The NASPP Blog

Monthly Archives: April 2009

April 30, 2009

Restricted Stock Popularity

We have seen increasing interest in the use of restricted stock over the past few years; RSU grants in particular. In our 2007 Domestic Stock Plan Design and Administration Survey, co-sponsored by Deloitte, 58% of the companies responded that they had increased restricted stock or RSU usage. For many companies, restricted stock awards and units are seen as having more retention power than options because they will continue to retain real value through market volatility. Additionally, restricted stock grants typcially require fewer shares than option grants, which helps reduce a company’s burn rate and overhang.

The latest in this trend are companies that are exchanging underwater options for RSUs. In Radford’s underwater exchanges research, 33% of the companies exchanged options for restricted stock or RSUs, making this the second most popular exchange approach. Recently, we’ve seen Marvell Technology wrap up their exchange of underwater options for restricted stock units. Just yesterday, eBay shareholders approved an exchange of options for restricted stock units. EBay proposes to exchange underwater options for an RSU grant that is 90% of the fair value of the exchanged option. In June, Zoran shareholders will be asked to vote on an options-for-RSUs exchange, and we can expect to see more companies with similar proposals. For more information on option exchanges, visit our Underwater Options portal.

Administering a plan with restricted stock and/or restricted stock units can be tricky. If your company has a restricted stock program, or will be implementing one in the future, I highly recommend registering for the NASPP Restricted Stock Essentials that will be offered November 9th immediately preceding our 17th Annual NASPP Conference. We’ve updated our Restricted Stock Essentials course to include performance-based restricted stock as well as global plan considerations. So, even if you participated last year, you should consider updating your expertise at this year’s program. Take advantage of our special pricing that will be available through May 22nd on both the Conference and the RS Essentials.

Perhaps the most talked-about issue surrounding restricted stock programs is the tax withholding obligation. Each company situation is different, and there is no ‘perfect’ approach that will work across the board. Here are some of the issues to consider.

Cash: Coordinating cash tax payments can be onerous, especially if you have a broad-based grant process, because the exact tax withholding in most arrangements can’t be known in advance of the vesting event. Implement a process on how to handle vests when the employee has not delivered the tax payment.

Payroll deductions: Consider the timing of vesting events vs. payroll dates as well as how to handle situations where the taxes due may be a large percentage of, or even more than, the employee’s paycheck.

Selling shares from a restricted stock vest to cover the taxes: This may not be compliant in all situations, and ties you to ensuring that each participant has a current brokerage account from which to sell the shares. You will also need to have a process in place to accomodate timely tax deposits when the cash from the sale may not be available until after settlement.

Withholding shares: Aside from the need to have the cash flow prepared to cover employee tax withholding, the most difficult issue with share withholding is how to handle the fractional share difference between the tax amount and the closest whole-share value. Additionally, withholding shares to cover the taxes due means that you must have accurate tax rates; withholding shares in excess of the statutory rate triggers liability accounting under FAS123(R).

Whichever approach, or combination of approaches, your company uses to fulfill tax withholding obligations on restricted stock, it does mean diligent coordination with your payroll department. You will need to ensure accurate tax rates, which can be particularly complicated internationally or with mobile employees. Additionally, coordinating timely tax deposits can be a challenge, especially in the U.S. in situations where the vesting creates a cumulative tax liability in excess of $100,000. We recently posted a white paper from Barbara Baksa’s Computershare FreeSMARTS presentation, Tax Reporting and Withholding on Restricted Stock and Unit Transactions, to the site that provides some fantastic tips and considerations. Check it out today!


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April 28, 2009

Steve Jobs’ Affinity for Mega Grants

Last Friday, Forbes published the full transcript of Steve Jobs’ deposition in the SEC’s backdating case against two Apple executives (Jobs is not a subject of the case). The 119-page document is an interesting exploration of Apple’s grant procedures back in 2001 and Jobs’ memory (or lack thereof). It also provides some perspective on why Apple, and Jobs in particular, has been so drawn to mega grants.

Don’t Do That!

