The NASPP Blog

January 18, 2017

Amending Share Withholding Provisions

As most of my readers know, the FASB has amended ASC 718 to expand the exception to liability treatment that applies to shares withheld to cover taxes to include withholding up to the maximum individual tax rate. This has led many companies to consider changing their tax withholding practices for stock compensation.

Plan Amendment Likely Necessary

As noted in my blog entry “Getting Ready for the New Share Withholding” (May 5, 2016), companies that are interested in taking advantage of the expanded exception face an obstacle in that virtually all stock plans include a prohibition on using shares to cover taxes in excess of the minimally required statutory withholding. Where companies want to allow shares to be withheld for tax payments in excess of this amount, the plan must first be amended to allow this.

Shareholder Approval Not Necessary

In the aforementioned blog entry, I had noted that it wasn’t clear if shareholder approval would be required for the plan amendment, particularly if the shares withheld will be recycled back into the plan. I have good news on this question: both the NYSE and Nasdaq have amended their shareholder approval FAQs to clarify that this amendment does not require shareholder approval, even if the shares will be recycled.

Here are the updated FAQs:

  • NYSE (Question C-1, pg 5)
  • Nasdaq (ID number 1269, it should be the last question on the second page. Or do a keyword search for the word “withholding” and the relevant FAQ should come right up.)

For a while, there was still a question as to whether the NYSE required shareholder approval when shares withheld from restricted stock awards would be recycled. In late December, John Roe of ISS arranged for the two of us to meet with John Carey, the ‎Senior Director at NYSE Regulation, to get clarification on this. Just prior to our meeting, the NYSE updated their FAQs to clarify that shareholder approval is not required even in the case of share withholding for restricted stock awards, even when the shares will be recycled.

ISS Still Not a Fan of Share Recycling

It should come as no surprise that, where the withheld shares will be recycled, ISS isn’t a fan of amendments to allow shares to be withheld for excess tax payments. Now that it’s clear shareholder approval isn’t required for the amendment, this likely isn’t a significant concern for most companies, unless they are submitting their plan for shareholder approval for some other reason. It isn’t a deal-breaker, but it could enter into ISS’s qualitative assessment of the plan. This would particularly be an issue if ISS’s recommendation is tied to more than the plan’s EPSC score.

Not a Modification for Accounting Purposes

There also has been some question as to whether the amendment would be considered a modification for accounting purposes if applied to outstanding awards.  Based on the FASB’s recent exposure draft to amend the definition of a modification under ASC 718 (see “ASC 718 Gets Even Simpler,” November 22, 2016), the FASB doesn’t seem to think modification accounting is necessary. The comment period on the exposure draft ended on January 6.  There was little opposition to the FASB’s position: only 14 comment letters were received, one letter clearly opposed the change, 12 supported the change, and one was “not opposed” but not enthusiastic. Given that response, hopefully the FASB will finalize the proposed update quickly so that this question is settled.

– Barbara


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January 11, 2017

Form 3922 Gets an Upgrade

Here we are again at the start of another season of Section 6039 filings. Nothing much has changed with respect to Section 6039 filings in recent years, so imagine my surprise when I learned that the IRS had updated Form 3922.

Form 3922 Grows Up

As it turns out, the only update to the form is that it has been turned into a fill-in form. If you are planning on submitting paper filings, this allows the form to be filled in using Adobe Acrobat, so you don’t have to scare up a typewriter or practice your handwriting. I haven’t owned a typewriter since college and even I can’t read my handwriting, so I am a big fan of fill-in forms.

Unfortunately, this is just about the least helpful improvement to the forms that the IRS could make. Form 3922 is for ESPP transactions. ESPPs tend to be offered by publicly held companies with well over 250 employees.  Chance are, if a company has to file Form 3922, the company has more than 250 returns to file (less than 250 ESPP participants is probably a pretty dismal participation rate for most ESPP sponsors) and the returns have to be filed electronically. The fill-in feature doesn’t impact the electronic filing procedures; it is only helpful for paper filings.

It would have been more helpful if the IRS had made Form 3921 a fill-in form. Given the declining interest in ISOs (only around 10% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant ISOs), companies are more likely to be filing this form on paper.  The IRS notes, however, that it selected Form 3922 to be made into a fill-in form because they receive so few filings of it on paper. I guess the IRS’s goal was to appear helpful but not actually be helpful. Your tax dollars at work.

