The NASPP Blog

Monthly Archives: March 2009

March 31, 2009

Proposals for Option Exchange Programs

Last week, Nasdaq filed with the SEC to extend its suspension of the minimum stock price listing requirement. Under this requirement, companies that do not have a closing price of at least $1 for more than 30 days can be delisted. But, at least until June 30, 2009, the requirement won’t apply. See our January 29 2009 blog for more information on this requirement and the delisting process.

While I’m on the topic of depressed stock prices, I thought I’d highlight a few notable recent shareholder proposals for option exchange programs.

eBay’s Option Exchange Program

Under eBay’s program, underwater options would be exchanged for RSUs. Far from a one-for-one exchange or even a value-for-value exchange, participants would receive only 90% of the current value of their underwater options in RSUs. This results in some pretty steep exchange ratios–eBay estimates as high as 35 options for one RSU for some grants–and possibly some pretty small RSUs grants. Grants of less than 100 shares will be paid out in cash.

Shares cancelled in the underwater options will NOT be available for regrant under eBay’s plan. As a result, the whole program is also contingent on eBay shareholders approving an additional allocation of shares for eBay’s 2008 plan.

Starbucks Program

Starbucks has received shareholder approval for a fairly straight-forward, reasonably shareholder friendly option exchange program. There’s nothing terribly remarkable about the program–either good or bad. It will be a value-for-value exchange of options for options. Interestingly, Starbucks had to agree to amend the plan’s share counting language relating to shares tendered to cover tax withholding (but not for options surrendered in the exchange–those shares will return to the plan), to get RiskMetrics to recommend that investors vote in favor of the proposal.

Intel’s Program

Just like Starbucks, Intel’s program will be a value-for-value exchange of options for options. Despite the fact that Intel is aiming for value-for-value in new option grants, some of its options are so far underwater that Intel estimates the exchange rate for them could be 99.6 to 1! 

Just as with ebay’s program, shares underlying the surrendered options generally will not be available for future grants, so Intel is asking for an additional allocation of shares.

Features Common to All Three Programs

  • For all three companies, a majority of their options are underwater.  Intel reports that 99% of its options are underwater and eBay reports 96%.  Comparatively, Starbucks maybe could have waited it out a bit, with only 62% of their options underwater. 
  • All three programs exclude both NEO’s and directors.  Starbucks goes even further to exclude additional members of their “senior leadership team.”
  • All three companies are essentially asking shareholders to pre-approve the program and then giving themselves a specified period in which to implement it: eBay has 12 months, Starbucks has six months, and Intel splits the difference with nine months.    
  • In all three programs, only options with a price above the 52-week high are eligible for exchange.  eBay and Intel exclude grants made in the past year and Starbucks excludes grants made in the past 17 months (which seems like an odd number–no idea how Starbucks arrived at it).  eBay also excludes options that will be expiring within 12 months.     
  • All three programs also restart vesting, with no portion of the new awards vesting for at least one year. Starbucks and Intel keep things simple by using the same vesting schedule for all new awards; eBay assigns different schedules based on when the surrendered options were originally scheduled to vest.  Starbucks and Intel will reduce the contractual term of the options to seven years.
  • All three companies state that reducing overhang is one of the benefits of the program. But, my understanding of the term “overhang” is that it includes any shares available for grant under the plan (e.g., overhang = shares available for grant + shares outstanding).  So, I’m not sure how Starbucks program will reduce their overhang.  Since the eBay and Intel programs don’t add shares back to the plan, their programs will reduce overhang under the traditional definition.    

Reason #19 to Renew Your NASPP Membership: “Half-Off” the NASPP Annual Conference!
I’m thrilled to announce that the 17th Annual NASPP Conference will be in San Francisco, from November 9-12.  I’m even more excited to announce that we are offering a special “half-off” rate on the Conference for members that register by April 24. We know that many of our members are struggling financially but, with all the regulatory changes the current economic environment is bringing about, are also in critical need of the practical guidance delivered at the Conference. As a thank you to our members and to ensure that they are able to attend this year, members that register by April 24 pay only $795 per person, half the standard member rate of $1,595 (which we did not increase this year). It’s been a long time since the NASPP Conference was available at this price and I don’t expect that we’ll offer it again. Register today at

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 

March 25, 2009

Keeping Current with Global Stock Plans

Are you staying current with international developments that may impact your company’s equity compensation program? You will find many essential tools in the NASPP Global Stock Plans portal to keep up-to-date. If you haven’t browsed through the portal recently, you really need to check out our latest feature; the Stock Plan Compliance Evaluation tool.

