committee has a bright idea about making existing ISOs better.

– Barbara

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April 18, 2017

6 Things I’m Excited to Learn

As announced yesterday, we’ve extended the deadline to participate in the Domestic Stock Plan Administration Survey that the NASPP co-sponsors with Deloitte Consulting. For today’s blog entry, I have six things I am excited about learning from this year’s survey.

  1. Domestic Mobility Compliance: New this year, we’ve added questions on tax compliance for domestically mobile employees. This is an area of increasing risk and I’m curious to learn how far companies have come in their compliance procedures.
  2. ESPP Trends: This survey takes an in-depth look at the design and administration of ESPP plans. I hear rumors of increased interest in ESPPs—both in terms of companies implementing new plans and enhancing the benefits in their existing plans; I’m excited to see if this plays out in the survey results.
  3. Stock Plan Administration Staffing: This is the only survey I’m aware of that collects data on how stock plan administration teams are staffed, the department that stock plan administration reports up through, and how companies administer their plans. It is always intriguing to see the trends in this area.
  4. Ownership Guidelines: The prevalence of ownership guidelines has increased dramatically in the last decade, with 80% of respondents to the 2014 survey reporting that they have these guidelines in place. Has this trend topped out or will we be reaching near universal adoption of ownership guidelines in this survey?
  5. Rule 10b5-1 Plans: These trading plans have become de rigueur for public company executives, with 84% of respondents to the 2014 survey allowing or requiring them. We’ve expanded this area of the survey to capture more data on policies and practices with respect to these plans.
  6. Director Pay: The survey reports the latest trends in the use of equity in compensating outside directors. I’m particularly interested in seeing what percentage of respondents indicate that they have imposed a limit on the number of shares that can be granted to directors. This is a best practice to avoid shareholder litigation but adoption of it was low in the 2014 survey—have we made progress on this in the past three years?

If you are interested in these trends, too, you’re going to want to participate in the survey so that you’ll have access to the results. It’s not too late to participate, but you have to do so by the end of this week. We’ve already extended the deadline once; we can’t extend it again. Register to participate today!

– Barbara

* Only issuers can participate in the survey. Service providers who are NASPP members and who aren’t eligible to participate will receive full access to the published results.

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April 13, 2017

Five Trends in Restricted Stock/Units

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.

– Barbara

P.S.—It’s not too late to participate in this year’s survey! Don’t miss out–you’re going to want this data!

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April 11, 2017

Restricted Stock/Units: Not Just for Employees

For today’s blog, I discuss trends in the use of equity in compensation outside directors, as noted by consulting firm Frederic W. Cook & Co. in its 2016 Director Compensation Report.

The study includes 300 public companies of varying sizes in the financial services, industrial, retail, technology, and energy sectors. FW Cook has been publishing this study annually for well over a decade (the earliest report I can find on their website is from 2001). The 2016 study found that on average more than half (57%) of total director compensation is paid in the form of equity awards (in general, the larger the company, the greater the percentage of stock compensation for directors). It’s worth looking at a few of the trends in the use of equity in director compensation.

Trend #1: Restricted Stock/Unit Awards

With respect to the use of restricted stock and units versus stock options, the study found that:

  • Most of the studied companies (more than 80%) grant only restricted stock/RSUs to directors (no stock options).
  • Use of full-value-only equity programs increased year-over-year among small-cap companies while staying flat for large- and mid-cap companies. Option-only programs declined in prevalence at large- and small-cap companies versus last year.
  • At technology companies in the study, which have historically granted stock options more than companies in other sectors, there has been a significant swing toward the granting of only restricted stock/RSUs to directors (up from 78% to 85% of those companies). The leading sector for stock options is now the industrial group, where 18% of the companies grant stock options to directors.

Two Other Trends

A couple of other trends you should think about for your director compensation, if you aren’t doing these things already:

  • Compensation Limits: About a third of studied companies now include an annual limit on compensation paid to directors under their equity plans (in increase from prior years—by way of comparison, only 23% of respondents to the NASPP/Deloitte Consulting 2014 Domestic Stock Plan Administration survey included such a limit on director awards). Companies have been adding these limits in response to shareholder litigation over excessive director pay. FW Cook found that these limits are also increasingly covering total pay, not just equity awards.
  • Ownership Guidelines: A majority of studied companies have director stock ownership guidelines. The study notes that these guidelines have been ubiquitous at large-cap for many years and usage at small- and mid-cap companies has increased.

– Barbara

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April 6, 2017

5 Trends in Tax Withholding Practices

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):

  1. 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.
  2. 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.
  3. 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“).
  4. 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.
  5. 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).

– Barbara

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April 4, 2017

FASB Exposure Draft on Nonemployee Accounting

The FASB has issued an exposure draft of the proposed accounting standards modification to bring awards granted to nonemployees under the scope of ASC 718. Here are six things to know about it.