A Fill-In Form Isn’t As Helpful As You Think, Anyway

As it turns out, having a fill-in form may not be that helpful, anyway. I was thinking you could fill in the form, save it, and then email it to the IRS but it doesn’t seem like this is the case.  No, even if you fill it in using Adobe Acrobat, you still have to print it out and mail it to the IRS. And the requirements for printing the form out still include phrases like “optical character recognition A font,” “non-reflective carbon-based ink,” and “principally bleached chemical wood pulp.” I think this means that you have to print the form on white paper, using black ink that isn’t too shiny, and using the standard fonts in the fill-in form. But I’m not entirely sure.

What About Form 3921?

When I first saw that Form 3922 is now fill-in-able, I assumed, perhaps naively, that a fill-in Form 3921, which would truly be useful, would be available any day. But that was back in September and still no update to Form 3921. Upon reflection, especially given the IRS’s statement about why this honor was bestowed upon Form 3922, I think I may have been overly optimistic.

More Information about Section 6039 Filings

For more information on Section 6039 Filings, check out the NASPP Alert “Reminder: ISO and ESPP Information Returns and Statements.”

Thanks to Diana Woods of Fenwick & West for bringing the updated form to my attention.

– Barbara

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January 5, 2017

And the Winner is…

Happy New Year! It’s that time of the (new) year again where we offer up congrats for our annual Question of the Week contest. 


Question of the Week Winner!

The winner is of our 2016 Question of the Week contest is (drum roll!): DMekwunye (who, by the way, placed 2nd in our 2015 contest and has landed in the top 3 scorers for at least three years in a row now). For those of you who are asking “What’s the Question of the Week Contest?“, it’s a weekly quiz challenge designed for stock plan professionals to test their know-how in a variety of areas, while competing against their peers. Hone your equity compensation knowledge while having fun at the same time! There’s a new question each week, and a correct answer earns points.

And the Winners Are…

A big congrats to screen name alias DMekwunye for coming out on top of our 2016 contest. Since she uses her real name as her screen name and she’s been one of our most dedicated Question of the Week competitors for years, I’m going to reveal her full name – De Anna Mekwunye of Wind River Systems. Congrats De Anna!

The screen names of the top 5 scorers for the 2016 contest are:

  • 1st – DMekwunye (420 points)
  • 2nd – mamaandmore (410 points – tie with Sunny Days)
  • 2nd – Sunny Days (410 points – tie with mamaandmore)
  • 4th – All About Equity (390 points)
  • 5th – SMKS (380 points)


What’s in a Name?

Your play is tracked by your screen name – so you can be as anonymous or transparent in your game playing as you like. It’s become an annual tradition for me to highlight some of the fun, intriguing and perplexing screen names each year. In 2016, once again it seems nothing was off limits, from the range of “equity” and “stock” possibilities (Equity for Dummies, Stock Plan Warrior, Equity Gamer, StockFiddler, CEP III 2003 & 2011) to the mythical (unicorn6872) to the humble (Will Give It A Go, Guessing) to those who tell it like it is (Ace1, Sure, winningduck, TestMe, Lucky13). Finally there were a few that would probably require a happy hour and some time to explain (Jane Jetson, bagelbert, Amateur Lurker, woohoo, and PeabodyMarble).

Work Hard, Play Hard

We’ve just reset scores and this week’s challenge starts a whole new contest, so this is the perfect time for NASPP members to sign up, create your screen alias and jump into the Question of the Week Contest. We leave all of January’s questions active for the entire month, so you have plenty of time to complete the first quizzes of the new game.

I wish all of you an incredible 2017!


January 4, 2017

Yet Another EDGAR Security Protocol

The SEC has announced an update to the process used to generate a new EDGAR passphrase. In anticipation of this, now would be a good time to make sure your email address is correct (and the email addresses for all of your Section 16 insiders) in the EDGAR system.

What Is a Passphrase and How Is It Different from a Password or a Password Modification Authorization Code (PMAC)?

The EDGAR system has a ridiculous number of password-type codes assigned to each individual user.  You probably only need one password to access your bank account, but EDGAR assigns four password-type codes to each user.  And, even with that shockingly complex security protocol, it’s still possible to submit fake EDGAR filings.

Your passphrase is used to generate a completely new set of EDGAR codes (CCC, password, and PMAC). You do this when you are first assigned a CIK (because you won’t have any of the other codes yet). It’s also the only way to generate a new password if you’ve forgotten yours.

What Is the New Process?

The problem with having to use your passphrase to generate a new password (and CCC) is that if you’ve forgotten your password, you’ve probably also forgotten your passphrase. In which case, you have to request a new passphrase before you can generate a new password.

