Last Friday, ISS issued an updated FAQ for its Equity Plan Scorecard. For most companies, the overall scorecard structure remains unchanged: a max of 100 points and 53 points is a passing grade. For companies disclosing three years of equity data, the points available under each pillar also remain the same, but the scores for each test within the pillars may have been adjusted (ISS doesn’t disclose the number of points each test is worth).
Here’s what ISS is changing for 2016 (effective for shareholder meetings on or after February 1, 2016):
New Company Category
The IPO/Bankruptcy category has been renamed “Special Cases” and includes any companies that have less than three years of disclosed equity grant data. This is still largely newly public companies and companies emerging from bankruptcy, but it could include other companies. For example, if a public company implemented a new stock compensation program in 2016 and had not previously granted any equity awards, they would presumably be in this category (because they wouldn’t have any equity grant data to disclose for prior years).
In addition, the Special Cases category is now divided into S&P 500/Russell 3000 companies and non-Russell 3000 companies. The S&P 500/Russell 3000 companies can earn 15 points for the Grant Practices pillar; to provide these points, their max score for the Plan Cost pillar is reduced by ten points to 50 and their max score for the Plan Features pillar is reduced by five points to 35. Scoring for the non-Russell 3000 companies in this category is the same it was for IPO/Bankruptcy companies last year: 60 points for plan cost, 40 points for plan features, and no points for grant practices.
The “CIC Single Trigger” category under Plan Features is renamed “CIC Equity Vesting” and is a little more complicated (last year it was pass/fail).
For time-based awards:
- Full points for 1) no acceleration, or 2) acceleration only if awards aren’t assumed/substituted
- No points for automatic acceleration of vesting
- Half points for anything else (does this mean half points for a double trigger?)
For performance-based awards:
- Full points for 1) forfeiture/termination, or 2) payout based on target as of CIC, or 3) pro-rata payout
- No points for payout above target (ISS doesn’t say if this applies if performance as of the CIC is above target)
- Half points for anything else
Post-Vest Holding Periods
The period of time required to earn full points for post-vest holding periods increased from 12 months to 36 months (or termination of employment). 12 months (or until ownership guidelines are met) is still worth half credit.
Tags: Equity Plan Scorecard, ISS, post-vest holding, proxy advisors, proxy advisory firm, shareholder approval
It’s that time of the year when attention begins to focus on year-end tax reporting. Sometimes when it comes to tax reporting, the devil is in the details – there are many nuances that need to be monitored and addressed to ensure proper compliance with the tax code. One of those is the IRS’s rule of administrative convenience, which allows companies to delay the collection of FICA taxes on certain transactions until a future date, on or before 12/31. In today’s blog, I’m going to dive into the inner-workings of this rule.
What is the Rule of Administrative Convenience?
The rule of administrative convenience allows FICA withholding for certain transactions to occur by 12/31 of the year of the triggering event. This means that companies can delay the mechanics of actually withholding FICA until the end of the year, when many employees may have already met their annual FICA limit. In this case, no additional FICA withholding for the original transaction would be necessary and the company is off the hook in terms of having to figure out how to collect FICA on the shares. However, if the employee hasn’t met their FICA limit as year end approaches, then an appropriate amount of FICA will still need to be withheld. This is the time of year when the stock plan administrator should evaluate the deferral of any FICA taxes under the Rule, and work with Payroll to ensure any necessary withholding occurs on or before 12/31. I should note that while the focus of most examples of this rule centers around the last possible date – 12/31 – to comply, companies can withhold the deferred FICA on any prior date as well. It’s just that for practical purposes, the “date” slated for collection is often near year-end, since that is a logical point in time when most employees who are going to max on on their FICA withholding for the year would be at that threshold, eliminating the need for any additional FICA withholding for the deferred event.
To What Types of Stock Compensation Does the Rule Apply?
The short answer is that the rule applies only to withholding of FICA on restricted stock units (RSUs). The long answer is below.
