The NASPP Blog

February 4, 2016

Speculating About 10b5-1 Plans

Last week’s news that the CEO of Telsa Motors, Elon Musk, had exercised stock options with an estimated value of $100 million spread like wildfire. Picked up by the national news outlets – the news was well covered. It’s not every day that a CEO exercises $100M worth of stock options and pays cash for the taxes (yes, the company confirmed he paid cash for his taxes). This was a cash exercise with no sale involved. As I read several articles on this transaction, I realized there is still much taken for granted when an executive transacts in the company’s stock. I’ll cover highlight some of those areas in today’s blog.

The article that caught my rapid attention was Forbes’ “Elon Musk Exercising Stock Options Could Mean Tesla Will Disappoint Next Week.” Now, before I get too far down this path, I have to say I know nothing about Tesla’s inner-workings and nothing about their earnings. So anything I am saying IS pure speculation. The title of the article got me interested, though. I mean could the exercise of stock options really, single handedly foreshadow less than stellar earnings? If I had to dissect that assumption, my own thoughts went to something far more benign – I mean, what if the CEO had a 10b5-1 plan (after all, these options that were exercised were scheduled to expire in December 2016) that was merely acting on autopilot in an attempt to exercise these stock options before they expire? I have no idea whether Tesla’s CEO has a 10b5-1 plan or not. According to Tesla’s proxy statement, 3 officers do have 10b5-1 plans. And, according to the NASPP’s 2014 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte, of the companies that do allow (but not require) 10b5-1 plans for insiders, 62% of CEOs of those companies were using the plans.  Is it possible? Yes, it is. Do we know? No, we do not. That’s not even the point, though.

What does a 10b5-1 plan have to do with things taken for granted? These plans got some negative publicity a couple of years ago when the SEC looked into whether or not the plans, in principle, were being abused. There were some situations where it appeared that 10b5-1 transactions were well-timed around negative news – as in the company may have delayed or accelerated the timing of that news around the planned transactions. Nothing much ever happened from that speculation, and, for the most part, I’d venture to say these plans are not being abused. Rather, this type of plan works fairly well if used as intended, especially in aiding executives and other insiders to put distance between their decision making about their shares and the execution of those transactions. What worries me is that the possibility of a 10b5-1 plan’s existence still often seems to be overlooked when the media casts the spotlight onto these larger, high profile transactions. Not all of it is their fault, though. There is no present requirement for the existence of a 10b5-1 plan to be disclosed. Some companies voluntarily disclose the existence of plans and subsequently footnote their Form 4s noting transactions that occurred pursuant to a trading plan. Without disclosure, the media remains unaware that the executive may be operating under one of these plans. Does disclosure need to happen? The law firm of Morrison and Foerster summarized that consideration in an FAQ on 10b5-1 plans:

Should a Rule 10b5-1 plan be publicly announced?
A public announcement by any person of the adoption of a Rule 10b5-1 plan is not required. A company may choose to disclose the existence of certain Rule 10b5-1 plans in order to reduce the negative public perception of insider stock transactions. A company making such disclosu
re generally will disclose the existence of a plan but not the specific details. Typically, the disclosure will be for executive officers, directors, and 10%
shareholders required to file ownership forms under Section 16(a) of the Exchange Act (that is, Forms 3, 4,and 5). A company can choose whether to announce the existence of a Rule 10b5-1 plan by a press release followed by a Form 8-K or solely by a Form 8-K. The applicable Form 8-K item is Item 8.01, although Item 7.01 may be used under appropriate circumstances.
If a company decides to publicly announce the adoption of a Rule 10b5-1 plan, it is advisable to publicly announce changes to or termination of such plan as well. Under the Dodd-Frank Act, the SEC is required to implement a regulation prescribing disclosure by reporting issuers of their hedging policies. The proposed rule, if it becomes final in its current form, may result in more companies disclosing the existence of trading programs of executive officers.
While we await final hedging rules from the SEC, companies may consider proactively looking at their 10b5-1 disclosures and the potential positive potential such disclosures could have on mitigating public perception of their executive transactions. Disclosing the existence of a plan and attributing transactions related to an automatic plan in a Form 4 footnote may go miles in helping to ease some of the rampant speculation around transactions that could occur absent this information.
We won’t know anytime soon if CEO was operating under a 10b5-1 plan when he exercised his stock options, but if he did, a footnote on the Form 4 could have alleviated some of the speculation about the timing of the transaction and its relationship to earnings and other important company events.
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February 3, 2016

