The NASPP Blog

May 20, 2015

NASPP To Do List

New Study on Executive Compensation
We posted Meridian Compensation Partners’ survey, 2015 Trends and Developments in Executive Compensation, which looks at executive compensation in 114 major companies. A few highlights:

  • For a majority of companies, 2015 LTI grants were largely in line with grant sizes in 2014. Among the 33% of companies that increased LTI values, the average increase was approximately 10%.

  • When determining LTI grants for senior-most executives, approximately 74% of respondents consider market data (e.g., proxy or survey data) as a primary factor.  Internal equity and prior year grant value are also key factors.

  • 82% of respondents use two or three LTI vehicles for senior executives.

  • In Meridian’s experience, it is most common to grant just one vehicle below the senior executive level, most often restricted stock or restricted stock units (RSUs).

NASPP To Do List
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May 19, 2015

How Many Grant Dates Can One Option Have?

How many grant dates can one option have? The answer, as it turns out, is more than you might think.  I was recently contacted by a reporter who was looking at the proxy disclosures for a public company and was convinced that the company was doing something dodgy with respect to a performance option granted to the CEO.  The option was not reported in the SCT for the year in which it was granted, even though the company discussed the award in some detail in the CD&A, had reported the grant on a Form 4, and the option price was equal to the FMV on the date the board approved the grant.  The reporter was convinced this was some clever new backdating scheme, or some way of getting around some sort of limit on the number of shares that could be granted (either the per-person limit in the plan for 162(m) purposes or the aggregate shares allocated to the plan).

Bifurcated Grant Dates

When I read through the proxy disclosures, I could see why the reporter was confused.  The problem was that the option had several future performance periods and the compensation committee wasn’t planning to set the performance goals until the start of each period. The first performance period didn’t start until the following year.

Under ASC 718 the key terms of an award have to be mutually understood by both parties (company and award recipient) for the grant date to occur. I’m not sure why the standard requires this.  I reviewed the “Basis for Conclusions” in FAS 123(R) and the FASB essentially said “because that’s the way we’ve always done it.” I’m paraphrasing—they didn’t actually say that, but that was the gist of it.  Read it for yourself: paragraph B49 (in the original standard, the “Basis for Conclusions” wasn’t ported over to the Codification system).

The performance goals are most certainly a key metric. So even though the option was granted for purposes of Section 409A and any other tax purposes (the general standard to establish a grant date under the tax code is merely that the corporate action necessary to effect the grant, i.e., board approval, be completed), the option did not yet have a grant date for accounting purposes.

And the SCT looks to ASC 718 for purposes of determining the value of the option that should be reported therein. Without a grant date yet for ASC 718 purposes, the option also isn’t considered granted for purposes of the SCT. Thus, the company was right to discuss the grant in the CD&A but not report it in the SCT. (The company did explain why the grant wasn’t reported in the SCT and the explanation made perfect sense to me, but I spend an excessive amount of time thinking about accounting for stock compensation. To a layperson, who presumably has other things to do with his/her time, I could see how it was confusing and suspicious).

Trifurcated Grant Dates?

The option vested based on goals other than stock price targets, so it is interesting that the company chose to report the option on a Form 4 at the time the grant was approved by the compensation committee. Where a performance award (option or RSU) is subject to performance conditions other than a stock price target, the grant date for Section 16 purposes doesn’t occur until the performance goals are met. So the company could have waited until the options vested to file the Form 4.

If you are keeping score, that’s three different grant dates for one option:

Purpose  Grant Date
 1. Tax  Approval date
 2. Accounting / SCT  Date goals are determined
 3. Form 4  Date goals are met

If the FASB is looking for other areas to simplify ASC 718, the determination of grant date is just about at the top of my list. While they are at it, it might nice if the SEC would take another look at the Form 4 reporting requirements, because I’m pretty sure just about everyone (other than Peter Romeo and Alan Dye, of course) is confused about them (I had to look them up).