The Stock Plan Compliance Evaluation tool is available only to NASPP members.  To access, click on the link that is under the Country Guides on the NASPP Global Stock Plans portal. This evaluation tool, provided by GlobalSharePlans, is a fantastic interactive tool that you can use to evaluate your international stock plans. By choosing your countries of interest, you can get an instant overview of the potential issues to be aware of. If you are seeking greater detail, head to the “Plan design by country” drop-down and run a personalized healthcheck on your plans by including applicable details. The Stock Plan Compliance Evaluation tool may be available this year only, so take advantage now!

We also continue to get regular updates to our Country Guides, Alerts, Articles, and Quarterly Updates. If you don’t already, sign up now to receive country alerts. You can subscribe to receive alerts for just the countries your company does business in, or all countries on the list! And, here’s a tip you may not be aware of:  you can search the archive for alerts on a particular topic, or find a summary of individual country alerts in each Country Guide link. Here is an alert that recently caught my eye:

Korea: The Korean government recently updated its position on the deductibility of employee stock options costs to a Korean subsidiary or branch. The Korean subsidiary or branch will now be able to deduct the costs associated with employee stock options issued by a foreign parent company as long as the subsidiary incurred the costs directly or through a recharge agreement. Because of this new position, when the Korean subsidiary or branch bares the cost of employee stock options, the employee’s stock option income will be subject to income tax and social security tax withholding. Additionally, the Korean government clarified that in many cases, the income assessed and subsequent tax withholding on income from stock options earned by mobile employees will be calculated pro-rata for the time spent in Korea.

Our Global Stock Plans portal Task Force Members regularly contribute in-depth articles and quarterly newsletters. Valerie Diamond and Barbara Klementz from Baker & McKenzie recently contributed the “Top 10 Things You Need to Know for Option Exchanges Involving International Employees”. A great reminder included in this valuable list is that there are countries where the employee and/or the local entity have had to pay taxes on the options at grant. Additionally, it is likely that neither the employee nor the local entity may be able to obtain a refund or tax credit and will owe taxes again at grant for the new option.

Don’t miss out on the latest developments; be sure to put a regular review of the NASPP Global Stock Plans portal on your schedule!

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March 24, 2009

Bigger Than Underwater Stock Options – Part 2

Last week I blogged about the ways in which the current market decline is impacting stock plans beyond just making a lot of options not worth anything.  This week I take a look at some of the long-term impacts the market volatility could have in terms of option valuation.

Stock Price Volatility

One concern that I’ve heard discussed in a number of different venues is that all this market fluctuation is wreaking havoc on expected volatilities for stock plans.  Whether your stock is going up or down overall (only .5% of respondents to the NASPP’s quick survey on market volatility and stock plans indicated that their stock had remained flat over the past year), the fact is, it’s probably moving around a lot these days.  And that is likely to cause your estimate of future volatility for option valuation purposes to increase. 

Expected volatility (along with expected life, which we’ll get to next) is one of the most influential factors on option fair value.  The higher your expected life, the higher your option fair values will be.  That might not seem like a big deal now, while your stock price is depressed (and, thus, so are your option fair values) but it could be a very big deal once your stock price starts to recover. If you rely on historical volatility to estimate future volatility, you are likely to be basing your volatility estimate on a historical period that includes the current market for many years to come.  Remember, you generally calculate historical volatility over a period that is commensurate with the expected life of the options being valued, so you could end up including the current volatile market in your estimates for the next four years or longer. 

Expected Life

At the same time that your volatility is going up, if your stock options are underwater, your expected life is probably getting longer.  Underwater options cause employees to wait longer to exercise.  This might be mitigated to some extent by terminations, but unless you are laying off employees, with the job market the way it is these days, most employees probably aren’t going anywhere. 

A longer expected life has two significiant implications: 

  1. In and of itself, a longer expected life means a higher option fair value.
  2. If you use historical volatility to estimate expected volatility, it lengthens the historical period you are using for that analysis. This cause the current period of market instability to remain a part of your expected life calculations for more years into the future. 

