The NASPP Blog

Monthly Archives: January 2009

January 29, 2009

Who Says You Can’t Bend the Rules

Rules were meant to be broken, right? Thankfully the U.S. Securities and Exchange Commission (SEC) and the NASDAQ stock exchange (NASDAQ) think so.  If not, I can bet there would be a number of publicly traded companies struggling today to maintain compliance with their stock exchange listing standards.  The SEC recently agreed to temporarily allow the NASDAQ to “bend the rules” a bit related to its listing standard criteria in response to the current economic environment.  Additional information about this topic is below.




To be able to trade securities (i.e. shares of common stock issued by a public company) on a stock exchange, such as the New York Stock Exchange or the NASDAQ, a company has to be listed on that exchange and continue to follow certain listing standards thereafter to keep trading on that exchange.  For purposes of this blog, we will discuss the NASDAQ stock market’s listing standards only.

Failure to meet the listing standards imposed by a stock exchange will result in the possible delisting of the company.  One of the more common events prompting a delisting is the company’s failure to uphold the minimum required stock price rule, or market capitalization.  This requirement stipulates that a listed company have a closing stock price of more than $1 at least once during a 30 consecutive business day period.


The Good News


Don’t panic if you are employed by a NASDAQ listed company that might normally be at risk of not meeting the minimum share price rules mentioned above or other rules requiring a minimum value of publicly held shares.  The NASDAQ requested on two different occasions (an initial request and a second request extending the original grace period) that its regulators, the SEC, allow it to suspend these rules for NASDAQ listed companies who have recently been impacted by the steep decline in the stock market and might be at risk of non-compliance with its listing standards.  The SEC agreed to this suspension.  See Issuer Alert #2008-005A. As a result, the NASDAQ exchange won’t enforce its minimum bid price rule or other rules requiring a minimum value of publicly held shares until April 19, 2009.  No companies will be delisted during this period so you can breathe easy for now.  The old rules will resume effective April 20th unless the NASDAQ requests another extension of this temporary suspension period and the request is accepted by the SEC.


Warnings and Second Chances to Comply


If the minimum bid price requirement does go back into effect as scheduled on April 20, all is not yet lost for those companies that don’t meet it. Here is a summary of the delisting process; you can see that there are numerous opportunities for companies to come back into compliance and to appeal NASDAQ’s decision:


  • NASDAQ will send deficiency notices to affected company’s, advising that they have been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements.

  • If the company does not demonstrate compliance within the compliance period, it will be issued a delisting letter, which it may appeal at that time.
  • If the company is unable to maintain the continued listing criteria, it will be notified, in writing, of the nature of the deficiency and the action necessary to regain compliance. If the company receives a delisting letter, it will have the opportunity to appeal NASDAQ’s determination to the Hearings Panel.

Each trading day, NASDAQ publishes a list of companies that aren’t compliant with its listing standards. A company can regain compliance with the minimum bid price requirement when it has a closing bid price of $1.00 or more for 10 consecutive business days. NASDAQ views reverse stock splits as an acceptable method to regain compliance.

For more information regarding this topic, check out the NASDAQ’s general listing standards.

NASPP Quick Survey on Section 16

The NASPP has posted a new quick survey on Section 16 reporting and compliance procedures; please take a moment to complete it today.  The survey is only seven questions; you can probably complete it in less than 10 minutes.

Exequity Quick Take Survey: 2009 LTI Grant Practices 

Exequity is conducting a short survey on 2009 LTI grant practices to assess changes as a result of the recent economic turmoil.  The survey asks 11 questions, which a person knowledgeable about a company’s recent and current LTI grant practices can answer in five minutes or less.  Participants will receive a summary of the survey results.




January 27, 2009

Recent Option Exchange Program Announcements

I was surprised to see that Google announced in an 8-K last week that they are implementing an option exchange program for their underwater stock options.  I was even more surprised to read how the program will work. 

What About the TSO Program?