– Barbara

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May 18, 2015

NASPP Chapter Meetings

There’s a lot going on at NASPP local chapters this week:

Phoenix: Peter Kimball of ISS presents “Tallying the Score: Reviewing the First Year of ISS’s Equity Plan Scorecard Policy and Other Compensation Trends from the 2015 Proxy Season.: (Wednesday, May 20, 11:30 AM)

San Francisco: Marianne Friebel of Dolby, Ying Long of Cisco, and Marlene Zobayan of Rutlen Associates present “Employee Mobility: We’ve All Heard the Rules, But what Are People Actually Doing?” (Wednesday, May 20, 11:30 AM)

Western PA: The chapter hosts a happy hour networking event. (Wednesday, May 20 5:00 PM)

Philadelphia: Irv Becker and Matthew Kleger of Hay Group and Amy Pocino Kelly and Mims Maynard Zabriskie of Morgan Lewis present “Executive Compensation Challenges for 2015/2016.” (Thursday, May 21, 8:30 AM)

San Fernando Valley: Tara Tays, Paul Gladman, and Justin LaSalle of Deloitte present “How Different Are We? A Look at Long Term Incentives, ESPP and Stock Administration.” (Thursday, May 21, 11:30 AM)

Wisconsin: Nathan O’Connor of Equity Methods presents “What to Expect in 2015 in Stock Compensation.” Thursday, May 21, 11:30 AM)

I will be at the Phoenix chapter meeting; I hope to see you there!

– Barbara


May 14, 2015

An Unintended Downside of 10b5-1 Plans

It’s been about 15 years (yikes, already?) since the SEC adopted Rule 10b5-1. For those new to the concept, a 10b5-1 plan may be best explained as a device that allows company insiders to trade in the company’s securities pursuant to a pre-arranged trading plan or instruction. The pre-arranged element is intended to help the insider avoid automatic liability for insider trading and serve as an affirmative defense to claims of insider trading. While there have been many benefits to enacting such trading plans, 10b5-1 plans have not escaped scrutiny from the SEC. I won’t cover that particular scrutiny in today’s blog, but will tackle another unintended downside: the impact of well-intentioned, pre-determined trades on a company’s stock price.

Haven’t We Seen It All?

In recent years we’ve seen the gamete of questionable situations that arise from having a 10b5-1 trading plan. Did the executive really not have material non public information at the time they created the plan? Or, on the flip side, did the executive time that press release to be just before or shortly after the trade already set to occur in his or her 10b5-1 plan? The thing these scenarios have in common are that they raise a question as to whether a specific individual should have indeed been able to trade in the company’s stock, in spite of having a 10b5-1 plan. We could cover a lot of examples of these instances. But today I want to turn to one thing I hadn’t heard of until recently, a circumstance that had nothing to do with the ethics of the trades executed under an individual’s 10b5-1 plan. It appears to be a completely, unintended consequence of the executives and company being well intentioned and yet still generating some ripples about it.

It Started With A Tweet

On February 9, 2015, CNBC’s Jim Cramer sent a memo to the board of social media darling Twitter. The essence? Stop 10b5-1 trades, because the flow of these trades (albeit pre-timed and planned) are hurting the company’s stock price. As CNBC reported, the actual memo said: “Memo to the board of directors of Twitter: Someone suggest that there be a moratorium on selling stock for a bit, maybe six months, maybe a year, to show that you believe in the company… If I were on the board I would simply say, ‘Hey guys, could you give it a break for a while because you are now telling a good narrative about user growth and engagement and you are starting to get people excited again about the company and its stock and your selling makes them feel foolish.’”

The activity that prompted the memo was a series of sales of stock by top executives at Twitter in the weeks and months prior to the memo. Although the trades were done pursuant to 10b5-1 plans, several were executed in close proximity to each other, bringing in millions of dollars to Twitter executives ($8.5 million to its CEO in January and February alone, with a similar amount to its founder and chairman, and $1.8 million to another executive). Although it may be argued that the trades were executed based on long, pre-planned directives, the quantity and dollar value of the shares liquidated seemed to be sending a message that the executives were dumping stock. Not to mention simultaneously releasing thousands of shares into the market.