Both restricted stock units (RSAs) and restricted stock awards (RSUs) are subject to FICA taxes once the risk of forfeiture no longer exists (this usually occurs at vesting, but could occur be at the time of retirement eligibility – even if unvested). If the shares are not released to the employee at that time (let’s say that vesting will occur in the future, after the retirement eligible date, even though the risk of forfeiture no longer exists), then selling or withholding shares to pay for the FICA withholding is not an option. In these situations, the company must figure out how to withhold FICA (and other) taxes.
RSUs are considered to be a form of non-qualified deferred compensation and, therefore are taxed under a different section of the tax code than restricted stock and non-qualified stock options. This makes them eligible to rely on the Rule of Administrative Convenience.
RSAs are subject to tax under Section 83 of the tax code. As a result, both income taxes and FICA are due when the award is no longer subject to a substantial risk of forfeiture. This also means that the rule of administrative convenience is not available for this type of award.
ESPP and incentive stock option transactions are not subject to withholding or to FICA taxes, so the rule of administrative convenience also does not apply to shares acquired under these instruments.
Using the Rule, What FMV is Used to Calculate FICA?
I see this question come up regularly, usually as we creep towards year-end. This was answered in a recent NASPP webcast “Ask the Experts, Retirement and Retirement Eligibility“:
“The rule of administrative convenience permits an employer to use any date, on or after the award vests (becomes nonforfeitable) but prior to the end of the year, to take the value of the award into account for FICA purposes. This rule of administrative convenience, for example, would allow an employer until December 31st as the date for all employees who vest during the course of the year. Bear in mind that the “taken into account” date will have the benefit, or detriment, of earnings/losses on the award that has become, effectively, deferred compensation. This is because under the nonduplication rule of FICA taxation, once compensation is taken into wages for FICA, further earnings/gains are not treated as FICA wages.”
More on Tax Reporting
Tax reporting can be tricky. The good news is that the NASPP’s upcoming Annual Tax Reporting Webcast
will be on December 1st at 4pm eastern time. Mark your calendars! The webcast is free to NASPP members; non-members can contact email@example.com
for information on how to access the webcast. We’ve got a Sneak Peek
of the webcast available now in our latest podcast episode
Tags: rule of administrative convenience
What does Madonna have to do with the FASB? Well, nothing, except that they both use the term “material,” albeit to refer to different things. The FASB has issued two proposals relating to materiality recently; I read both of them today and now I can’t stop humming “Material Girl” by Madonna. That’s just the way my brain works.
Proposed Amendment to Financial Accounting Concepts
The first proposal would amend Statement of Financial Accounting Concepts No. 8 to remove the definition of materiality originally included therein and instead refer to the legal definition of materiality, as determined through “legislative, executive, or judicial action.” This would cause a misalignment with IFRS, but it seems preferable for the FASB’s definition of materiality to align with other definitions of this term as used in the United States. I’m not sure how significant an impact this change would have on stock compensation, but the FASB notes that IASB’s definition of materiality (which SFAC 8 originally aligned with) “generally would require disclosure of more information than would the legal concept of materiality in the United States.” I guess people outside the United States have a lot more time to read through tedious disclosures.
Proposed Accounting Standards Update
The second proposal would amend ASC 235 (Notes to the Financial Statements) to add a new section titled “Assessing Whether Disclosures Are Material.” This section would clarify that it is permissible to omit disclosures that are immaterial (apparently there has been a fair amount of confusion about this) and that this omission is not an error that must be disclosed to the company’s Audit Committee (there’s no point in omitting a disclosure if you still have to disclose it somewhere else). The amendment would further clarify that the materiality assessment applies to both quantitative and qualitative disclosures and is applied to each disclosure individually as well as in the context of the financial statements as a whole. The proposal states “Preparers…should be evaluating whether the disclosure is material, not the Topic itself.”
I read this to mean that, although overall, ASC 718 might be very material to a company’s financial statements (particularly where a significant portion of employee pay is in the form of equity), specific disclosures that would be otherwise required under ASC 718 can be omitted from the company’s financial statement notes if they are immaterial to that company.