NASPP To Do List

Submit a Speaking Proposal for the 24th Annual NASPP Conference
The NASPP is now accepting speaking proposals for the 24th Annual NASPP Conference. Proposals can be submitted online and will be accepted through Friday, February 26.

Tip #1 to Submit a Success Speaking Proposal:  Many Egg and Many Baskets
Don’t put all your eggs in one basket.  Smart submitters know that the more proposals they are on, the more likely they will get to speak at the NASPP Conference.  Each company can submit up to three proposals and can be included in proposals submitted by other speakers.  Don’t wait to be invited; proactively reach out to your network now to let your colleagues know that you are interested in speaking and would be happy to join them on any proposals where you have something to add.   Note, however, that individual speakers can participate in no more than two panels and firms can be represented on no more than six panels; if you are included on proposals in excess of this number that we have designated for acceptance, we will ask you to step down from a panel(s).

Check out ten more tips for submitting a successful proposal.

CEP Institute Seeks Public Comments on GPS
The CEP is asking for people to submit comments on its newly revised GPS|Stock Options document. The GPS series provides unbiased, university based research to address risk assessment and identify best practices for the equity compensation community.  Review the Stock Options draft today.

NASPP To Do List
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February 2, 2016

162(m) Trap for Smaller Reporting Companies

A recent IRS Chief Counsel Memorandum indicates that smaller reporting companies must treat their CFO as a covered employee under Section 162(m) if he/she is one of the top two highest paid executives other than the CEO.

Wait a Minute! The CFO Isn’t Subject to 162(m)?

Yep, that’s right. For larger reporting companies, it may seem crazy, but the CFO isn’t ever a covered employee under Section 162(m). This is because the definition of a named executive officer under Item 402 of Reg S-K for purposes of the executive compensation disclosures in the proxy has evolved and the definition of a covered employee under Section 162(m) hasn’t kept pace.

Section 162(m) applies to the following executives:

  1. The CEO
  2. The top four highest paid executives other than the CEO, as determined for proxy disclosure purposes.

Back when 162(m) was adopted, this was the same group of people that were considered NEOs for purposes of the proxy disclosures.  But in 2006, the SEC changed Item 402 to carve out a separate requirement for CFOs. So now, the NEOs in the proxy are:

  1. Anyone serving as CEO during the year
  2. Anyone serving as CFO during the year
  3. The top three highest paid executives other than the CEO and the CFO.
  4. Up to two additional executives that would have been in the top three except that they terminated before the end of the year.

Unfortunately, only Congress can change the statutory language under Section 162(m), so the IRS can’t modify the definition of a covered employee to match the SEC’s new definition of an NEO. (When Congress drafted Section 162(m), they probably should have just said that it applies to all NEOs as determined under Item 402 of Reg S-K.)

All the IRS can do is interpret the requirement under 162(m) in light of the SEC’s definition.  Their interpretation is that the SEC’s change exempts CFOs from Section 162(m) (see the NASPP alert “IRS Issues Guidance on ‘Covered Employees’ Under Section 162(m),” June 9, 2007). (If you are wondering, former employees are also not subject to Section 162(m); this is another evolution in the SEC definition that hasn’t been implemented in the tax code.)

What Gives With Smaller Reporting Companies?

Smaller reporting companies are subject to abbreviated reporting requirements, including fewer NEOs for proxy reporting purposes.  Thus, the SEC’s new definition in 2006 never applied to smaller reporting companies. Instead, NEOs in smaller reporting companies are defined as:

  1. The CEO
  2. The top two highest paid executives other than the CEO.

Per Chief Counsel Memorandum 201543003, because the CFO isn’t separately required to be included in the proxy disclosures for smaller reporting companies, he/she is still a covered employee for Section 162(m) if he/she is one of the top two highest paid executives other than the CEO.

