Many companies are very excited about the expanded exception to liability treatment that is available under ASU 2019-06 (see my blog entry, “Update to ASC 718: The FASB’s Decisions,” December 1). In the NASPP’s quick survey on the ASU, about 30% of respondents so far have said that this is the amendment they are most excited about (to the extent that anyone can be excited about accounting).
But, hold your horses there, buckaroo. As Mike Melbinger of Winston & Strawn noted in his blog on CompensationStandards.com this week (“Can You Amend Your Stock Plan to Allow Tax Withholding Up to the Maximum Statutory Rate?,” May 2), changing your share withholding procedures may be more complicated than you think.
Plan Amendment May Be Required
Many plans (possibly even most plans, by a wide margin), include language prohibiting employees from tendering award shares to cover tax payments in excess of the minimum statutory required withholding. This language is included in the plan to make it abundantly clear that the company doesn’t allow share withholding in excess of the minimum required tax payment; liability treatment could be required if it appears that the company would allow this, even if it isn’t ever actually done. I’m sure the language is also included to protect companies from themselves—if anyone had ever gotten the bright idea to allow share withholding for a tax payment in excess of the minimum required, hopefully someone would have realized the plan prohibited this.
If this language exists in your plan, the plan has to be amended to change the limitation from the minimum required payment to the maximum payment before you can change your share withholding procedures.
Shareholder Approval May Be Required
At a minimum, the Board of Directors would need to approve the amendment to the plan. But for some companies, shareholder approval may be required as well. The NYSE and NASDAQ require shareholder approval of any material amendments to stock plans. As Mike notes:
From the perspective of the NYSE and NASDAQ, if the Stock Plan allows the recycling of shares surrendered or withheld to pay tax withholding (that is, puts those shares back in the authorized share pool and allows those shares to be re-used for future awards), then an amendment of that Plan that allows for tax withholding at the maximum rate, instead of the minimum rate, would be material because it will increase the number of shares available for issuance under the Plan!
According to the NASPP’s 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting), close to 60% of respondents allow shares withheld for taxes to be recycled. These companies would need to obtain shareholder approval of this amendment.
Companies May Need to Wait Until After Adopting the ASU
Once you amend your plan, your auditors make take this as an indication that you plan to allow share withholding in excess of the minimum required tax payment. If so, and the amendment is approved before you adopt ASU 2016-09, that’s going to trigger liability treatment for all of the awards under the plan. This liability treatment will go away once you adopt the ASU, but until then, it could be a problem.
Thus, once this plan amendment is adopted, you may need to immediately adopt ASU 2016-09. As Mike notes in a follow-up blog, (“Follow-Up: Can You Amend Your Stock Plan to Allow Tax Withholding Up to the Maximum Statutory Rate?,” May 3), once you adopt ASU 2016-09 for share withholding purposes, you’d better be ready to adopt it for all other purposes as well.
It might be possible to structure the amendment so that it is effective only after your company adopts ASU 2016-09, but it’s a good idea to consult with your legal and accounting advisors before rushing headlong into amending your plan.
Tags: accounting, Accounting standards update, ASU, ASU 2016-09, FASB, share withholding
Just Over Two Weeks Left!
The early-bird rate for the 24th Annual NASPP Conference expires in just two and a half weeks, on May 20! Don’t miss your chance to save—register today!
Quick Survey on ASC 718
Take the NASPP’s quick survey on the FASB’s update to ASC 718 to find out how companies are responding to this exciting development. And when I say quick; I mean quick! The survey has only seven questions; you can complete it in less than five minutes. Do it today; before you forget!
NASPP To Do List
Here’s your NASPP To Do List for the week:
Last week it was widely reported that the founder of Chobani (yes, the yogurt company) became the latest to join a recent trend of CEOs who are sharing their wealth with employees in the form of stock.
Chobani Founder and CEO, Hamidi Ulukaya, committed to give shares to his 2,000 employees equal to an estimated 10% of the company. Chobani is still a privately held company, so its exact present value is not known. But recent estimates put the company’s value between $3 billion to $5 billion.
While such a practice may be more prevalent in tech startup companies, Chobani is in an entirely different industry – the food industry. That’s part of what makes this move by Chobani’s CEO so unique. Sharing equity (especially pre-IPO) in a food company is not the norm, or even common. It’s a rare occurrence. Additionally, Chobani is giving shares to employees after a decade of being in business and after a value has been established, which makes this even more interesting.
In a New York Times article “At Chobani, Now It’s Not Just the Yogurt That’s Rich,” CEO Ulukaya was quoted as saying “I’ve built something I never thought would be such a success, but I cannot think of Chobani being built without all these people. Now they’ll be working to build the company even more and building their future at the same time.”
One Chobani employee’s reaction was also reported in the NY Times article, and it seemed like the perceived value component that every company strives for when issuing equity to employees. When one of the original employees, Rich Lake, was asked about his new shares, he said “It’s better than a bonus or a raise. It’s the best thing because you’re getting a piece of this thing you helped build.” I know HR consultants and stock plan people everywhere are cheering because isn’t that exactly what you want to hear an employee say about their stock awards?