What surprised me most about the exchange program was that Google feels the need to do it at all.  You will recall that one of the major headlines of 2007 was Google’s transferable options program, which enables Google employees to sell their options to a third party, rather than exercising them.  One of the touted benefits of the program was that it should make underwater options less of a concern for Google.  Even underwater options have time value, thus, Google employees would still be able to realize a return by selling through the TSO program even when their options have no intrinsic value.

Does the exchange program mean that Google employees haven’t been able to sell their underwater options through the TSO program, or is it just that they weren’t making enough money on their sales? According to Google’s September 2008 10-Q, options covering almost 500,000 shares were sold through the program in Q3, but the 10-Q doesn’t say whether those options were underwater or in-the-money.  It does say that the options sold at an average of about $276 per share (a premium of about $38 per share).   

Is This 1998 Again?

I was also surprised to see Google offering to exchange the options on a one-for-one basis–something I haven’t seen much of since FASB announced variable-plan accounting for repricings under APB 25, back in 1998 (yeesh, has it really been ten years since the halcyon days of cost-free repricings?). For most public companies, this would never get past their shareholders, but Google isn’t submitting the exchange program to a shareholder vote (their plan expressly allows repricing without shareholder approval).  Even if they did, it wouldn’t matter: according to their last proxy statement (March 2008), their officers and directors hold 70% of the votes on their common stock, which gives them the luxury of being able to do things with their stock plan that other, more widely held companies with institutional investors, can’t. 

If your management team is thinking that they can do this type of exchange just because Google did it, they might need to think again (I’m guessing that not many of you work for companies where management controls a majority of votes).

Eligible Options

Another feature of the program that is surprising to me is that Google is repricing all options with a price above FMV on the day before the exchange, rather than requiring that options be a minimal percentage underwater to be eligible for exchange.  The last company I know that did this saw their FMV rise on the date of the exchange and some employees that participated ended up with options that had a higher exercise price that the ones they exchanged–not at all the intended outcome.

Compared to Starbucks

Starbucks also announced an exchange program last week, but their program is a lot more like what I expect to see in exchange programs these days:  only options with a price above the 52-week high are eligible, options will be exchanged on a less than one-for-one basis (Starbucks is hoping to achieve the elusive value-for-value exchange), executive officers are excluded, and the program is subject to shareholder approval (probably the reason why the program is more like what I’d expect).

Reason #10 to Renew Your NASPP Membership:  The Latest Information on Underwater Options

Visit our Underwater Options Portal for the latest strategies on dealing with underwater stock options, including a recent memo from ISS on key features institutional shareholders consider when evaluating exchange programs.  And don’t miss our webcast, “The Dark Side of Option Exchanges,” coming up this Thursday, January 29.

Submit Your Proposal for the 2009 NASPP Conference Now

We are accepting speaking proposals for the 2009 NASPP Conference through February 27.  For more information, visit our Proposal Submission Website.  We begin evaluating proposals as soon as the submission period ends, so we can’t make any exceptions to this deadline, no matter how dire the circumstances. Plan accordingly! 

We have not yet announced where the Conference will be or the exact dates.  Rest assured it will be in the continental US, in the October timeframe. As soon as we know more, I promise to announce it here in my blog.

In Case You Are Wondering…

Rachel Murillo, the NASPP’s Editorial Director, gave birth to a boy, Dylan Matazas Murillo, at 6:24 AM last Wednesday, January 21.  7 lbs 6 oz and 21 inches long. Both Rachel and Dylan are doing great.    

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

– Barbara

January 22, 2009

Making a Good First Impression

Leave it to my friend and colleague, Rachel Murillo, our Editorial Director, to compete with Tuesday’s presidential inauguration for a bit of publicity. If you know Rachel or have seen her in the past few months, you would know that Rachel was pregnant with her first child.  Rachel went into labor on Tuesday and we are all waiting anxiously for news about the arrival of her new baby.  While Rachel enjoys some time with her newborn (and gets very little sleep) during the next couple of months, I will be taking over her blogs.  Below is my blog for the day.

Making a Good First Impression

We form opinions about people the first time we meet them.  We even form opinions about people we have never met!  This is why it’s worthwhile to make every first impression positive and memorable.  You may be thinking, “What do first impressions have to do with equity compensation?” They do, and I’ll explain here why.