What To Do

The articles “Granting Stock Options in Turbulent Times: Take Care When Choosing Valuation Assumptions” by Towers Perrin and “Valuing Stock Options: Is It Time to Reconsider Binomial Lattice Models?” by Watson Wyatt discuss these concerns and ways to mitigate them:

  • Once your stock price stabilizes, consider incorporating implied volatility into your expected volatility analysis
  • Consider expanding the period used to compute historical volatility
  • Consider switching to a binomial or other lattice model

If you haven’t yet started considering the impact the current market environment is having on your option valuations, now is the time to start preparing for this.

Don’t Forget to Resubscribe to the NASPP Blog
If you haven’t already, don’t forget to resubscribe to the NASPP blog so that you will continue to receive email notices of new entries once we discontinue the old notification service. 

M&A Course Begins Today
The NASPP’s newest online educational program, Tackling Equity Compensation Issues Related to Mergers & Acquisitions, begins today, March 24. This course will offer a tactical approach to address the real-world, practical challenges that arise in mergers and acquisitions. Register now to make sure you don’t miss the first webcast (although if you do miss it, you can always catch the recorded archive).

Reason #18 to Renew Your NASPP Membership:  Customized Global Stock Plans Compliance Evaluation
NASPP members can now receive a customized analysis of their global stock plan compliance, courtesy of GlobalSharePlans.  Simply go to the NASPP’s Global Stock Plans Portal and click the link in the left column for the Stock Plan Compliance Evaluation. You can indicate the countries you have stock plan participants in, the number of participants in each country, and whether or not you’ve filed an EU prospectus for the country. The tool will then indicate whether or not you need to seek legal advice for your stock plans in each country. It’s cool–check it out today!

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 

March 19, 2009

The Tie-Out Binder

As you begin to wrap up proxy season, it’s time to start pulling together all of those supporting documents you’ve referenced in your proxy statement into one location. Proxy reporting is undoubtedly a reoccurring event, but not one we perform on a daily or monthly basis. What often happens with these non-routine projects is when we need to perform them again, we discover we’ve forgotten how to do them or where to obtain various supporting documentation e.g., what report do I run in my stock plan database to assist me in completing my “Grants of Plan-Based Awards” table. Similarly, when we are new to a process, such as proxy reporting, we often spend too much time and energy trying to figure out how to get these non-routine projects done. If you have ever been in this position, then I’m talking to you!

To take the mystery out of these types of non-routine or novel tasks, consider using a tie-out binder. The tie-out binder can be used to leave a document trail that anyone can follow in your absence, it can educate somebody new to the job and it is a way to substantiate data.

Why so important?

First, if you leave the company, and there are no documented records about the work you did on a project, everything related to the project next time it happens becomes a challenge for your replacement. This also results in a lot of wasted time and lost work productivity for this person.

Second, just think how much easier your life will be the next time you perform the task if you don’t have to rely on your memory or the memory of your colleagues to work through a project; having to piece together work because your memory has failed you also results in a lot of wasted time and lost work productivity.

And, finally, the tie-out binder is an invaluable way to substantiate data. I can’t tell you how many times I’ve been asked, “Where did that number come from?” If you have a tie-out binder on hand, you can save unnecessary hours of searching for work papers that support the numbers you’ve reported in your filings.

What to include?

• A copy of your “as filed” proxy statement or similar document i.e., Form 10-Q or 10-K.
• Supporting documents for any numbers that appear in the filings, such as reports you generated from various databases, spreadsheet calculations and important correspondence. (These supporting documents should be arranged in your binder in a way that follows the order in which the information appears in the document.)
• A final audit of your “as filed” document to the supporting documentation mentioned above. You want to make sure that every number in the filed document matches its counterpart in the supporting documentation. This is one of the most basic, and most valuable, ways to audit your work. It is the best way to find mistakes or locate numbers that have been inadvertently transposed. It is also the best way to easily locate back-up documentation for a number referenced in your master document.

Final thoughts

This probably goes without saying, but be sure to prepare your tie-out binder prior to filing your proxy statement or other related financial reports. Doing so will give you comfort about the numbers you’ve reported in your filings and will allow you to correct any mistakes before you formally report them. Further, be sure that your tie-out binder includes a clear description of its purpose and the period of time it covers e.g., “as filed 2009 proxy statement” noted on both its cover and spine so that it can be easily located by anyone at a later point in time. Another good practice here is to keep all of your tie-out binders in a single location in chronological order at your organization. And one more thing, your tie-out binder should be neat, and free of clutter; save the clutter for a separate, more informal file.