– Barbara

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February 1, 2016

NASPP Chapter Meetings

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

Denver: Erik Lundgren of Winston & Strawn presents “Action Items to Prepare for the 2016 Proxy Season.” (Thursday, February 4, 12:00 noon)

Twin Cities: Kevin Kelly of Morrow & Co. presents “2016 Proxy Season and Activist Investors. (Thursday, February 4, 7:30 AM)

Carolinas: Kevin Liu of Glass Lewis presents on the advisory firms 2016 Guidelines.  (Thursday, February 11, 11:30 AM)



January 28, 2016

5 Tips for Engaging Stock Plan Participants

If you’re a regular reader of The NASPP Blog, you’ve probably caught wind of my passion for employee engagement and communications. In today’s blog, I’ll explore some important and creative ideas for crafting your stock plan’s communication approach for 2016.

I’m always on the lookout for new ideas and trends in getting the message out to employees. If you’ve got a stock plan, you’ve probably figured out that the stock plan is only as good as your participants think it is, and communicating about the plan is an important factor in determining its success. With so many modern tools and choices at our fingertips, figuring out the best options for communication can feel overwhelming at times. To help with that, I’ve come up with 5 communication ideas for 2016.

Cultivate Plan Champions

Sometimes the task of engaging employees feels extra-large because of the quantity of people involved. If your stock plan participants number in the hundreds or thousands, then you know what I mean. While you definitely want your outreach and education to reach all participants, you may also want to consider investing time and resources into developing a handful (a few or dozens, depending on your stock plan size) of stock plan champions – employees who already ooze engagement and, armed with the right information, could spread the word among their peers in the workplace. Consider some smaller meetings or one-one-one sessions with these champions to educate them and encourage them to spread the word. Some ideal candidates for the role may be those who frequently show up at your door to ask questions, or are vocal about their appreciation for the plan. Studies have long shown that word of mouth in the workplace does have an effect – people trust their friends, including co-workers.

Publish Benchmark Information

A wealth of stock plan information is publicly available, which makes it fairly easy to compare the attributes of your stock plan to those of your industry peers and competitors. You’ll want to gain support and approval from management before taking this step, but evaluating your stock plan compared to other plans and highlighting some of your plan’s unique or attractive features can help employees understand how their stock compensation may compare to the rest of the industry.

Create Videos that Reflect Corporate Culture

Hands down, some of the best stock plan videos I’ve come across have a common thread: they all reflect some element of the company’s unique culture. I recall listening in on a session at our 23rd Annual Conference this past fall where a panelist who works for Facebook talked about a family of foxes that lives on site at their corporate headquarters (the foxes even have their own Facebook page). The company created stock plan videos featuring…you guessed it…a fox, which added a unique factor, oozed creativity, and tied into something special about the company’s culture. Instead of a boiler plate corporate video, think of what may plug in well to your company’s culture and let that inspire a theme for your stock plan videos and communications.

Diverse Populations Need Diverse Communications

There are so many forms of diversity in employee populations, and all of them need to be considered. I keep hearing buzz that addressing the needs of a very diverse group of participants continues to be a hot topic. There are generational issues to consider, including how values, work habits, and communication preferences vary among different generations. Baby boomers are working longer, and there are more and more millennials graduating college and entering the workforce. There are cultural considerations in communicating with participants from multiple geographic and cultural backgrounds. If you haven’t seriously contemplated all of these factors in the past, this is the year to evaluate your stock plan demographics and really dig into which modes, formats, and messaging are going to succeed in engaging employees across the board. Just as with marketing efforts, it may be necessary to “target” select participant groups for different communications in order to ensure the message resonates with the audience and achieves the intended goal of engagement.