Most companies provide some sort of introductory training or orientation for their new employees.  This new hire orientation is your opportunity to create a favorable first impression of your department, set the tone for the type of service these folks can expect to receive from you and your department, and get new employees excited about your company’s equity compensation program(s).  Having a representative from your Human Resources department deliver a stack of stock plan documents to your new hire employees during orientation is not going to cut it when it comes to welcoming a new employee to your organization and getting them familiar with what they need to know about your company’s stock programs. 

Key Content

Instead, a thoughtful and effective new-hire orientation program should include and cover several things:

    • Prior to orientation, consider sending an agenda with the employee’s offer letter to outline the topics you will be covering during your part of the new hire orientation.  

    • Come armed to this orientation with a PowerPoint presentation highlighting why your company’s stock plan programs are innovative and desirable.
    • Be sure to describe unfamiliar concepts and/or terms in your presentation, i.e., restricted stock versus restricted stock units.
    • Call attention to important critical dates, i.e., the next opportunity for enrollment in your company’s ESPP.
    • Share important contact information, i.e., service provider contacts.
    • Additional materials you might provide during this orientation include a list of frequently asked stock plan questions, program summaries and/or enrollment forms with samples on how to complete these documents.

Words of Wisdom

Have some fun with this process, but don’t overwhelm people. In my experience, one of the more common complaints about new hire orientation is that it is overwhelming or boring.  An effective orientation program (or lack of it) will make a significant impact on your company’s new hires.  Ask yourself, “what impression and impact do I want to make on new employees their first day,” and remember that an important aspect of any equity-based compensation program is the manner in which the program and its benefits are communicated to employees.  Don’t discount the importance of your company’s new hire orientation; instead take full advantage of this occasion.  You have just one chance to make a good first impression so make it count

PS. Did I mention that much of the content you will want to create a brilliant equity-related presentation and articulate difficult concepts during your part of the new hire orientation can be found on in the Prospectus/Plan Brochures/Other Communications Material section of our Document Library?  Access to this information is only available to members; be sure your membership is current so you can validate the content provided in your part of the new hire orientation.  And we’re always looking for new submissions–if you’ve created something innovative for your new-hire presentations, please send it along so we can share it with your fellow NASPP members. 


January 20, 2009

Options for Nothing

Things are bad out there.  I’m not talking about the freezing temperatures and snow that much of the country is experiencing (that’s bad, but weather is a topic for someone else’s blog); I’m talking about underwater stock options.  The market is so depressed that some companies have options so far underwater that they think their employees might be willing to voluntarily give them up for nothing in return–no cash, no new stock option, no stock or units–zip, nil, nada, a big fat $0.  I’ve had enough people ask me about this that I’ve decided to make it the topic of today’s blog. 

You Aren’t Doing Your P&L Statement Any Favors

From an accounting standpoint, this strategy doesn’t do anything for you.  If the options are fully vested, you’ve already fully expensed them and you don’t reverse any of that expense.  If the options aren’t fully vested, then the transaction is viewed as akin to an acceleration of vesting and all remaining unamortized expense is recognized immediately. Don’t believe me–check out paragraph 57 in SFAS No. 123(R)

In this scenario, the company would be ahead if the employees kept their options. Some of the employees are surely going to terminate before their options vest, forfeiting their unvested options; when that occurs, no further expense is recognized for the forfeited options.  By having employees voluntarily surrender their options, the company loses the opportunity to reduce the expense for future forfeitures upon termination.

Some members have wondered if the company would have to be careful about making future grants, lest they be combined with the voluntary surrender of the underwater options and the whole thing treated as a repricing.  I’m not terribly concerned about this, at least from an accounting standpoint, because the company would come out ahead if the surrender and new grants were treated as a repricing. 

Let’s say that an employee holds a option granted a year ago to purchase 1,000 shares at a price of $50 per share and the stock is currently trading at $5 per share.  The option is 25% vested, with the remaining shares vesting over the next three years.  The grant date fair value of the option is about $28, resulting in an aggregate expense of $28,000.  The company has recognized 25% of this, or $7,000, with remaining unamortized expense of $21,000. 