On a separate note, I wanted to let you all know that I am handing back these weekly blogs to my colleague, Rachel Murillo, who has returned from maternity leave.  A warm welcome back to Rachel!  Thank you all for letting me blog for you over the past couple of months. I look forward to making occassional “guest appearances” here from time to time in the future.



March 18, 2009

Resubscribe to the NASPP Blog

I’m excited to announce that we’ve implemented a new notification service for our blog. Unfortunately, we aren’t able to manually transfer all the email addresses on the distribution list for our old notification service to the new service. To continue receiving email notifications of our blog entries, you will need to resubscribe to the blog. This is very easy to do–just enter your email address in the “Subscribe to Blog” field in the left column of the blog and then respond to the verification message. 

Don’t put it off!  It will take less than 30 seconds for you to resubscribe; do it now and you don’t have to worry about forgetting to do it later.

Benefits of the New Notification Service: The new notification service will resolve the consistency issues we’ve been having with the old service and also sends a nice, clean, HTML-formatted notice that included the full blog entry. I am certain that all of our readers are going to be much happier with it.

Duplicate Notices: We will continue to send notices under the old service for a short period, so once you resubscribe, you may get both notices for a brief period. If you no longer want to receive the old notices, simply follow the instructions to unsubscribe.  The old notices are the ones that are in plain text format and that only include the first line or so of the entry.

March 17, 2009

Bigger Than Just Underwater Options

While there’s plenty of buzz these days about underwater stock options and the inevitable option exchange programs, the NASPP’s quick survey on market volatility and stock plans clearly shows that the market decline is wreaking havoc on stock programs in other ways as well.

Burn Rates and Share Reserves

49% of respondents indicate that they are concerned about running out of shares in their plan and 41% are concerned about burn rates.  Many companies set grant guidelines based on values, rather than a flat number of shares. In fact, 63% of respondents to the NASPP’s 2007 Stock Plan Design and Administration Survey (co-sponsored by Deloitte) use this method to determing grant sizes. In a declining market, grant sizes have to grow increasing larger if the company wants to keep new awards within the established guidelines.  In a market like the one we are currently experiencing–51% of respondents to the quick survey indicated that their stock had declined by more than 50% over the past year–this can quickly eat through a company’s plan reserve and cause burn rates to spiral out of control. 

Getting Grants Under Control

Although it’s a few years old, Watson Wyatt’s article “Compensation Apples and Pricing Model Oranges,” in the NASPP Document Library, discusses solutions to this dilemma that are still relevant today.  Some alternatives for getting grant sizes under control are to:

  • Revisit your grant guidelines to determine if they are still appropriate.
  • Consider using a different valuation technique for grant guidelines vs. 123(R) expense purposes (9% of respondents to the quick survey indicate that they are using this approach).
  • Set an arbitary limit on grant sizes (12% of respondents).
  • Limit the aggregate number of shares that can be granted to all employees (27% of respondents).

The more recent Mercer alert, “Weathering the Storm: Equity Compensation Actions for 2009,” offers additional suggestions for this year’s grant strategy. 

Increasing the Share Reserve

Where companies are running out of shares in their plan, additional solutions include asking shareholders to approve more shares (35% of respondents), implementing an option exchange program at a less than one-for-one ratio (7% of respondents) or for cash, or asking executives to surrender awards for no consideration (3% of respondents). 

Take the Quick Survey

If you haven’t yet completed it, take a moment today to participate in our quick survey on market volatility and stock plans.  Literally, just a moment–the survey is only four questions, no research required; you can complete it in under ten minutes. 

Fundamentals Early-Bird Rate Ends Friday
You must register by Friday, March 20, to take advantage of the early-bird rate for the NASPP’s acclaimed online educational program, Stock Plan Fundmentals. This is a $300 savings off the regular member rate–a price we are unlikely to ever offer again on this course. If you’ve ever wanted to complete this program–or want your staff to complete it–this is the year to do it.

M&A Course Begins Next Tuesday
The NASPP’s newest online educational program, Tackling Equity Compensation Issues Related to Mergers & Acquisitions, begins next Tuesday, March 24. This course will offer a tactical approach to address the real-world, practical challenges that arise in mergers and acquisitions. Register today to make sure you don’t miss the first webcast.