“If you can’t measure it, you can’t improve it.” (Peter Drucker)

All of the above steps are virtually pointless if you don’t measure their impact on employee engagement. Communicating is not about throwing information out to the universe and hoping it sticks. If you haven’t been steadily measuring your communication strategies and efforts, make it a goal for 2016. There are many ways to measure – I’ll share a few here:

  • Conduct an employee engagement survey (keep the questions and survey on the shorter side – the longer it is, the less likely employees are to remain engaged long enough to complete it).
  • Track email click rates (How many people opened the email? Did people click on links in the emails?)
  • See if you can gather data from your IT department on employee technology behaviors (How many employees use email? Which social media sites are most popular?)
  • Consider allowing participants to rate content. This will give feedback on what is most useful and engaging from their perspective.



I said 5 tips, but I couldn’t resist a 6th: Be discerning with your content. Set a high standard for the content you put out to participants. Chances are, they are already inundated with messages from a variety of sources on many topics. Being consistent in putting out high quality content builds trust – participants begin to realize that any information coming from you is worth their attention.

Remember, whatever you do – be prepared to measure, measure, measure it!

You don’t need to do a complete overhaul all at once – focusing on one or two key areas can make a difference. Now’s the time to set your communication goals for 2016.


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January 27, 2016

NASPP To Do List

ESPP Survey
Participate in the 2016 ESPP Survey (a joint project of the NASPP, the NCEO, and the CEP Institute). Complete the survey by January 29 and you’ll be eligible to win a $100 gift card. Issuers only. Register for the survey today.

Podcast with Alan Dye
Listen to our newest podcast featuring an interview with Alan Dye and hear his thoughts on the future of Section 16.

NASPP To Do List
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January 26, 2016

Cost-Basis: Five Things Your Employees Need to Know

In just a couple of weeks, employees will begin receiving Forms 1099-B for sales they conducted in 2015.  Here are five things they need to know about Form 1099-B:

  1. What Is Form 1099-B?  Anytime someone sells stock through a broker, the broker is required to issue a Form 1099-B reporting the sale. This form is provided to both the seller and the IRS.  It reports the net proceeds on the sale, and in some cases, the cost basis of the shares sold. The seller uses this information to report the sale on his/her tax return. [Same-day sale exercises can be an exception. Rev. Proc. 2002-50 allows brokers to skip issuing a Form 1099-B for same-day sales if certain conditions are met. But your employees don’t need to know about this exception unless your broker isn’t issuing a Form 1099-B in reliance on the Rev. Proc.]
  2. The Cost Basis Reported on Form 1099-B May Be Too Low. For shares that employees acquire through your ESPP or by exercising a stock option, the cost basis indicated on the Form 1099-B reporting the sale is likely to be too low.
  3. Sometimes Form 1099-B Won’t Include a Cost Basis.  If employees sold stock that was acquired under a restricted stock or unit award, or if they acquired it before January 1, 2011, the Form 1099-B usually won’t include the cost basis (although procedures may vary, so check with your brokers on this).
  4. What To Do If the Cost Basis Is Incorrect (or Missing).  If the cost basis is incorrect, employees will need to report an adjustment to their gain (or loss) on Form 8949 when they prepare their tax returns. If the basis is missing, they’ll use Form 8949 to report the correct basis.
  5. An Incorrect Cost Basis Is Likely to Result in Employees Overpaying Their Taxes. It is very important that employees know the correct basis of any shares they sold.  They will subtract the cost basis from their net sale proceeds to determine their taxable capital gain (or deductible capital loss) for the sale. Reporting a cost basis that is too low on their tax return could cause them to pay more tax than necessary. In some cases, this doubles their tax liability.  The only person who wins in this scenario is Uncle Sam; your employees lose and you lose, because no one appreciates the portion of their compensation that they have to pay over to the IRS.  Your stock compensation program is a significant investment for your company; don’t devalue the program by letting employees overpay their taxes.

Employees should review any Forms 1099-B they receive carefully to verify that the cost basis indicated is the correct basis. If it is missing or incorrect, they should use Form 8949 to report the correct basis.