If the employee surrenders the option for no compensation, the company immediately recognizes the remaining $21,000 of unamortized expense and that’s the end of the story.  If the employee then terminates a month later, this event has no impact on the expense recognized for the employee’s option.

If the employee tenders the option for a new grant, however, that’s a completely different story.  Let’s assume the new grant is for 500 shares at the current FMV of $5 per share, and is subject to a new four-year vesting schedule.  First off, if the employee terminates a month later, the company doesn’t recognize any expense for the new grant or any of the remaining expense on the original underwater grant (since the employee won’t have fulfilled the new grant’s vesting requirements or the remaining vesting requirements on the old grant).  If the employee terminates any time during the next three years (before the original grant would have vested), the company benefits by not recognizing expense for the portion of the original grant that would have been forfeited (and also doesn’t recognize expense for the unvested portion of the new grant). 

And there’s more.  The grant date fair value of the new option is about $3 per share.  If granted on a standalone basis, that’s a total expense of $1,500.  But if granted in exchange for the underwater option, that expense is reduced by the current fair value of the cancelled option, which is about $.50 per share or $500 in total. This reduces the expense for the new grant by a third. 

* For those of you doing the math on your own, for purposes of computing the fair values in this example, I used the Black-Scholes model and assumed a volatility of 60%, historical interest rate of 5%, current interest rate of 1.5%, and no dividend yield. I also assumed an expected life of 5 years for all valuations, which is probably not reasonable.  And I rounded, quite liberally, so the numbers would come out even. 

Other Considerations

My understanding is that there’s no black and white definition of a tender offer, but I’ve got to believe the SEC would view this as one if more than just a handful of employees are asked to surrender their options. It’s clearly an investment decision.  I also think that the SEC might be concerned that companies were trying to use this strategy to circumvent the tender offer requirements that would apply to an exchange for consideration.

The cynic in me is concerned that this is just a tactic to get more shares into the hands of executives. Senior managements’ options are underwater and the plan is running out of shares, so they figure they can replenish the share reserve by convincing employees to give up their “worthless” options. 

And there’s the obvious obstacle of getting employees to agree to surrender their options. Companies that implement programs in which employees do actually receive something of value in exchange for their options put in a lot of effort encouraging employees to participate and rarely have 100% participation. I imagine it would be even harder to get employees to participate when they won’t get anything out of it.  As a recent article in Finance and Commerce demonstrates, savvy employees know that even underwater options have value (“Stock Options Boost Income–For Those Who Know the Rules,” Mark Anderson, January 15, 2009). 

For more information on underwater options, check out the NASPP’s Underwater Options Portal.  The following articles in the portal discuss the treatment of options that are surrendered for no compensation:

And don’t miss our January 29 webcast: The Dark Side of Option Exchanges

Reason #9 to Renew Your NASPP Membership:  Sample Employee Communications in Year-End Procedures Portal

The NASPP’s Year-End Procedures Portal includes sample memos, statements, disqualifying disposition surveys, and other materials that you send to employees at the end of the year.  Save time by using our samples as a starting point for your own employee communications. 

New NASPP Online Course on Stock Compensation and M&A

The NASPP is pleased to introduce our newest online educational program, Tackling Equity Compensation Issues Related to Mergers & Acquisitions. At only $495, this course is a true bargain–and members that register by February 6th can qualify for yet another $100 off this price. Stock plan professionals involved in any aspect of the M&A process won’t want to miss this valuable program. 

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

– Barbara   

January 15, 2009

Volatile Times

Volatility is one of the inputs used to calculate a Black-Scholes model valuation of stock options. As volatility increases, so does the maximum gain that an employee could realize through a future exercise of their option. This, in turn, increases the value of that option, which may be a difficult concept to reconcile when the volatility is increased because of a down market!

With the recent turmoil in the stock markets, companies may find that the volatility they are using to value their stock options is jumping up as their stock price drops. Whether companies are using implied volatility or their own historical volatility, the recent changes in stock price could have impacted those numbers dramatically. There was a thread on this in our NASPP Discussion Forum recently on how to handle these changes, and I’m sure the question on many peoples’ minds right now is “should my company be doing something to deal with this increase in volatility?”