Reason #17 to Renew Your NASPP Membership:  NASPP Quick Surveys
NASPP Quick Surveys are easy to complete, take only a moment of your time, and provide a real-time look at industry practices and trends.  We’ve conducted quick surveys on everything from grant practices to insider compliance, plan design in light of 123(R), option valuation, state tax withholding procedures, and everything in between.  And we take requests: if you have a topic you’d like to see covered in a quick survey, email it to

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


March 12, 2009

IRS Authority

In keeping with the spirit of the season, tax season that is, I’ve devoted my blog this week to IRS guidance. Contrary to public perception, the IRS is responsible for more than auditing tax returns, collecting taxes (revenue) and pursuing tax evaders. A core responsibility of the IRS division of the Treasury Department is the administration of tax laws enacted by Congress. It is this division’s role to take the specifics of these laws and translate them into rules, procedures and detailed regulations that will then provide guidance to American taxpayers, IRS personnel, tax professionals and firms.

I’ve included a description here of some of the more common forms of IRS guidance. Having familiarity with the function of these various rules and regulations can be helpful in your jobs when assessing their controlling authority to your company’s stock plans and in applying these rules or regulations to specific tax-related matters at your organization.

Common Types of IRS Authority

Revenue Ruling: An IRS position on a certain matter that can be followed as precedent by all taxpayers. In other words, revenue rulings are the conclusion of the IRS on the application of the law to a specific set of facts and are numbered so that they correspond to the year they are issued.

A number of Revenue Rulings related to equity compensation can be found in our document library. Please note that Revenue Rulings can be revoked or modified at any time, so it is always recommended to verify the current status of a Revenue Ruling before treating it as precedent.

Revenue Procedure: A formal statement by the IRS regarding specific procedures or information, and can be used as precedent by all taxpayers.

Private Letter Ruling (aka PLR): A written statement to an individual taxpayer that asserts the IRS’s position on a particular tax issue (specific to the taxpayers unique set of circumstances). PLR’s are typically made public (absent any confidential information), but may not be cited or relied on as precedent by other taxpayers.

A member recently posed a question in our Q&A Discussion Forum as to whether an 83(b) election could be corrected where the purchase/transfer date was incorrect. We checked with expert legal counsel on this topic and learned that an existing PLR suggested that an election could be amended as long as the original election was timely filed. While this PLR cannot be relied on as precedent in the circumstances described above, it can be used to give the impacted party a better sense of how the IRS will respond to a similar set of facts and circumstances.

Regulations: Issued by the IRS or Treasury Department to interpret and give directions on complying with tax laws. Taxpayers can look to proposed regulations for guidance on how the IRS is thinking on certain issues, but are not typically required to be followed until final regulations become effective (because they are frequently modified based on comments received by the IRS); final regulations are the highest level of administrative guidance and are treated as law.

Last year, the IRS issued proposed regulations for Section 423 employee stock purchase plans, clarifying certain areas of ESPP design and administration. These regulations are important and have touched many of us in this profession. Until final regulations are issued, these proposed regulations can provide direction on various areas of ESPP design and administration that have been unclear for many years.

Notices & Announcements: Both are public statements that are considered authority, and may be relied upon to the same extent as a revenue ruling or revenue procedure. A notice can be used to convey what regulations will say in situations where the regulations may not be published in the immediate future. Conversely, announcements can be used to convey what regulations will say in situations where regulations are certain to be published in the immediate future, and may be issued to provide information such as, guidance for complying with regulations or procedures.


As always, we continue to post certain relevant IRS guidance to our website and will maintain this practice as new and important legislative authority develops. However, it is always advised that you check with your tax advisors for guidance on matters unique to your organization.

Webcast Today
Don’t forget to tune in to our webcast, “The Race to IFRS-Don’t Be Left Behind,” this afternoon.


March 10, 2009

EDGAR Passwords: One Less Thing To Do

When I read suggestions for best practices for Section 16 reporting, I often see keeping your insiders’ EDGAR passwords current included as a critical procedure.  I disagree–I think it is a waste of time to keep your insiders’ EDGAR passwords current.

EDGAR Password: What Is It Good For?

An EDGAR password is necessary only to log onto the EDGAR filing websites, such as the EDGAR OnlineForms Management website used for Section 16 filings.  It is not included in EDGAR filings and an insider’s EDGAR password does not need to be current for you to submit filings on his or her behalf.  My guess is that your insiders never have occasion to log onto the EDGAR filing websites; in fact, you probably discourage them from doing this for fear they will inadvertently mess something up. 