So what happened? What did the Twitter board do? The company has not commented on the matter, but in a Fortune article citing exclusive information (Exclusive: Twitter execs put stock sales on ice – April 22, 2015), it appears that the memo was received and action taken. Fortune cites having multiple sources who confirm a moratorium on 10b5-1 transactions, save one insider who continues to be permitted to sell stock. Aside from the transactions of that lone insider, no other 10b5-1 transactions have occurred since February 6, 2015. It’s not clear if the company canceled plans or simply did not renew them. Whatever the details, the end results appears to be a moratorium. Since that time, Twitter’s stock price has risen approximately 25% (as of the date of the Fortune article). You be the judge. Did a halt in insider trading activity send a positive message to shareholders, resulting in an increased stock price?


While the Twitter scenario is the first I’ve heard of this type of moratorium, in particular initiated by a party external to the company, it certainly provides food for thought. Social media has given a voice to many – shareholders, customers, media, and others. It’s quite simple to send a message to a company, including its board of directors. And in this case it seems the message was heard. This raises the question – do other companies need to worry about how their 10b5-1 plan trades are perceived by the market?  I don’t have a definitive answer on that, but I do have some suggestions.

Consider the potential timing of trades when approving 10b5-1 plans. One thing companies should consider, if they haven’t already, is how the future trades may be perceived by shareholders in the best and worst of trading scenarios. If an insider has multiple stock price targets to trigger sales, for example, and all those targets are hit in a short period of time given a rapid rise in stock price, how will those multiple trades be perceived?

Evaluate how many plans have similar triggers. Companies approach evaluating and approving proposed 10b5-1 plans differently. One thing to assess is just how many insiders have plans or propose plans with similar triggers. If five executives want to sell shares when the stock price reaches $50, this could result in a large volume of shares and transactions hitting the market all at one time. I’m not a 10b5-1 expert, but it seems there has to be a way to monitor existing plan terms and match those up against those proposed by new trading plans. If volume of shares and shareholder/market perception is a potential concern, perhaps the company can establish collective limits (as a matter of policy) as to how many shares can be sold at a given price or under a certain trigger. I may get flack for even suggesting this option, but I’m throwing it out there. Should companies, as a matter of policy, restrict the number of shares that can be sold under a trading plan, or, even a limit on shares sold cumulatively – based on the collection of all existing plans? This would certainly have helped Twitter buffer against the influx of shares into the market earlier this year.

This type of unintended aftermath of 10b5-1 trades feels like new territory. I’d love to hear from anyone who has (as a matter of policy) specific limits to prevent an influx of shares into the market, or who has ideas about best practices to help companies avoid a public call-out like Twitter received. Although they haven’t publicly admitted to any action taken, if we are to listen to the “sources” in this matter, kudos is due to Twitter’s board for handling the situation in a constructive way.


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May 13, 2015

NASPP To Do List

Taxation for Stock Compensation: Beyond the Basics
This unique online course will examine questions and solutions for today’s most pervasive tax compliance challenges, including IRS deposit requirements, reporting on Forms W-2 and 1099-MISC, FICA taxes, acceleration of vesting upon retirement, and more. Don’t wait! You must register by this Friday, May 15, for the early-bird rate!

Quick Survey on Rule 10b5-1 Plans
Wondering how your Rule 10b5-1 plans stack up?  Participate in this joint NASPP/Morgan Stanley quick survey to find out.  You can complete the survey in less than 15 minutes. Don’t wait–you must complete the survey by this Friday, May 15.

One More Threshold for Executive Pay: Post-Vest Holding Periods
Submitted by SFG Wealth Planning Services, this article reviews the implications of post-vesting holding periods.

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May 12, 2015

The Role of Luck in Pay-for-Performance

Arguments in a recent divorce proceeding potentially cast doubt on the idea of pay-for-performance, i.e., that outsized executive compensation is justified by performance.