Previously, to generate a new passphrase, you completed the online request form and submitted a new notarized Form ID to the SEC (for a more detailed, somewhat humorous explanation of this, see “My EDGAR Nightmare“).  Now, you’ll also have to provide an “electronic security token” with your request.  The electronic security token will be emailed to you by EDGAR at the time you make the request to change your passphrase. This is why it is important to make sure your email address is correct; if the EDGAR system doesn’t have your correct email address, you won’t get the email with your electronic security token and you’ll have to go through some sort of manual review to get your passphrase updated, which could take more than two days (and I’m sure you all understand the significance of process that takes longer than two days in the EDGAR context).

What Exactly Is an Electronic Security Token?

Got me. Since EDGAR is emailing it to you, my guess is that it is some sort of code that you enter into the EDGAR website, but it could also be a link in the email that you have to click.

Will Form ID Still Be Required to Change a Passphrase?

No idea on this either. The announcement from the SEC did not include a lot of information.

When Is the New Process Going Into Effect?

The SEC announcement, which was issued on December 12, says “soon.” When dealing with the government, “soon” often is later than you might expect but I still wouldn’t wait to make sure your and your insiders’ email addresses are correct.

Thanks to Tami Bohm of Radian Group for reminding me to blog about this.

– Barbara

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December 28, 2016

Memory Lane (AKA My Filing Cabinets Are a Fire Hazard)

Since it is a holiday week, my blog entry for today is on the lighter side.  I recently acquired a new file cabinet, which gave me occasion to reorganize some of my files. While going through some of them, I came across some old documents which I found interesting. I thought some of my readers might find them interesting as well.

20161227_135519_resizedA page from a 1994 ShareData newsletter; the entire issue is focused on fighting FAS 123. It includes information on the Coalition for American Equity Expansion, formed to oppose the standard; discussion of the Equity Expansion Act, which would have required the SEC to maintain the then-current accounting treatment of options (including lists of companies and representatives supporting the Act); point-by-point rejection of the FASB’s proposal; and an FAQ on something called “performance stock options,” which were a type of qualified stock option included in Equity Expansion Act. Ah, those were the days.

20161227_153816_resizedFor years, we worried that ISO and ESPP disqualifying dispositions were subject to withholding (and that purchases in these plans were subject to FICA). Here are two articles on this topic that appeared in the The Tax Journal, published in 1990 and 1995. The matter wasn’t resolved until passage of the American Jobs Creation Act in 2005 (in case you aren’t sure, withholding isn’t required).

20161123_135741_resizedI have been looking for this form for at least ten years. It is a form companies can ask employees to complete to attest that they included income on their tax return. It can be used to potentially mitigate the penalties the company would otherwise be subject to for failing to withhold taxes. I couldn’t remember the name or number of the form, so I couldn’t find it on the IRS website; I should have known to check my own files because I save everything. I had ten copies of it at the back of my “Taxation – General” file (as opposed to the 12 other tax-related files that I have).

20161123_135803_resizedThe Taxpayer Relief Act of 1997 was a big deal when it was enacted–who remembers what it did? While we’re at it, who remembers PaineWebber and whatever happened to it?

Answer:  The Taxpayer Relief Act of 1997 reduced the long-term capital gains rate from 28% to 20%. PaineWebber was acquired by UBS in 2000. My files are filled with articles from companies that no longer exist.

20161227_153253_resizedRemember when all companies were going to adopt transferable stock option programs? I do. In fact, I have a whole, albeit relatively thin, file folder on it. So if it ever happens, I’m ready (did I mention that I save everything, forever).

20161123_141335_resizedKaylee the Cat helped me sort through my to-be-filed pile. Here she reviews handouts from recent presentations to determine what category they should be filed under. I guess the thought of mobility compliance has made her a bit wistful.

I hope you all are enjoying the holiday season and that you have a fabulous new year! May all your files be well-organized and your file cabinet drawers open with ease.

– Barbara

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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December 15, 2016

CEO Pay Ratio: Unexpected Side Effects?

While the future of several of the Dodd-Frank provisions appears uncertain as our nation changes leadership in the coming year, there are some interesting side affects currently surfacing as public companies are still on a trajectory to disclose their CEO pay ratio (relative to that of the median employee) in 2018 (reporting on 2017 fiscal year compensation).

In a blog by Ning Chiu of Davis Polk titled “Pay Ratio Rule Leads to Local Tax Increases,” (also quoted in the blog this week), Chiu describes recent city and state level legislation (and proposed legislation) that tax businesses in their jurisdictions based on the CEO pay ratio. For example, the city of Portland, OR recently adopted a surtax based on the CEO pay ratio disclosure—the larger the gap between CEO and median employee pay, the higher the tax. As Chiu describes:

“…the city of Portland, Oregon, recently passed an ordinance authorizing a surtax to the city’s business license tax for public companies doing business in Portland based on their pay ratio disclosure.