The proposal would also amend each Topic in the Accounting Standards Codification that includes disclosures to refer to Topic 235 and remove any existing phrases that conflict with it. The proposal doesn’t describe how each individual Topic would be amended, but does include an example to generally demonstrate what the amendments might look like. Handily, the proposal uses ASC 718 as the example so I know what language would be changed therein:
- In paragraph 718-10-50-1, the phrase “An entity with one or more share-based payment arrangements shall disclose information” would be changed to “Entities shall provide disclosures required by this Subtopic to the extent material.”
- The phrasing in paragraph 718-10-50-2 that suggests that the disclosures identified in the standard are the minimum necessary would be eliminated. Instead, the new language would suggest that the identified disclosures are merely an example of how companies might satisfy the disclosure objectives of the standard.
Does it make me a nerd that I feel kind of special that, of the 40 Topics in the Codification that need to be amended, we were chosen to be the only example?
I leave you with “‘Cause we are living in a material world and I am a material girl. You know that we are living in a material world…”
Tags: ASC 718, disclosures, footnotes, materiality, stock plan disclosures
Here’s what’s happening at your local NASPP chapter this week:
Connecticut: Takis Makridis and Narine Karakhanyan of Equity Methods present “2015 Stock Compensation Accounting Best Practices.” (Wednesday, November 18, 8:30 AM)
Phoenix: The chapter hosts its annual holiday reception at Culinary Dropout/The Yard. There will be delicious food, fun, and prizes! (Wednesday, November 18, 4:00 PM)
Chicago: Mike Kesner of Deloitte presents “Pay for Performance–A New Way to Look at Pay?” (Thursday, November 19, 7:30 AM)
NY/NJ: Takis Makrids and Raenelle James of Equity Methods present “Stock Compensation Accounting Best Practices” (Tuesday, November 19, 8:30 AM)
San Francisco: Lunch and two sessions! Jon Doyle of International Law Solutions presents “Global Hot Spots: Where the Rubber Meets the Road” and Kathy Huston of Group Five presents “What are Plan Sponsors Saying About Service Providers.”
Tags: NASPP chapter meetings
There’s been a theme emerging in some of my recent blogs, covering a wave of companies finding creative ways to expand their equity compensation pool. Last week I talked about the move of Twitter’s CEO to give his own stock back to the company for use in the equity plans. Shortly before that, Apple announced it was giving RSUs to all employees. It seems more and more companies are trying to find ways to expand the equity offering to employees. It seems the Wall Street Journal has also taken notice of some of these efforts. In a recent article (Do Workers Want Shares or Cash?, October 27, 2015), the WSJ explored what do workers really want – stock or cash? The conclusion of the article seemed to be that stock is a tough sell. I’m not sure I fully agree. So in today’s blog, we’ll explore what’s on top? Shares or cash?
Value is in the Eye of the Beholder
Before I answer the question, we need to revisit the concept of perceived value. This, in my opinion, remains a widely underestimated component of truly comparing the merits of receiving cash over stock or vice versa. From the WSJ article, I gleaned some phrases that tell me that there is work to be done in elevating the perceived value of the equity plan. I read things like: [Employee X] “says his shares didn’t make him more likely to stay in his $60,000-a-year job, in part because he was unsure what his stake was worth.” Or, “‘Is this money real and am I really going to get it?’”
On the flip side, and I don’t have data to support it (someone should look into this!), there seem to be companies that have established, on a broad basis, that equity compensation has value – to the point where employees at all levels are requesting more of it. Interestingly, many of these companies offered broad based grants from the point of new hire. Do companies that offer broad based equity from hire do better at upping the perceived value of stock compensation? It’s hard to tell. Perhaps those companies are also more engaged in education and communication, two critical factors in raising the perceived value of equity awards.