We’ve never been a fan of mega grants here at the NASPP. If the stock increases in value, they are excessive and can result in overcompensation. If the stock declines in value, they are a waste of shares. This is especially true if granted in the form of stock options that end up underwater, but even restricted stock/units are wasteful in that the company recognizes an expense that could be several times higher than the benefit paid out to the executive (I use the term “executive” rather than employee, because, let’s be honest, there aren’t many mega grants issued to non-executives).

In the current climate, some mega grants have proven to be so worthless that executives are surrendering them for no compensation–see Rachel’s April 16 blog and the article “Executives ‘Donate’ ‘Mega’ Grants Back to the Plan” in the upcoming issue of The Corporate Executive (arriving in your mailbox this week).

Jobs on Mega Grants to Apple Execs

In 2001, Apple granted options to purchase 1,000,000 shares to four executives.  Jobs’ rationale for these mega grants was to grant four years’ worth of annual grants at once, with the idea of locking in the current FMV as the strike price, and with the hope that the extra-large grants would serve to retain the execs (with mixed success–at least two have since left). This works great in an up market, but if the stock price declines, it’s a disaster. Personally, I also think that people have short memories and if you grant them four years’ worth of annual grants today, in a few years, they’re going to be wondering why they haven’t received any grants recently. Apple did end up issuing grants of restricted stock units to some of the same execs just three years later, even though the options granted in 2001 were in-the-money at the time.

Jobs’ Own Mega Grant

As for Jobs’ own mega grant that was issued to him in 2001 (an option to purchase 7.5 million shares that ended up underwater and that he exchanged, along with another option to purchase 20 million shares, for 5 million restricted shares in 2004), according to his deposition, the 2001 option (the 2000 option was not a subject of the investigation) wasn’t about the money at all, it was just that his feelings were hurt because he felt like the Board wasn’t looking out for him.

All I can say is “wow”–that’s a lot of hurt feelings; it seems hard to believe that the board couldn’t have found a less expensive way to assuage Jobs. And is it the board’s responsibility to look out for Jobs or to look out for Apple and Apple’s shareholders? I suppose that, to some extent, looking out for the company and its shareholders involves keeping the CEO happy, but I don’t think those aims are one and the same. Then there is Jobs’ gripe that part of the reason he felt so hurt is that the option to purchase 20 million shares that he received the year before was underwater due to what he believed to be simply current market conditions rather than his or Apple’s performance. 1) See my above rant about not making mega grants and 2) it seems like if the stock price is down for whatever reason, and the shareholders are suffering, the CEO should feel their pain.

Read excerpts from the deposition at or read the full transcript at

NASPP Blog Poll: Mega Grants

Online Surveys & Market Research

Early-Bird Rates on NASPP Conference
The deadline for our “half-price” offer on the NASPP Annual Conference expired last Friday, but NASPP members can still get a great rate through May 22. We’re offering a 2-for-1 price on members from the same company/location and half price on any members after the first two registrations. Even members that register on an individual basis still qualify for a substantial discount through May 22. But don’t put off registering any longer–we won’t be extending the deadline on these discounts.

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 blog. 

– Barbara 

April 23, 2009

Do Your Shareholders Want a “Say”?

One day after Canada’s Manulife Financial Corporation made its announcement to give shareholders a non-binding vote on the compensation structure for top executives, outgoing Manulife CEO Domonic D’Alessandro put his own compensation on the line by saying he would place share performance requirements on his restricted share units that are set to vest in 2011 (see “Manulife CEO bows to critics” from Globe and Mail). D’Alessandro said he was surprised that there was such bad press over the grant (estimated at a $10 million value), which was part of his compensation for the 18 weeks he will work in 2009. At a time when stock prices are down, as is public opinion of company executives, most executive compensation programs are under scrutiny. Even given the public pressure, the voluntary gesture by D’Alessandro sets him apart.

Shareholders, workers, and government agencies are clamoring for ways to ensure that executive compensation provides appropriate incentive for executives to make strong decisions for the company’s growth. The SEC is working to give shareholders access to their company’s proxy statement (see Commissioner Aguilar’s Feb. 6th remarks) as well as considering additional disclosures detailing not only company decisions on leadership structure, but also how the company’s “compensation structures and practices drive an executive’s risk-taking” (See Chairman Schapiro’s April 6th Address to the Council of Institutional Investors). Proxy access and enhanced disclosures may mean an invigorated push for “say on pay” policies similar the one announced by Manulife.