If you have your own CIK number, the only reason you would need to log onto the EDGAR filing websites under your insiders’ CIKs would be if you needed to update their account information.  There’s not a whole lot of account information stored on EDGAR, it’s mainly just the insiders’ addresses.  And, since most of your insiders probably list their work address, these addresses probably don’t change that often. 

Get Your Own CIK

I recommend that you have your own CIK number with your own password.  This gives you access to the EDGAR OnlineForms Management website and ensures that no one can accidentally change the password and forget to tell you.  Once you have logged onto the EDGAR OnlineForms Management website under your own CIK, you can submit filings on behalf of all your insiders without re-logging in under their CIKs.

It’s easy to obtain your own CIK; you use the same process that you go through to obtain EDGAR codes for a new insider, except when you complete Form ID, you indicate that you are a “filing agent” rather than a “filer.” You simply go to the EDGAR Filer Management website, click the link to “Apply for EDGAR Access (New),” complete the form (be sure to specify that you are a “filing agent,” not a “filer”), print it out and have it notarized, fax the notarization to the SEC, then wait for your CIK and passphrase. When you receive your CIK and passphrase, go back to the EDGAR Filer Management website to generate your other EDGAR codes, including your password.

Once you have your own CIK, you can use it to log onto the EDGAR website and the only password you’ll need to maintain will be your own.  You can let your insiders’ passwords expire and you will still be able to submit filings on their behalf.  None of your information is included in their filings (you still include their CIK and CCC in the EDGAR submission, you are just using your CIK and password to log onto the EDGAR OnlineForms Management website), so the filings won’t look any different than if you were logging onto the website using their CIK. 

What If I Need to Update Insider Account Data?

If an insider’s password has expired, you can easily and quickly generate new EDGAR access codes, including a new password, via the EDGAR Filer Management website (this will generate a new CCC for the insider as well, so be sure to notify anyone else that submits filings on behalf of the insider of the new CCC and password).  It seems to me that it is easier to do this in the rare situations where you need to log onto EDGAR using an insider’s CIK than to keep track of all your insiders’ EDGAR passwords and update them every year.

Answers to All Your Section 16 Questions is a fabulous resource for anyone responsible for Section 16 compliance.  It includes the complete text of Romeo & Dye’s Section 16 Forms and Filing Handbook, Alan Dye’s blog on Section 16 developments, and Q&A forums on EDGAR filing procedures and general Section 16 reporting questions.  Alan, the industry’s foremost authority on Section 16, frequently answers questions posted to the forums, making your direct line to Alan Dye.  No one should be without this resource!

Reason #16 to Renew Your NASPP Membership: The NASPP Compliance-O-Meter
The NASPP Compliance-O-Meter is a quick and fun way of evaluating your own compliance procedures and comparing them to your peers’. We feature a monthly quiz of just four or five questions that focus on an area of stock plan compliance.  The questions are easily in just ten minutes or less answered–no research required. Once you’ve answered the questions, you’ll be able to see how your answers compare with everyone else’s and you can read explanations of each procedure.  Take this month’s quiz on Reconciling Stock Plan Balances today and visit the archive of past quizzes

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  

March 5, 2009


What’s the scoop?

If you regularly visit our website, you may have noticed a number of discussions recently in our Q&A Discussion Forum regarding a topic that is impacting many of our issuer members and gaining the attention of others in the industry–DWAC fees. DWAC is the acronym for Deposit/Withdrawal at Custodian and is the method used to request the movement of shares to or from an issuer’s transfer agent electronically to a shareholder’s account i.e., in the event of an ESPP purchase, restricted stock release or an option exercise. There is a fee associated with these events, but a fee to what party has typically varied. Often times this fee has been passed on to the broker by the transfer agent who has then absorbed the cost on behalf of the corporate client or weaved the cost in the client’s service related fees.

It seems that, contrary to past practice, a number of brokerage firms have started passing the transfer agent’s DWAC fees on to their corporate clients, which is the origin of this topic in our Q&A Discussion Forum. The reason for this change in practice isn’t entirely clear; it might involve an increase in fees by the transfer agent, the state of the current marketplace or just a change in practice.

Fees, fees and more fees!