We’ve seen other CEOs handing over portions of their shares to employees in recent months. Hopefully this trend will continue, as more executives see the value of sharing in the equity pie as a team. After all, to sum it up with a sports phrase – there is no “I” in team. And I’m guessing Chobani’s CEO would agree that given the huge success of the company in a decade, the team is well deserving of their stake in the company.
Here’s what’s happening at your local NASPP chapter:
Austin: Amit Tekwani and David Outlaw of Equity Methods present “2016 State of the Union in Equity Compensation.” (Wednesday, May 4, 11:30 AM)
Orange County: Lunch, learn and network! The chapter hosts a presentation on “Preparing for Dodd-Frank Disclosure Compliance.” (Thursday, May 5, 11:30 AM)
Dallas: The chapters hosts its 4th Annual Southwest Roundup. Highlights include 5 credit hours of CEP, CPE and SHRM; 4 credit hours of CLE; and presentations on employee communication, global and domestic updates in tax and financial accounting, and industry trends and best practices. (Friday, May 6, 8:45 AM)
Tags: NASPP chapter meetings
Last week, I used an example to illustrate the impact the new tax accounting rules under ASU 2016-09 will have on companies’ P&L statements. If your company is profitable, this is something you can do using your own financials. In this week’s blog entry, I explain how.
Finding the Numbers
I found all the numbers for my example in the company’s 10-K. I didn’t even have to pull up the full 10-K; I used the interactive data on EDGAR—it took me about 5 minutes. Here’s where to look:
- You can find your company’s net earnings, tax expense, and basic EPS in your income statement (“income statement” is the less cool way to say “P&L,” which is shorthand for “profits & loss statement”).
- You can usually find your excess tax benefit or shortfall in your cash flow statement or the statement of stockholders’ equity (or you may already know this amount, if you manage the database that this information is pulled from).
- The number of shares used in your basic EPS calculation will be indicated in either your income statement or your EPS footnote.
What To Do With the Numbers
Once you have collected that data, you can do the following:
- Post-Tax Earnings: The tax benefit represents how much post-tax earnings would be increased (or, if you have a shortfall, how much earnings would be decreased).
- Effective Tax Rate: Subtract the tax benefit (or add the shortfall) to tax expense and divide by pre-tax earnings to determine the impact on your effective tax rate.
- Earnings Per Share: Divide the tax benefit (or shortfall) by the shares used in the basic EPS calculation to figure out the impact on basic EPS.
Do these calculations for the past several years to see how much the impact on earnings varies from year to year.
Stuff You Should Be Aware Of
This exercise is intended to give you a general idea of the impact of the new tax accounting rules for your company. There are lots of complicated rules that govern how earnings and tax expense are calculated that have nothing to do with stock compensation, but that, when combined with the rules for stock compensation, could change the outcome for your company. This is especially true if your company isn’t profitable—if you are in this situation, it may be best to leave the estimates to your accounting team.
Also, I’ve suggested calculating the impact only on basic EPS because it’s a little harder to figure out the impact on diluted EPS. In diluted EPS, not only will the numerator change, but the number of shares in the denominator will change as well, because excess tax benefits no longer count as a source of proceeds that can be used to buy back stock. See my blog entry, “Update to ASC 718: Diluted EPS” for more information).
Tags: ASC 718, ASU, ASU 2016-09, earnings-per-share, FASB, tax accounting
It’s Not Too Late!
Taught by the industry’s leading experts, the NASPP’s acclaimed online program, “Stock Plan Fundamentals,” is the definitive primer on stock compensation, covering both the regulatory framework and day-to-day administrative procedures key to overseeing stock plans. The course started last week but there’s still time to register! All program webcasts are archived for your listening convenience.
Before You Adopt the Update to ASC 718
Got 15 minutes and 42 seconds? Check out my podcast on five things to consider before you adopt the Accounting Standards Update to ASC 718!
If you have 14 more minutes (and 8 seconds), check out my other podcast on five things I learned about the ISS Equity Plan Scorecard. Maybe you’ll learn something too!
Three Benefits of a Purpose-Driven Workday
Check out Andrea Best’s latest Career Corner blog in the NASPP Career Center: “Being of Service: Three Benefits of a Purpose-Driven Workday.”
NASPP To Do List
Here’s your NASPP To Do List for the week:
Tags: NASPP To Do List
If you’re feeling curious about how equity plan proposals are performing with shareholder votes, today’s blog has answers. Semler Brossy recently released their 2016 report on Trends in Equity Plan Proposals. Keep reading for some of the highlights.
Upward Trend in Failed Say-on-Pay Votes?
The number of companies each proxy cycle that have failed to obtain say-on-pay (“SOP”) approval from shareholders has remained fairly constant since SOP became mandatory 2011. This time last year, only two of the Russell 3,000 companies had failed their SOP vote. This year, that number has increased to five companies so far. Does this signify an uptick in SOP failures? It appears so, because the number of companies with failed votes so far in 2016 amounts to 3.5%, marking the first time more than 3% of Russell 3000 companies have failed at this time in the cycle to obtain an affirmative vote. Whether this is an anomaly year, or an indicator of a trend, time will tell.