In April of 2007, the House passed H.R. 1257, which would have required companies to adopt a policy for non-binding “say on pay” shareholder votes. The bill stirred up talk about implementing these policies, but was never put to vote in the Senate. It looks like the current environment in the U.S. is forcing a closer look at “say on pay.” Already, banks participating in the TARP are required to institute “say on pay” practices. Even companies not impacted by the TARP are coming out in record numbers with shareholder votes on non-binding “say on pay” policies. According to the New York Law Journal article, “‘Say-on-Pay’: Linking Executive Pay to Performance” there were only seven such proposals put to vote in 2006, with a sharp increase in 2007 in conjunction with the House’s “say on pay” bill to 51 proposals (only 3 of which were approved). Last year, there was a small increase to 76 proposals (9 of which were approved). This year is already looking to be a much bigger year for “say on pay.” Social Investment Forum published a list of 85 companies that were prepared to put “say on pay” policies to vote by the end of March 2009 alone!

The U.S. isn’t the first on board with “say on pay.” In 2002, the UK became the first country to enact legislation requiring executive compensation to be put to a non-binding shareholder vote. Australia also requires a non-binding vote. The Netherlands, Sweden, Norway and Spain all go one step further to require a binding shareholder vote. France is set to adopt a binding vote requirement in 2009, and the Canadian Coalition for Good Governance has come out in favor of “say on pay.”

There is still much debate over whether or not “say on pay” is an effective way to control the risk-taking of company executives. It is clear, however, that providing shareholders more insight into pay practices and giving them a forum to voice their opinion on those practices is something that companies will need to address in 2009. has been closely following “say on pay.” For more information, go to the “say on pay” portal and don’t miss the “say on pay” practice pointers in the 4th Annual Proxy Disclosure Conference, which is in San Francisco on November 9th; the day before the NASPP’s 17th Annual Conference kicks off.

Speaking of our Conference this year, tomorrow is your last chance to take advantage of our unprecedented early bird rate. Register now, and pay just half the regular registration fee! Don’t count on this deal being extended past the 24th.


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April 21, 2009

NASDAQ Repricing Update

NASDAQ has updated its FAQs on the requirements pertaining to shareholder approval of stock plans to align with the NYSE’s requirements when the plan is silent with regards to whether stock options can be repriced without shareholder approval.

Since the date the new listing requirements relating to shareholder approval went into effect, the NYSE’s rules have specified that repricings must be subject to shareholder approval unless the plan specifically states otherwise. The NASDAQ listing requirements, however, were not as clear.

Nevertheless, I think most practioners felt that, unless a plan specifically allows repricing withhout shareholder approval, shareholder approval would be required even under NASDAQ’s listing requirements. But now NASDAQ has made it official. In the April 13 update of their FAQs, NASDAQ updated the question “What is considered a “material” amendment to an existing equity compensation plan or arrangement?” to include the following language:

“…absent specific authorization in the plan, a repricing, or a similar action, would not be permitted without shareholder approval.”

I doubt there are any NASDAQ companies that have been or would be aggressive enough to reprice options without shareholder approval unless (1) their plan specifically allowed it (a la Google’s plan) or (2) they received an OK from NASDAQ to do so. But now, we know that the conservative approach is, indeed, the right way to go.

NASPP Conference Half-Off Rate Ends This Week
You have only a few days to take advantage of the NASPP’s “half-off” rate for the 2009 NASPP Annual Conference. We haven’t offered the Conference for a rate this low in many years and we aren’t likely to offer it again any time soon.  Don’t miss this opportunity–the “half-off” rate is only available until this Friday, April 24 (I wouldn’t count on this deadline being extended).

Reason #22 to Renew Your NASPP Membership: The NASPP Member Directory
With close to 7,000 members, the NASPP Member Directory is a veritable who’s who of stock compensation.  You can use the directory to look up contact information for any of your fellow members (but remember that the directory is designed to facilitate networking among our members and cannot be used for solication purposes).