Companies may have created their method of calculating the volatility assumption without anticipating such a sharp downturn in the market. Now, they are looking at their method to see if it is still the best approach. The real intent of calculating volatility is to provide the best estimation of what future volatility will be. Ideally, the period of time the company is using to analyze historical or implied volatility will be long enough to provide an appropriate amount of stability which will accommodate short-term fluctuations. The shorter the period of time being analyzed, the more impact short-term fluctuations have, which may not be a reasonable reflection of what the company’s stock price volatility will look like over the life of the option. On the other hand, won’t options granted during this economic downturn have a higher chance of realizing gain through a dramatic increase in stock price over the life of the grant?

If this is the beginning of the fiscal year for your company, then it is a good time to take a look at how you are coming up with your valuation assumption. This is your opportunity to review your process for estimating volatility to see if it really is the most appropriate. Keep in mind, however, that FAS 123(R) clearly states that the method for determining the estimates should not only be “reasonable and supportable” (Paragraph 16), but also be “determined in a consistent manner from period to period” (Paragraph 23). So, if you are considering a change, such as an increase in length of time included in the calculation or a change to the way you weigh different periods, you will need to make sure that it is a change your company can not only justify to your auditors now, but also sustain as a valid method going forward.

For more information on your valuation assumptions, check out this article from Towers Perrin, Granting Stock Options in Turbulent Times: Take Care When Choosing Valuation Assumptions, in our Stock Plan Expensing portal. Also, get an idea of how your method for determining volatility measures up against other companies by taking our Compliance-O-Meter quiz on Volatility. We’ve got one for private companies and one for public companies.


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January 13, 2009

Recent 409A Developments

There were several developments in December related to Section 409A that you should be award of; today I discuss two of them. 

Notice 2008-113: Corrections Program for Discounted Stock Options

One thing that the options backdating scandal highlighted is that few of us have blemish-free grant procedures (although hopefully we are a lot closer to that ideal now, then we were ten– or even five–years ago).  Occasionally, a snafu occurs and an option that was intended to be granted at FMV is granted at a discount.  This results in a host of legal and accounting pitfalls, not the least of which is that the option could retroactively become subject to Section 409A–forcing the optionee to exercise within a fairly limited time after the option vests or face 409A’s onerous 20% penalty tax.

Fortunately, under Notice 2008-113, the IRS has established a 409A corrections program for discounted stock options, essentially giving the company a “do-over” for option pricing glitches.  Under the corrections program, once an option is granted, the company has until the end of the calendar year to correct pricing errors for options granted to Section 16 insiders and has until the end of the calendar year following the grant to correct pricing errors for options granted to other individuals. In both cases, however, the options must be corrected before they are exercised–once an option is exercised, all bets are off and the optionee could be looking at that 20% penalty tax.

To be eligible for the corrections program, 1) the company has to take steps to ensure that the error won’t happen in the future, 2) the optionee can’t be under examination by the IRS, and 3) the grant documentation must indicate that the option price was intended to be at least 100% of the FMV at grant.

Of these three requirements, numbers 1 and 2 seem fairly straightfoward.  I hope that when a mistake like this occurs, you take steps to make sure that it doesn’t occur in the future. The notice does specify that you need to take “commercially reasonable” steps and I’m not quite sure what “commercially” means in this context, but I’m going to presume whatever normal steps you would take to prevent the error from occurring again would suffice. 

I also hope that you don’t have many, or any, employees under investigation by the IRS.  Although–now that I think about it–more than one stock plan administrator has mentioned to me that, in some years, large numbers of their employees receive notices from the IRS about not filing Schedule D for their same-day sale exercises, so making sure employees understand the tax ramifications of their stock plan transactions might be key to this requirement.