From the WSJ article:
At MediaMath, a marketing software company, all employees—including customer-service reps and receptionists—are given stock options designed to equal the amount of their starting salary at the time the shares fully vest. Employees at all levels have requested more equity, and the company recently rolled out new performance incentives that include options.
“We would rather not have the haves and the have-nots,” chief people officer Peter Phelan says. The company is considering an IPO at some point in the future, a move that could bring windfalls for workers.
Online lender Avant Inc. is in the process of implementing policies giving hourly employees the chance to receive equity when they join the company as well as additional grants as part of an annual incentive program. Before, hourly employees were excluded from equity compensation. CEO Al Goldstein says he thinks it will take time before employees trust the perk is meaningful.
“I don’t think it’s a magical thing that happens right away,” he says. Of Avant employees who currently get equity, just 1% have left the company, according to Mr. Goldstein.
Which Wins? Cash or Stock?
Not all companies are valued the same, not all companies have the same stock growth potential, and stock compensation is not necessarily easy to understand if left to the employee to figure it out. For employees who are muddling through those considerations, stock can be a tough sell. Most people don’t want to give up cash to take on something they don’t understand. I think that’s where the key to answering the cash vs. stock question lies – it’s not necessarily that employees want only cash; I think in many cases they want both: cash and incentive compensation that they can understand and value.
Certainly cash may not be the top choice for every scenario. The same goes for stock. I think stock can absolutely be an easy sell to employees…if they are given the tools to appreciate what it means. Ultimately, companies need to pursue what works best for their employee demographics. For companies that are considering more broadly expanding equity programs in lieu of cash incentives, a key focus in mapping a strategic plan should include how to educate employees and raise the perception of the value of the award. And, to the point of one CEO mentioned above, if a company is expanding equity to a broader base of employees, it may take time for the employees to build up that perception of value. It may not magically happen overnight, but with a focus on supporting employees in their understanding and lots of persistence, companies can get there. So in my biased opinion, stock wins. After all, didn’t the turtle win the race?
As followers of this blog know, the FASB recently issued an exposure draft proposing amendments to ASC 718 (see “It’s Here! The FASB’s Amendments to ASC 718,” June 9, 2015). In today’s blog, I take a look at common themes in the comment letters on the exposure draft.
A Lot Less Controversial
The FASB received just under 70 comment letters on the exposure draft, making this proposal far less controversial than FAS 123 or FAS 123(R) (by contrast, the FASB heard from close to 14,000 commenters on FAS 123(R)). In general, the letters are supportive of the proposed amendments.
Opposition to Proposed Tax Accounting
The area of most controversy under the exposure draft is the proposal to require all tax effects (both excess deductions and shortfalls) to be recognized in the income statement. Virtually all of the letters submitted mention this issue and this was the only issue that a number of letters address. A little over 70% of the letters oppose the FASB proposal. About half of the letters suggest that all excess deductions and shortfalls should be recognized in paid-in capital, instead of in earnings.
Many commenters mention the volatility the proposed approach would create in the P&L and express concern that this would be confusing to the users of financial statements. This is the argument we made in the NASPP’s comment letter (see “The NASPP’s Comment Letter,” August 18).
Here are a few other arguments in opposition of the FASB’s proposal that I find compelling (and wish I had thought of):
- Several commenters refer to the FASB’s own analysis (in the Basis for Conclusions in FAS 123(R)) that stock awards comprise two transactions: (i) a compensatory transaction at grant and (ii) an equity transaction that occurs when the award is settled. They point out that it is inconsistent to recognize the tax effects of the second transaction in income when the transaction itself is recognized in equity.
- Several commenters point out that the increase or decrease in value between the grant date and settlement is not recognized in income, therefore it would be inconsistent to recognize the tax effects of this change in value in income.
- One commenter points out that this would merely shift the administrative burden from tracking the APIC pool to forecasting the impact of stock price movements on the company’s earnings estimates, negating any hoped for simplification in the application of the standard.