In addition to the current 2.2% business license tax, a surtax of 10% of base tax liability will be imposed once the disclosure is effective if a company reports a pay ratio of at least 100:1 but less than 250:1. Companies with pay ratios exceeding 250:1 will face a surtax of 25%.

There are currently at least 545 publicly traded companies subject to this tax in Portland, with collective revenue of $17.9 million. The new surtax is projected to bring in annual tax revenue of between $2.5 to $3.5 million, and will be used to partly fund a city office devoted to homeless services.”

It has also been reported that attempts to explore or implement new taxes tied to CEO pay ratio, or conversely to provide incentives to companies with lower pay ratios, have also been proposed or considered in states such as California, Rhode Island and Massachusetts. It appears the CEO pay ratio disclosure is on the local radars (state and city jurisdiction level) and it could be only a matter of time before more of them follow the path of Portland in implementing surtaxes tied to the disclosure.

As companies continue their conversations around these disclosures, it may be prudent to include some of the peripheral and unexpected side affects that could result from a higher than desired pay ratio. In the past we’ve discussed concerns around the optics of the ratio to shareholders and internal employees, but now it looks like the tax offices are watching this matter closely as well. What other peripheral effects will be tied to the pay ratio disclosure? Will it be repealed entirely? These are all questions that will begin to take shape in the coming months. Don’t forget to renew your NASPP membership so that you stay current on these developments and more in the New Year.


December 14, 2016

Correction: Other ISS Policy Amendments

In my blog entry this week titled “Other ISS Policy Amendments,” I said that ISS no longer permits the 5% carve-out with respect to minimum vesting requirements. This statement was not correct.  ISS will still permit up to 5% of shares granted under a stock plan to vest quicker than required under the plan’s minimum vesting requirements. I apologize for my error and any confusion it created; I have corrected my original entry.

– Barbara

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December 13, 2016

Other ISS Policy Amendments

On November 29, I discussed ISS’s amendments related to dividends paid on awards (ISS Targets Dividends on Unvested Awards), but that’s not the only amendment to their 2017 Proxy Voting Guidelines that impacts stock compensation programs.  For today’s blog entry, I discuss the other amendments.

Minimum Vesting Requirements

The plan must specify a minimum vesting period of one year for all awards to receive full points for this test under the Equity Plan Scorecard.  In addition, no points will be earned if the plan allows individual award agreements to reduce or eliminate this vesting requirement (note, however, that ISS still permits an exception for up to 5% of shares awarded).

Anyone who listened to my podcast “Five Things Barbara Baksa Learned About the ISS Equity Plan Scorecard” knows that I’m not a fan of this test in the EPSC because I’m convinced it is just a compliance disaster waiting to happen.  And now that the plan can’t allow any exceptions to it all, I like it even less.

Plan Amendments

Although ISS didn’t deem this change significant enough to include it in the Executive Summary, the policy with respect to how plan amendments are evaluated has also been updated. For most types of substantive amendments (i.e., amendments that aren’t purely administrative or that aren’t solely for purposes of Section 162(m)), the plan will be reevaluated under the EPSC and ISS will assess the amendments on a qualitative basis.

It isn’t clear to me why the EPSC isn’t enough by itself (since it would be enough for a new plan).  Apparently ISS just doesn’t like some stuff that companies do with their equity plans and they want to be able to recommend that shareholders vote against amendments that would add those features to your plan, even if they would be allowed under the EPSC.

Where private companies are submitting a plan to shareholders for the first time, the plan will have to pass the EPSC even if no new shares are being requested (e.g., if the plan is submitted solely for Section 162(m) purposes) and ISS will make a qualitative assessment of any amendments.

– Barbara

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December 12, 2016

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

KS/MO:  The chapter hosts a holiday luncheon, featuring highlights from the 2016 NASPP Conference, planning for chapter meetings in 2017, and discussion of current hot topics. (Tuesday, December 13, 11:30 AM)

Connecticut: Daniel Kapinos and Kate Hall of Aon Hewitt present “Are you Feeling Crazy Yet? The Ever Changing Environment Thanks to Regulatory Updates.” (Thursday, December 15, 10:00 AM)

NY/NJ: The chapter presents a recap of two sessions from the 2016 NASPP Conference: “Our Company Is in Play: What to Do Before and After the Transaction” and “What the Board Giveth, the Clawback May Taketh Away.”  (Thursday, December 15, 8:30 AM)

San Fernando Valley: Paul Gladman of Deloitte Tax presents “A Global Perspective On Contingent Workers.” (Thursday, December 15, 11:30 AM)