The third requirement, that the grant documentation state that the option price was intended to be at least 100% of FMV at grant is the most concerning.  I see a lot of grant agreements that have been streamlined over the years to remove the legal jargon that used to be de rigueur.  Generally, I encourage this practice, but here it could be a problem.  If your grant agreement just states the option price as a dollar value, with no qualification, and your option plan allows the grant of discounted options–it seems to me that you wouldn’t meet this requirement.  To make sure your options are eligible for the corrections program, you might want to review your plans or option agreements now to ensure that they state that options cannot have a price that is less than FMV at grant.

See the NASPP alert “409A Corrections Program for Discounted Stock Options” for more information.   

Notice 2008-115: 409A Reporting and Withholding and Calculation of Income Subject to Penalties

As mentioned in my December 17 blog, in early December the IRS issued Notice 2008-115, which suspends code Y reporting until further guidance is issued.  The notice also provides guidance on how to calculate income that is subject to penalty under 409A–which currently must be reported in boxes 1 and 12 (with code Z) of Form W-2.  I’ll write more about this calcuation in a future blog, when I discuss the proposed regs the IRS issued on this subject.

See the NASPP alert “IRS Issues Guidance on Section 409A Reporting and Withholding” for more information on Notice 2008-115 and see our alert “IRS Proposes Regulations for Calculating 409A Income and Penalty Taxes” for more information on the proposed regs.

Reason #8 to Renew Your NASPP Membership:  Year-End Procedures Portal

The NASPP’s Year-End Procedures Portal has everything you need to streamline your year-end processes, including tax and other legal updates for the year, sample employee communications, year-end reporting timelines and checklists, and FAQs on Form 1099 and Form W-2 reporting.

New NASPP Online Course on Stock Compensation and M&A

The NASPP is pleased to introduce our newest online educational program, Tackling Equity Compensation Issues Related to Mergers & Acquisitions. At only $495, this course is a true bargain–and members that register by February 6th can qualify for yet another $100 off this price. Stock plan professionals involved in any aspect of the M&A process won’t want to miss this valuable program. 

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

– Barbara

January 8, 2009

Contingency Plan

Every stock plan department should build a contingency plan for all essential daily functions into their records management and retention policy. Stock plan management processes are complex and typically involve multiple departments. You need to be confident in how not only your department, but those you work with will respond to situations that range from serious disaster (like floods, fire, blizzards, etc.) to a key employee being unavailable during an essential part of a process.

For your contingency plan, you will want to determine what your team will do in the event of an evacuation as well as in a situation where the entire team (which in some cases is the one stock plan administrator) is unable to return to work. Planning for an evacuation should involve a process for taking all necessary tools, contact information, access codes, licenses, and policies/procedures with you as you go. Preferably, all of this information would be accessible from off-site without the stock team having to physically remove anything from the office.

This will help you also in preparing for an event where the entire team may be unable to physically go to the office. Take, for example, a situation where incremental weather prohibits all employees at your location from going to work (sudden ice, for example) on the day an ESPP needs to be processed or you have a large vesting of restricted stock units. Sometimes you will know in advance when such an event is a possibility and be able to bring home a laptop with a good VPN connection. However, you should have a plan in place that would allow for required daily tasks to be completed remotely at any time without warning.

When allowing remote access to necessary data, you will need to maintain data privacy and data integrity. You will also want to build in redundancy so that your data is saved on servers that are physically in different locations (all important company data should be handled in this way). It’s a good idea to sit down with your IT team to understand and plan for emergency situations. You can work toward building your systems to better accommodate the unforeseen by automating processes, as well.

Once you have your own team plan under control, reach out to other departments and vendors that are essential to any part of your job function. For example, does your broker have a back-up plan for sending you trade information? Do your payroll teams have a contingency plan to get you payroll data on crucial data transfer days (such as contributions to the ESPP)? You should review these plans in regularly scheduled meetings annually to be sure that changes to personnel, location, and stock programs are accounted for in each department’s plan.

The beginning of the year is a busy time for not only the stock plan management team, but also many departments that work closely with them. However, it’s not too early to schedule planning meetings for later in the year to create or review your contingency plans!

Disaster recovery, along with other major data integrity planning and policy issues, is just one of the many topics covered in the NASPP’s fantastic Fundamentals of Stock Plan Administration education program. If you are new to the field and looking to get a solid foundation in regulatory requirements and administrative best practices, register now to take the online course or join us for the live program that will be offered as part of our 2009 NASPP Conference!