The comment letters overwhelming support the proposal to expand the exception to liability accounting for share withholding. Several letters point out what appears to be an inconsistency in the language used to amend the standard with the FASB’s described intentions. While the FASB indicated in its discussion of the exposure draft that it intended to permit share withholding up to the maximum individual tax rate in the applicable jurisdiction, the proposed languages refers to the individual’s maximum tax rate. Also, the exposure draft appears to have inadvertently excluded payroll taxes from the tax rate. Hopefully these are minor issues that will be addressed in the final update.
One commenter suggests that, for mobile employees, companies should also be allowed to consider hypothetical tax rates that might apply to individuals under the company’s tax equalization policy for purposes of determining the maximum withholding rate.
While the letters also were very supportive of the proposal to allow companies to choose to recognize forfeitures as they occur, I was surprised to find that a couple of letters suggested that companies should be required to recognize forfeitures as they occur.
The comment period ended on August 14, so the FASB has had close to two months to consider the comments. I heard a rumor at the NASPP Conference that the Board will discuss them at one of its November meetings but I haven’t seen anything on this in the FASB Action Alerts yet. I expect that we won’t see the final amendments until next year. Given the controversy of the tax accounting proposal, possibly late next year.
Tags: ASC 718, ASU, expected forfeitures, Exposure Draft, FAS123(R), FASB, forfeitures, liability treatment, share withholding, tax accounting
First off, I must say that I was thrilled to see so many of you last week in sunny San Diego (and boy, was it sunny in a perfect kind of way) at our 23rd Annual Conference. The Conference was a wild success and our members helped make it so. Shortly before the Conference, several news outlets carried the story of Twitter’s CEO returning a significant number of his own shares of stock to the Company for use in employee equity programs. There wasn’t time to cover it then, but I wanted to take a moment to share the story now.
In the latter part of October, Twitter CEO Jack Dorsey tweeted (of course!) that he was giving one-third (wow!) of his own shares of Twitter stock, 1% of the Company, to the organization for use in the Company’s equity pool. The value of those shares is estimated to be $200 million. While the return of stock to a company from a CEO or founder is not unprecedented, the size of Dorsey’s stock contribution marks new territory. I am hard pressed to find a CEO that has surpassed that figure.
A Way to Avoid Dilution?
Mr. Dorsey’s gift seems to be a win on multiple fronts. It’s bound to boost employee morale, since the shares are going straight to the Company’s equity pool and will be used to incentivize employees. Shareholders are likely to be happy, since the shares will reward employees without affecting the Company’s dilution figures. And, CEO Dorsey seems excited about it, tweeting “I’d rather have a smaller part of something big than a bigger part of something small.” It can’t hurt that his other company, Square, recently filed for their IPO. Forbes highlights that in an earlier, similar move, Dorsey also returned 20% of his stake in Square to employees as well.
A New Trend?
The question now becomes, will other CEOs follow suit? According to the Washington Post, Dorsey isn’t the first CEO to give shares back to employees. In their coverage of this story, they shared that “The chief executive of a Turkish food delivery company paid out $27 million to 114 employees this summer after selling the firm. In July, Bobby Frist, the nephew of former U.S. Senate Majority Leader Bill Frist, gave $1.5 million of his own shares to 600 employees of the Nashville-based health care company he runs. Dan Price, the founder of Seattle-based Gravity Payments, made headlines for using his $1 million salary (as well as company profits) to fund raises for every employee in his company to at least $70,000. In 2013, Lenovo CEO Yang Yuanqing gave $3.25 million of his $4.23 million bonus to hourly employees.” The noticeable difference in Twitter’s case is the size of the gift – shares valued at $200 million – a huge step above the other recorded cases. I’m guessing that a gift of Dorsey’s magnitude is probably not going to start a wave of similar actions (though it certainly would be nice if it did). For one thing, not all CEOs have such a wealth of stock from which to pull such a sizable donation. Founder CEOs (or simply founders) may have the advantage here, as they are often likely to have a larger stake in the company than subsequent CEOs – which makes them more able to give away a large number of shares without making much of a dent in their own personal fortune. CEO Dorsey is a billionaire, so this is a smaller drop in the bucket for him. However, the gift is not likely to be small potatoes to the employees who will benefit from receiving stock awards.