The Jed Clampett Defense

If this sounds familiar, it’s because we highlighted an article (“Are C.E.O.s That Talented, or Just Lucky?,” Robert Frank, Feb. 7, 2015) in the New York Times that discussed case in the Across Our Desk column in the March-April 2015 NASPP Advisor. Lawyers for the founder and CEO of Continental Resources argued that he should only have to pay a small portion of his overall wealth to his ex-wife because most of the growth in his wealth was attributable to factors outside his control.  Apparently under the applicable state laws (and in the laws of a number of states), the increase in value of an asset that you owned prior to marrying is not divisible in your divorce if the increased value is not due to your own efforts.

According to the article, the CEO’s lawyers argued that “under 10 percent of his wealth was a result of skill and effort, and that mostly he rode the crest of oil prices and the slide.”  The CEO’s holdings included a 68% stake in Continental Resources, which has market capitalization of over $30 billion. Essentially the argument was that, although the CEO’s wealth increased during his marriage and much of that wealth was attributable to his holdings in the company he founded and runs, the holdings increased in value through little effort of his own. He was just lucky enough to be CEO of a successful company (sort of like Jed Clampett of The Beverly Hillbillies striking it rich by finding oil in his backyard).


This was interesting to me because there is so much emphasis these days on paying for performance.  This emphasis has lead to a surge in the use of performance awards, which often include multipliers when the company performs well, increasing payouts to execs.

I looked up what the Continental Resources proxy said about the CEO’s compensation.  The 2014 proxy included statements like: “We rely upon our judgment in making compensation decisions, after…reviewing the performance of the Company, and evaluating an NEO’s contribution to that performance…and long-term potential to enhance shareholder value,” and other statements that seemed to indicate that compensation is based, at least in part, on individual performance.  So while the CEO might not have thought he contributed to the company’s success, management and the compensation committee didn’t seem to share this view.

On the other hand, the Times article notes that academic research seems to indicate that individual executives don’t necessarily have a lot of control over the success of a company:

“As we know from the research, the performance of a large firm is due primarily to things outside the control of the top executive,” said J. Scott Armstrong, a professor at the Wharton School at the University of Pennsylvania. “We call that luck. Executives freely admit this — when they encounter bad luck.”

The Ends Justify the Payouts, Even If They Aren’t the Means?

Ultimately, do shareholders care about the reason for a company’s success?  I suspect that if the company is doing well and increasing shareholder wealth, they are fine with large payouts to executives even if the company’s success is not due to the efforts of executives.

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May 7, 2015

A Share is a Share, Until it’s Not a Share

As I write today’s blog, I realize the title may have already created confusion. “A Share is a Share, Until it’s Not a Share?” Huh? No, it’s not an attempt to be cryptic. Let me explain. I’ve recently blogged about some recent (and very public) errors in tracking share limitations within stock plans. Those situations were a good reminder about the need to track and audit the various ways that we limit, distribute, account for, book, and log shares across the various aspects of equity compensation and financial reporting. In fact, I’ve become so passionate about the need to track and reconcile shares that it was the subject of my Administrator’s Corner article (Keeping Track of Plan Limits – Mar-Apr 2015) in the most recent edition of The Advisor newsletter. In thinking through this topic on a more global level, it’s become apparent that tracking shares across equity compensation is not always as simple as it seems, because not all shares are counted or recorded equally across the board. I’m going to dive lightly into the “irreconcilability” of some of these areas in today’s blog.

Get it From the Source

Before we move on, I need to share that next week’s NASPP webcast, Irreconcilable Differences (May 13, 2015 from 4:00pm – 5:30pm ET), is the inspiration for this content. That webcast will examine the counting of shares at a much deeper level than I can do now. A short preview of the webcast is available in the latest episode of our Equity Expert podcast series, in my interview with panelist John Hammond of bendystraw.

How Can a Share Not be a Share?

There are so many areas where shares get recorded in their life cycle. Or not recorded. Keeping track can involve many spreadsheets, reports, third party systems, and manual effort.

One example John covered in the preview podcast was a restricted stock award (RSA) that is issued at grant and recorded on the books of the transfer agent. Although technically issued at grant, the shares underlying the RSA need to be reversed out of the transfer agent’s report that reflects weighted shares outstanding before that figure is used to perform EPS calculations. This takes careful attention and often manual intervention when receiving figures from the company’s transfer agent, prior to delivering those handling financial reporting. John’s advice is that companies reconcile their shares outstanding figures to the transfer agent’s records regularly to get ahead of any share counting differences.