Correlation Between Affirmative Say-on-Pay and Stock Plan Proposal Approvals
One correlation that appears to be rising is that companies who receive a pass Say-on-Pay vote also receive strong support for their equity plan proposals. Since SOP was adopted, the percentage of equity plan proposals that receive affirmative support relative to passing SOP votes has steadily increased (from 83% in 2011 to 90% in 2015). According to the Semler Brossy report,
Similarly, average vote support for equity plans at companies that receive an ISS ‘For’ recommendation has increased over time; this may suggest that ISS voting policies have become well-aligned with shareholder preferences
Companies that fail Say on Pay tend to have significantly lower support for their equity plan proposals, indicating that shareholders are assessing both proposals under similar lenses
A couple of final data points that seem to bring this all full circle are that ISS has recommended that shareholders vote “Against” Say-on-Pay at 10% of the companies it’s assessed so far in 2016, and, on top of that, shareholder support was 32% lower at companies with an ISS “Against” vote. This seems to suggest that companies looking for shareholder support in other areas, such as equity plan proposals, are more likely to gain shareholder support when ISS has recommended an affirmative Say-on-Pay vote. At minimum, there is an intertwining of all these factors and how they drive shareholder support.
For more interesting Say-on-Pay and equity plan proposal trends, view the full Semler Brossy report.
Here’s what’s happening at your local NASPP chapter this week:
DC/VA/MD: Erin Bass-Goldberg and Jarret Sues of Frederic W. Cook present “CEO Pay Ratio: Now What?” (Wednesday, April 28, 3:30 PM)
Boston: Equity Methods presents a webinar on “2016 State of the Union in Equity Compensation.” (Thursday, April 28, 4:00 PM)
Ohio: Barbara Baksa of the NASPP and Sean Waters of Fidelity Stock Plan Services present a webinar on the amendments to ASC 718. (Thursday, April 28, 2:00 PM)
Tags: NASPP chapter meetings
For today’s blog entry, I use an example to illustrate the impact the new tax accounting procedures required under the recently issued ASU 2016-09 will have on companies’ P&L statements.
Under the old ASC 718, all excess tax benefits and most tax shortfalls for equity awards were recorded to paid-in-capital. An excess tax benefit occurs when the company’s tax deduction for an award exceeds the expense recognized for it; a tax shortfall is the opposite situation—when the company’s tax deduction is less than the expense recognized for the award. The nice thing about old ASC 718 is that paid-in-capital is a balance sheet account, so these tax effects didn’t impact the company’s profitability. Under the amended ASC 718, all excess tax benefits and shortfalls are recorded to tax expense, which ultimately impacts how profitable a company is.
Effective Tax Rates
Not only do changes to tax expense impact a company’s profitability, they also impact the company’s effective tax rate. This rate is calculated by dividing the tax expense in a company’s P&L by its pre-tax earnings. A company’s effective tax rate is generally different from the company’s statutory tax rate because there are all sorts of credits that reduce the tax a corporation pays without reducing income and there are items that can increase a company’s tax expense that don’t increase income.
An effective tax rate that is lower than the statutory tax rate is good; it shows that the company is tax efficient and is keeping its earnings for itself—to use to operate and grow the company or to pay out to shareholders—rather than paying the earnings over to Uncle Sam. Just like you want to minimize the taxes you pay, shareholders want the company to minimize the taxes it pays.
This example is based on a real-life company that grants stock compensation widely. I’ve rounded the numbers a bit to make it easier to do the math, but my example isn’t that far off from the real-life scenario.
The company reported pre-tax income of $900 million for their most recent fiscal year and tax expense of $250 million. That’s an effective tax rate of 28%, which is probably less than their statutory tax rate.
The company reported (in their cash flow statement) an excess tax benefit for their stock plans of $70 million. Under the old ASC 718, that tax benefit didn’t impact the company’s earnings. But if it had been recorded to tax expense as is required under the amended ASC 718, it would have reduced the company’s tax expense to just $180 million. That reduces the company’s effective tax rate from 28% to just 20%.
In addition, the company’s basic earnings-per-share is $1.30, with 500 million shares outstanding. The tax benefit would have increased basic earnings per share by 14 cents, which is an increase of just over 10%.
Next week, I’ll explain how you can apply this example to your own company.
Tags: ASC 718, ASU 2016-09, FASB, tax accounting
Online Fundamentals Starts Today!
Taught by the industry’s leading experts, the NASPP’s acclaimed online program, “Stock Plan Fundamentals,” is the definitive primer on stock compensation, covering both the regulatory framework and day-to-day administrative procedures key to overseeing stock plans. The course starts today but there’s still time to register! If you have to miss the first webcast, a recording is archived for your listening convenience.
A new article Meridian Compensation Partners, “Are Your Retirement Vesting Provisions Motivating the Wrong Behaviors?,” offers commentary on the various ways awards can be treated in the event of retirement.
In case you missed them, we’ve posted two new podcasts in our Equity Expert series:
NASPP To Do List
Here’s your NASPP To Do List for the week:
Tags: NASPP To Do List