Time will tell if Mr. Dorsey’s generosity and smart thinking (giving employees more equity without increasing dilution) inspires other founders or CEOs to take similar action.
Tags: Gift, stock gift, Twitter
The Social Security Administration has announced that the maximum wages subject to Social Security will remain at $118,500 for 2016. The rate will remain at 6.2% (changing the tax rate requires an act of Congress, literally), so the maximum Social Security withholding for the year will remain at $7,347.
As noted in the SSA’s press release, increases in the Social Security wage cap are tied to the increase in inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. The Bureau of Labor Statistics found no increase in inflation over the past year based on this index, so there are no cost of living adjustments to Social Security benefits or the wage cap.
For those of you keeping score, the last time the Social Security wage base remained the same for a two years in a row was 2010 to 2011 (see “Social Security Wage Base Will Not Increase for 2011“), but in that year the Social Security tax rate was temporarily reduced.
A few other things that currently are not scheduled to change for next year:
- The Medicare tax rates remain the same and there’s still no cap on Medicare. The wage threshold at which the additional Medicare tax must be withheld is still $200,000.
- The flat supplemental rate is still 25% and the maximum individual tax rate is still 39.6%.
- The threshold at which supplemental wages become subject to withholding at the maximum individual tax rate is still $1,000,000.
- The compensation threshold at which an employee is considered highly compensated for purposes of Section 423 will remain $120,000.
Note that all of the above items can be changed by Congress and Congress has been known to sometimes make changes to next year’s tax rates very late in the year (e.g., see the 2011 alert noted above). But as things stand now, you have one less thing to worry about on your year-end checklist (but don’t forget that you still need to reset year-to-date wages/withholding back to $0 after December 31).
Tags: highly compensated, IRS, medicare, social security, tax withholding, withholding, year-end
The 23rd Annual NASPP Conference is in full swing! For today’s blog entry, I have a few scenes from the first full day of the Conference.
The Conference began with a rousing round of Family Feud–NASPP Style.
Attendees consult with experts in the Ask the Experts booth.
A moment of levity on the panel, “Navigating ISS & Glass Lewis.”
Sara Shoaf, president of the Phoenix chapter, and Kimberly Steele, officer of the Austin chapter, share tips on running an NASPP chapter during the Chapter Presidents’ Luncheon.
Jon Doyle of International Law Solutions, Bob Hartley of Square, and Wendy Jennings of AppDynamics discuss strategies for extending stock compensation to overseas employees.
Tags: NASPP Conference
The 23rd Annual NASPP Conference is in full swing! For today’s blog entry, I have a few pics from the Gala Opening Reception on Tuesday.
The talk of the reception was the entertainment provided by Phat Strad. Direct from the Las Vegas strip, Phat Strad is America’s original female rock electric string quartet.
Has it really been 40 years? Yes it has; the first issue of The Corporate Counsel premiered in 1975. In celebration of its 40th anniversary, The Corporate Counsel sponsored the reception.
Aon Hewitt’s pig races are always a popular attraction at the NASPP Conference. Heidi Thomerson of Alaska Communications Systems demonstrates that cheering for your pig is a key strategy for winning.
Charles Schwab is giving away t-shirts, screen-printed while you wait in their booth. Wend Jennings of AppDynamics waits for her shirt.
The CEP Institute says “Don’t monkey around with equity compensation.” Win their raffle and you go home with a larger than life-sized stuffed monkey (you might have to buy it its own seat on the plane).
It’s not all fun and games. Jon Doyle of International Law Solutions discusses the complexities of global stock plans with a Conference attendee.
The opening reception also include a green screen photo opp, with props and your choice of backdrops. Jenn Namazi, Kathleen Cleary, Barbara Baksa, and Brian Stovall of the NASPP take a moment out of networking to pose for a fun photo.
Tags: NASPP Conference