  1. It’s Long.  At 166 pages, the exposure draft is longer than I expected.  Partly it’s so long because there a million places in ASC 718 where the FASB has to replace the word “employee” with “grantee” and the word “employer” with “grantor.”
  2. No More Mark-to-Fair Value Accounting. This is the most significant change: awards granted to nonemployees that are settled in stock will receive equity treatment, the same as awards granted to employees. This means the expense will be determined on the grant date and will be recognized over the service period, with adjustments only for forfeitures and modifications. No more mark-to-fair value accounting until the awards vest.
  3. Contractual Term Is Still Required for Valuation Purposes.  The FASB is under the impression that all options granted to nonemployees are fully transferable (seriously, I kid you not—they really think this). So they require that when computing the fair value of options granted to nonemployees, companies have to use the contractual term, not the expected term. The NASPP will be commenting about this, for sure. (If you are a company that grants options to nonemployees, I would like to know if your options are transferable or not—email me at
  4. The Expense Attribution Rules are Confusing. I had expected that expense for awards to nonemployees would be attributed in the same manner as awards to employees, but the exposure draft requires the expense to be attributed as goods or services are received, in the same manner that expense would be recorded for cash compensation.  I don’t know beans about accounting for cash compensation (unless its in the form or SARs or RSUs), so I don’t know what that means. Ken Stoler of PwC assures me that it simply provides more flexibility for awards to nonemployees and that companies can probably record expense in the same way they record expense for their employee awards.
  5. Performance Award Accounting is Improved. Currently, ASC 505-50 requires that expense for (non-market) performance awards granted to nonemployees be recorded at the lowest possible payout, which is frequently $0.  The exposure draft proposes to align the treatment of nonemployee performance awards with that of employee awards: that is, expense would be recorded based on the expected payout, which makes infinitely more sense.
  6. Comments Are Due By June 5. You can submit comments via the FASB website or email them to You can also mail a letter to the FASB but I’m not going bother listing the address here because who actually mails letters anymore?

– Barbara

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March 30, 2017

Need More Time? Consider Using Prior Day Close

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

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.


[1] 2016 NASPP Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)

2 Fidelity client base, as of 9/30/2016

cervino_outdoor_landcape2-crop_webEmily 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

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March 28, 2017

Hot or Not?

It’s once again time to play the Hot or Not game. I have a list of possible topics for the 25th Annual NASPP Conference; your job is to tell me if each topic is “hot” (or not). Some quick guidelines:

  • Sizzling hot means you’d definitely want to attend a session the topic
  • Warm means you might be interested in this topic
  • Ice cold means that you have no interest in this topic
  • No opinion means you don’t really know what the topic is or otherwise don’t have an opinion on it

The survey should appear below. If you don’t see it or can’t access it, click here to participate.

Create your own user feedback survey

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March 23, 2017

Jettisoning Estimated Forfeiture Rates

Now that ASU 2016-09 allows companies to record expense for service-based awards without applying an estimated forfeiture rate to the accruals (see “Update to ASC 718: The FASB’s Decisions“), some our readers may be wondering how to make the transition to accounting for forfeitures as they occur. This is done by recording a cumulative adjustment to retained earnings in the period you adopt the ASU. In today’s guest blog entry, Elizabeth Dodge of Equity Plan Solutions explains how to calculate this adjustment (which she refers to as a “true-up amount”).

How to Get Rid of Your Estimated Forfeiture Rate

By Elizabeth Dodge, Equity Plan Solutions

So, you’ve decided to get rid of your estimated forfeiture rate… or at least decided to consider it. Congratulations! I recommend the elimination of an estimated forfeiture rate to all my clients. It simplifies equity accounting in so many ways.

Now how do you DO it? And better yet, do it without the auditors crawling all over you with time-consuming questions?

The short answer to the first question is:

  1. Run an expense report, life-to-date WITH your current estimated forfeiture rate.
  2. Run an expense report, life-to-date with a ZERO forfeiture rate.
  3. Compare “To Date” (aka cumulative) expense (or, if your report doesn’t give you To Date, add prior and current expense and compare that).

The difference is your true up amount. Yes, it’s that easy. Yes, proving it’s correct is a little harder. More on that later.

Note: If you are using a system that delays the reversal of expense to the VEST DATE, it’s not QUITE this easy, but that is outside the scope of this article.

Why life-to-date?

Can’t I just run the current period report with and without the rate and take the difference in To Date (aka cumulative) Expense. Yes, you SHOULD be able to do that, but your auditors will want to kick the tires on your analysis and having ALL your grants on the report will help them do that. And life-to-date (LTD) should be from your adoption of FAS 123(R) (now known as ASC 718)—January 1, 2006 for many companies—until the end of your most recent reporting period—December 31, 2016 for many companies.

So now how do you tick and tie the numbers to your auditors’ satisfaction?

The approach I’ve used thus far with all my clients that have early adopted or considered adopting is to create a spreadsheet with four tabs:

  1. LTD Expense Report With a Forfeiture Rate
  2. LTD Expense Report Without a Forfeiture rate
  3. Comparison tab
  4. Summary tab

The Comparison tab has one row per grant and indicates the grant date, unvested shares (optional), final vest date and cancel date, if any, for each. It also pulls in expense from tab 1 and tab 2 and compares them in a “Variance” column. Then I add a “Reason” column that categorizes the grants into (generally) three categories:

  • Fully Vested, No Cancellation: These grants should have no expense variance.
  • Cancelled: These grants should have no expense variance (unless you are using True Up at Vest).
  • Still Vesting, No Cancellation: All grants should have higher expense on the Without Forfeiture Rate tab

You could assign these categories by using formulas. I usually use the low-tech method of filtering for a given criteria and then pasting the Reason down through all the rows to which it applies.

On the Summary tab, I summarize the expense totals from both tabs and then use a pivot table to summarize the reasons (or categories) and the associated variances (or lack thereof):

Summary Tab

Thus far no auditors have had an issue with this approach. (Of course, now that I’ve said that, I’ve jinxed myself.) Have at it! And have fun!

Dodge_SqElizabeth is a Principal for Equity Plan Solutions, LLC, providing equity compensation consulting services to companies from startups to large public corporations. Previously, Elizabeth was a consultant and Vice President for Stock & Option Solutions, Inc. and held product management roles in stock plan services at BNY Mellon and ETRADE Corporate Services. Elizabeth became a Certified Equity Professional in 1999 and co-authors the chapter on accounting in The Stock Option Book. She also serves on the Executive Advisory Committee of the National Association of Stock Plan Professionals and was honored with the NASPP Individual Achievement award in 2012. You can contact Elizabeth at

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