-Rachel Murillo

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January 6, 2009

ISS/RiskMetrics Policy Updates

As we head into proxy season and many of you begin preparing to submit stock plans to shareholder votes, it might be helpful for you to know that RiskMetrics (formerly ISS) has issued updates to its corporate governance policy for 2009.  For the most part, the updates seem fairly light with respect to stock compensation (unlike in past years–see our practice alerts on ISS’s 2005, 2007 and 2008 updates).

Burn Rates

As usual, RiskMetrics updated the burn rates they consider acceptable for stock plans.  RiskMetrics will recommend voting against stock plans if a company’s burn rate exceeds their published guidelines.  For the most part, the acceptable burn rates seem to have increased. For Russell 3000 companies, the only industries where acceptable burn rates decreased were Commercial Services & Supplies, Consumer Services, Health Care Equipment & Services, and Real Estate.  Non-Russell 3000 companies saw decreases in acceptable burn rates in the Materials, Automobiles & Components, and Retailing industries.

In addition, RiskMetrics indicates that they are now using a 400-day volatility to determine the acceptable burn rates (rather than a 200-day volatility they’ve used in the past).  Wondering how volatility figures into a burn rate calculation?  When calculating burn rates, Riskmetrics applies a premium to full value awards based on the company’s volatility (e.g., for companies with a volatility of 54.6% or higher, each share granted under a full value award counts as 1.5 shares in RiskMetrics burn rate calculation). 

Paying Dividends on Performance Awards

The policy takes a position against paying dividends (or equivalents) on unvested performance-based stock awards.  Where companies have stock plans that provide for this, RiskMetrics may recommend withholding votes or voting against the company’s directors or may recommend voting against the company’s stock plans.

It seems like this could be significant for NASPP member companies that pay dividends.  According to our 2007 Stock Plan Design and Administration Survey (co-sponsored by Deloitte), 45% of respondents pay dividends on their performance share plans and 42% pay dividends on performance unit plans.

Change-In-Control Provisions

The policy introduces the concept of “liberal change-in-control provisions.” For stock compensation, this means a change-in-control provision that could result in acceleration of vesting even if the change-in-control never occurs.  Many of you will remember that this was a problem in the proposed US Airways/UAL and Sprint/Worldcom mergers that were not completed.  

Now might be a good time to review how your stock plans define a change-in-control because if your plan includes what RiskMetrics considers to be a liberal provision, in addition to recommending voting against your plan, RiskMetrics may recommend voting against (or withholding votes for) your directors–making this an issue even if you aren’t submitting a stock plan to shareholder vote this season.

See the articles “How to Handle Equity Compensation Awards in Corporate Transactions” and “Designing Stock Plans That Work in Corporate Transactions” for more information on drafting change-in-control provisions in your stock plans.


RiskMetrics already has a well-articulated policy on repricing stock options; the only update to that policy this year was to specify that they do not consider market deterioration, in and of itself, to be a reason to reprice options.  For more on what RiskMetrics requires before it will recommend that shareholders vote for a repricing (or other option exchange program), don’t miss our January 29 webcast, “The Dark Side of Option Exchange Programs.”

For more information on Riskmetrics 2009 policy update, see the NASPP alert “ISS/Riskmetrics 2009 Corporate Governance Policy Updates.” 

Reason #7 to Renew Your NASPP Membership: Discounted Registration for the NASPP’s Newest Online Course on M&A

We’ve just announced the newest addition to the NASPP’s online curriculum: “Tackling Equity Compensation Issues Related to Mergers & Acquisitions.” This program will address the real-world, practical challenges that arise for stock plan administration in mergers and acquisitions. The program includes two webcasts, interactive quizzes, and a dedicated online discussion forum allowing you to interact with the instructors. Don’t wait to register–the early bird discount is only available until February 6 and the first webcast is on March 24. And don’t forget to renew your membership–NASPP members can save up to $700 on registration.

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I’m keeping an ongoing “to do” list for you here in my blogs.