Another area where issuers need to pay careful attention is in managing some of the life cycle “events” and how those events impact share counts. For example, when someone terminates and shares are forfeited, what happens to those shares? What about when a stock option expires? Are they recycled back to the plan? Do they return to treasury shares? What is the path for those shares upon forfeiture or expiration? And, if there is a fungible or flexible share ratio in effect, the stock plan administrator needs to ensure that the ratio is considered in returning shares to the plan (if and when that occurs).

I’ve only been able to bring up a couple of areas where share counting and reconciling matters. If this strikes a chord with you, you’ll want to hear more from the experts in next week’s webcast.


May 6, 2015

NASPP To Do List

Taxation for Stock Compensation: Beyond the Basics
Last year’s pre-conference program was so well received, we’ve decided to offer it as an online program. This unique online course will examine questions and solutions for today’s most pervasive tax compliance challenges, including IRS deposit requirements, reporting on Forms W-2 and 1099-MISC, FICA taxes, acceleration of vesting upon retirement, and more. Register by May 15 for the early-bird rate!

Quick Survey on Rule 10b5-1 Plans
Wondering how your Rule 10b5-1 plans stack up?  Participate in this joint NASPP/Morgan Stanley quick survey to find out.  You can complete the survey in less than 15 minutes.

NASPP To Do List
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May 5, 2015

Proposed Pay-for-Performance Disclosure

As expected (and as I blogged last week), the SEC has issued a proposal for the pay-for-performance disclosure required under Dodd-Frank.  Proxy disclosures aren’t really my gig, so I don’t have a lot more to say about this topic. Luckily, Mike Melbinger of Winston & Strawn provided a great bullet-point summary of the proposed disclosure in his blog on  I’m sure he won’t mind if I “borrow” it.

The SEC Proposal, in 300 Words or Less

From Mike’s blog:

  • The proposed rules rely on Total Shareholder Return (TSR) as the basis for reporting the relationship between executive compensation and the company’s financial performance.
  • Based on the explicit reference to “actually paid” in Section 14(i), the proposed rules exclude unvested stock grants and options, thus continuing the trend to reporting realized pay. Executive compensation professionals will need to sharpen their pencils to explain the relationship between these figures and those shown in the Summary Compensation Table.
  • For equity-based compensation, companies would use the fair market value on date of vesting, rather than estimated grant date fair market value, as used in the SCT.
  • The proposed rules also would require the reporting and comparison of cumulative TSR for last 5 fiscal years (with a description of the calculations).
  • The proposed rules would require a comparison of the company’s TSR against that of a selected peer group.
  • The proposed rules would require separate reporting for the CEO and the others NEOs—allowing use of an average figure for the other NEOs.
  • The proposed rules would require disclosure in an interactive data format—XBRL.
  • Compensation actually paid would not include the actuarial value of pension benefits not earned during the applicable year.
  • The proposed rules would phase in of the disclosure requirements. For example, in the first year for which the requirements are applicable [2018?], disclosure would be required for the last 3 years only.
  • The proposed rules exclude foreign private issuers and emerging growth companies, but not smaller reporting companies. However, the proposed rules would phase in the reporting requirements for smaller companies, require only three years of cumulative reporting, and not require reporting amounts attributable to pensions or a comparison to peer group TSR.

A Few More Thoughts

In the NASPP’s last Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting), usage of TSR targets for performance awards increased to 43% of respondents.  With this new disclosure requirement, will even more companies jump on the TSR-bandwagon?

At least there’s one bit of good news:  the disclosure covers only the NEOs, not a broader group of officers as was originally feared.

More Information

To learn more about the proposed regs, check out our NASPP alert, which includes a number of practitioner memos.  The memo from Pay Governance includes a nifty table comparing the SEC’s definition of “actual” pay to the SCT definition of pay, traditional definitions of realized and realizable pay, and the ISS definition of pay.

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