Check out the NASPP’s new sample employee email “Five Things You Need to Know About Form 1099-B.”  Also, check out these other handy resources in the NASPP’s Cost Basis Portal and use them to develop your own educational materials:

The Portal also has examples and flow charts, all of which have been updated for the 2015 tax forms. [In case you are wondering, there were no significant changes to Form 1099-B, Form 8949, or Schedule D in 2015.]

– Barbara

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January 20, 2016

NASPP To Do List

ESPP Survey
Participate in the 2016 ESPP Survey (a joint project of the NASPP, the NCEO, and the CEP Institute). Complete the survey by January 29 and you’ll be eligible to win a $100 gift card. Issuers only. Register for the survey today.

NASPP To Do List
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January 19, 2016

Update to ASC 718: Early Adoption

For my last installment (at least for the moment—expect another blog when the FASB officially adopts the new standard) in my series on the FASB’s ASC 718 simplification project, I answer a few questions relating to early adoption of the new standard.

Can companies adopt it early?

Yes, companies can adopt the amended standard in any interim or annual period after the FASB approves the official amendment. If the FASB approves the amendment as expected in this quarter, companies could adopt it in this quarter.

Can companies adopt it now?

No, not quite yet. Companies have to wait until the final amendment is approved by the FASB to adopt it.

Can companies adopt just the parts of the update they like early and wait to adopt the rest of it?

Heck no! This isn’t a salad bar; it’s all or nothing. You have to take the bad with the good.

If we start allowing employees to use shares to cover tax payments in excess of the minimum required withholding now, are my auditors really going to make me use liability accounting, given that we all know the rules are changing soon?

Well, I can’t really speak for your auditors, so you’d have to ask them—accounting-types do tend to be sticklers for the rules, however. If the FASB approves the amendment on time, you could adopt it this quarter and there’d be no question about liability treatment. But you’d have to adopt the whole standard, including the tax accounting provisions, so you would want to make sure you are prepared to do that.

If you don’t want to adopt the entire update as soon as the FASB approves it, liability treatment applies if shares are withheld for more than the minimum tax payment. For awards that are still outstanding when you adopt the update, this liability treatment will go away. You’ll record a cumulative adjustment at the time of adoption (see my blog last week on the transition) to switch over to equity treatment. But for the awards that are settled prior to when you adopt the standard, you won’t reverse the expense you recognize as a result of the liability treatment.

If the awards that will settle between now and when you expect to adopt the standard are few enough, the expense resulting from the liability treatment might be immaterial. Likewise, if your stock price is at or below the FMV back when the awards were granted, you might not be concerned about liability treatment because it likely wouldn’t result in any additional expense.

Note, however, that if you establish a pattern of allowing share withholding for excess tax payments, liability treatment applies to all awards, not just those for which you allow excess withholding. You could have liability treatment for all award settlements that occur before you adopt the amended standard.

– Barbara

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January 18, 2016

NASPP Chapter Meetings

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

Silicon Valley: Christina Hall of LinkedIn and Jon Doyle of International Law Solutions present “Equity Compensation for a Global Workforce.” (Tuesday, January 19, 11:30 AM)

Chicago: Jeffrey Keckley and Matthew Wolfson of Meridian Compensation Partners present “2016 Executive Compensation Considerations: Highlights from Meridian’s Latest Corporate Governance and Incentive Design Survey.” (Wednesday, January 20, 7:30 AM)

DC/VA/MD: Andrew Gewirtz and Robert Delgado of KPMG present “Section 409A: Trips, Traps, & Pitfalls to Avoid.” The presentation will be followed by the chapter’s annual holiday event, including hors d’oeuvres, wine, games and prizes! (Thursday, January 21, 3:30 PM)

San Francisco: Michael Chang of The Core Group presents “Equity Incentive Plans in Asia – Regulatory Strategies for Successful Implementation” and Laura Lakin McDaniels of Cooley presents “A New Year, a New Proxy Season, a New You!” (Thursday, January 21, 11:30 AM)