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 blog. 

– Barbara

April 16, 2009

Newsworthy: 10b5-1 Plans and Getting Shareholder Approval

10b5-1 Plans

A class-action lawsuit was recently filed against Novatel by two pension funds that had invested in Novatel stock alleging that several executives engaged in insider trading. Each executive named in the suit claims to have been trading exclusively under a Rule 10b5-1 trading plan, so what went wrong? Although there were Rule 10b5-1 trading plans in place, these plans were allegedly modified to increase the sale of shares prior to a public disclosure of the loss of Novatel’s contract with Sprint (which resulted in a sharp decline in share price).

Sound familiar? Last October, I blogged on Rule 10b5-1 trading plans. I stressed the fact that entering into a Rule 10b5-1 plan does not inherently protect an individual from the risk of prosecution for insider trading. The most prominent illustration of this at the time was the ongoing SEC investigation of Countrywide CEO, Angelo Mozilo, who is also accused of modifying his Rule 10b5-1 trading plan to increase sale amounts prior to a sharp decline in share price.

Remember that Rule 10b5-1 trading plans must be properly administered in order to provide protection to the individual. The top ways Rule 10b5-1 plans may be misused are:

1. Entering into a plan with transactions that take place immediately
2. Cancelling a plan to prevent a transaction from taking place
3. Modifying an existing plan to increase or decrease sales

Take some time now to review your company’s policy on Rule 10b5-1 trading plans.

Getting Shareholder Approval

In other news, the CEO of Keynote Systems, Umang Gupta agreed to cancel his 400,000 share option grant (currently underwater) in exchange for a ‘yes’ vote from shareholders to extend the expiration date for Keynote’s equity incentive plan. In the original appeal to shareholders, Gupta attempted to assuage misgivings stemming from the ISS/RiskMetrics recommendation against the extension. The main concern voiced by ISS/RiskMetrics was the high number of options outstanding. Gupta explained that the reason so many options remain outstanding is that 90% of the grants are currently underwater–and that the company cannot do an option exchange without shareholder approval. Shareholders originally took ISS/RiskMetrics’ advice and rejected the extension. However, after Gupta agreed to relinquish his grant, shareholders voted to extend the equity plan expiration date. Ultimately, the 400,000 share grant wasn’t the only option cancelled by Umang Gupta. He also cancelled an additional grant for 300,000 shares; one that was even more underwater than the negotiated grant. Obtaining this expiration extension from shareholders means that Keynote can continue to offer equity compensation to current (or potential) employees without having to ask for shareholder approval on a completely new plan.

If this down market finds your company courting shareholder approval for a new plan or additional shares under an existing plan, consider what you can do to improve your odds for shareholder approval. Maybe your CEO isn’t ready to cancel his or her outstanding grants, but you can still take steps to help garner shareholder approval. For the top ways to improve your stock plan proposal, check out this article by on the NASPP Practice Alerts, “Five Tips for a Successful Employee Stock Plan Proposal”.

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April 14, 2009

Form 1099-B and Schedule D

With April 15 just a day away, I thought it might be time for a quick refresher on Schedule D.

When employees engage in same-day sale exercises of either ISOs or NQSOs, the compensation/ordinary income for their transaction is reported on their Form W-2 for the year. In most cases, employees also receive Form 1099-B reporting the sale proceeds from their broker. Employees will use both of these forms to complete Schedule D for Form 1040 (the full 1040, no 1040EZ for option exercises) to report the sales of their option shares.

Even more confusing, non-employees (consultants, outside directors, etc.) will get two Forms 1099: a Form 1099-MISC from the company reporting their ordinary income on the exercise and a Form 1099-B from their broker reporting their sale proceeds. 

Know Your Brokers

It’s important to know your brokers’ procedures relating to Form 1099-B, as they can vary from firm to firm.

Brokers can choose to report the sale proceeds net of any transaction fees or exclusive of these fees.  If they report net of fees, employees don’t need to do anything special to report the fees on Schedule D. If the 1099-B doesn’t deduct the fees from the sale proceeds, then employees should add the fees to their cost basis on Schedule D.