Fees for each DWAC transaction can range from $25 to $100. This can become a fairly sizeable amount, especially when stock activity is abundant. It only takes one transaction each business day in a one-month period to incur approximately $1,000 ($50 assumed DWAC fee * 20 business days) in DWAC fees–for just that one month. One member indicated that they recently received an invoice from their transfer agent in the amount of $5,200 for 104 DWAC transfers; a high price to pay by any party for this process.

Possible alternatives

In light of this change in practice and in lieu of using the DWAC system, some of our members have indicated that they will begin using the Direct Registration System (DRS), or have stock certificates sent to their captive brokerage firms on behalf of their shareholders. The DRS system works virtually the same way the DWAC system does, but without the exorbitant fees mentioned here. For more information regarding DRS, take a look here and and here.

Final thoughts

It remains to be seen what best practices evolve in this area in the days and months to come. Will companies look to the alternatives recommended above or is this just a whole lot of hype that will go unnoticed as time passes? Whatever the outcome, the flurry of discussions on this topic in our Q&A Discussion Forum  is evidence that any changes in past practice by a service provider, where additional fees might be incurred by the corporate client, should be delivered with care.

If you aren’t currently utilizing our Q&A Discussion Forum to seek out answers to your questions, network with colleagues, or just share information, I encourage you to reconsider this. I guarantee that many of the topics on your mind are likely addressed, or can be addressed, in a discussion topic in the forum–just one more way that you can take advantage of all that the NASPP has to offer today!

New Compliance-O-Meter: Reconciling Stock Plan Balances
We’ve posted a new Compliance-O-Meter quiz on reconciling your stock plan balances. Take the quiz today and find out how your procedures stack up against your peers. It’s only five easy questions–you’ll be done in less 10 minutes!


March 3, 2009

Acceleration of Vesting: More 123(R) Surprises

Last week I blogged about the accounting treatment of acceleration of vesting under 123(R), pointing out that, to my surprise, even an acceleration of vesting that is not connected with termination of employment can sometimes result in incremental compensation cost.

This week, I take a look at another unexpected outcome; that the acceleration of vesting might not change the period over which the company must record the remaining unamortized expense or might even make this period longer.

Who Cares?
Some companies with underwater stock options are considering accelerating vesting for the options. This doesn’t really do much in terms of making the options more valuable to employees–they are still underwater, after all–so that’s not the goal. Instead, the idea is to get all the remaining expense for the underwater options out of the way now, in a year when things are already looking so grim profit-wise that maybe the extra expense just doesn’t matter much. That way, the company can start next year with a clean slate, at least from a stock plan expense standpoint.

But, according to the Radford Alert “Accelerated Vesting of Underwater Options: Understanding or Discovering the Hidden Accounting,” this strategy could backfire.

Acceleration of Vesting But No Acceleration of Expense Recognition
The problem arises from footnote 69 of 123(R) (you have read all the footnotes to 123(R), haven’t you?), which states that acceleration of vesting on deeply underwater options is viewed as a non-substantive modification.  As a result the modification doesn’t have any impact on the service period of the option; expense is still recognized over the original service period.

The good news here is that this means that if employees terminate prior to their original vest dates, the company won’t recognize expense for the forfeited options.  But that’s probably small consolation for the fact that the acceleration hasn’t accomplished what the company intended. 

Acceleration of Vesting But Deceleration of Expense Recognition
Where options are only minimally underwater (i.e., aren’t deeply underwater), the result could be even more unattractive.  Here, the modification would be substantive but you would have a new option with a derived service period.  I won’t bore you with an explanation of explicit, implicit, and derived service periods (you can read about them in my article “Accounting for Equity Compensation Under FAS 123(R),” available in the NASPP’s Stock Plan Expensing Portal–see section 5.1), but the gist of it is that expense will be recognized over the period of time the company expects to elapse before the option is in-the-money.  This period would have to be determined using a lattice or more sophisticated option pricing model and could be longer than the originally stated service period.

How Deep is Deep?
FAS 123(R) doesn’t give any guidance as to what would be considered a deeply underwater option, so that’s really between you and your auditors.  Radford speculates that most underwater options would be considered deeply underwater.

More Information
For more information on this topic, read the Radford Alert “Accelerated Vesting of Underwater Options: Understanding or Discovering the Hidden Accounting,” available in the NASPP’s Underwater Options Portal

Thanks to Terry Adamson at Aon/Radford Consulting for bringing this to my attention and forwarding the alert to us. 

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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