Some brokers may not issue a Form 1099-B at all.  Rev. Proc. 2002-50 allows brokers to skip this if they follow certain procedures and you use the sale price to calculate employees’ W-2 income on same-day sale exercises.

What to Report on Schedule D

If the broker issued Forms 1099-B to your employees, then you can be sure the IRS also got a copy of the forms and will be checking employees’ tax returns for Schedule D. Employees who don’t file Schedule D (or whose Schedule D doesn’t match their Form 1099-B) are likely to get an automatic notice from the IRS telling them that they need to report their entire sale proceeds as a capital gain. This is, of course, wrong, but the IRS doesn’t know what the cost basis of the stock is, so they assume all the sale proceeds are taxable (at some point in the future the IRS will know the cost basis because brokers will have to include it on Form 1099-B, but this is still years away). Thus, it’s pretty unnerving for employees to get this notice.   

  • Employees report the sale proceeds indicated on their Form 1099-B in column D of Schedule D. It is critical that the amount reported in column D match what is reported on Form 1099-B; a discrepancy is likely to trigger the automatic notice from the IRS.
  • Employees report their cost basis in the stock in column E of Schedule D. Their cost basis will be their option price plus the W-2 income on their exercise. If they exercised an NQSO, the W-2 income is called out (with code V) in Box 12 of their W-2. If they exercised ISOs, they may need another statement from you that tells them what their W-2 income is (we recommend listing it in Box 14 of their W-2).  If their broker didn’t net out their transaction fees, then employees can add these fees to their cost basis.
  • To figure out their capital gain, employees subtract column E from column D.
  • For same-day sale exercises, this all goes into Part I of Schedule D, which is for short-term capital gains.

No Form 1099-B; No Schedule D?

If the broker takes advantage of Rev. Proc. 2002-50 and doesn’t issue a Form 1099-B for same-day sales, then the IRS won’t receive a report of the sale and won’t be looking for Schedule D.  Employees can still file Schedule D if they want–since you will have used their sale price to determine their W-2 income (a pre-requisite for the broker to not issue Form 1099-B), they’ll have a capital loss in the amount of their transaction fees; some employees may want to claim that loss. But, if employees don’t file Schedule D, the IRS will be none the wiser.

What If Employees Receive Error Notices From the IRS?

If employees receive notices from the IRS that their Schedule D is incorrect or omitted, they simply need to amend their tax return to include Schedule D (completed correctly this time). With same-day sale exercises, there should be little or no capital gain, so employees’ tax liability is unlikely to change and, thus, there shouldn’t be any penalties provided that employees respond within the time specified in the notice.

NASPP Conference Half-Off Rate Ends in Less Than Two Weeks
You have less than two weeks left to take advantage of the NASPP’s “half-off” rate for the 2009 NASPP Annual Conference–a mere $795 per member. We haven’t offered the Conference for a rate this low in many years and we aren’t likely to offer it again any time soon–don’t miss this opportunity (and don’t count on the deadline being extended).

Reason #21 to Renew Your NASPP Membership: Our New Economic Stimulus Legislation Portal
EESA, ARRA, TARP–who can keep it all straight?  Now, you can, with the NASPP’s one-stop-shopping portal on all the various forms of economic stimulus legislation impacting stock plans today.  The portal includes the text of the legislation and memos from leading law firms explaining it all. 

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 blog. 

– Barbara

April 9, 2009

Managing Leaves of Absence

Most companies have a policy that suspends vesting during certain types of leaves of absence (LOAs). Now is a good time to make sure your company’s policy is being managed correctly as it relates to equity compensation.

Review Your Policy

Locate and review the wording of your company’s leave of absence policy. It should be worded in a way that accommodates the flexibly needed to conform to labor laws and legislation, even if there is new legislation that comes up after the policy was created. You will also want to know when the policy was created and how (or if) it was approved. There are two ways in which an LOA may impact stock grants: vesting suspension and cancellation. There may or may not be a grace period before vesting is suspended, and there may be a period of suspension before the grant is cancelled. Once you have reviewed your company’s policy, review your employee education documents to be sure that they accurately reflect the parameters of your policy.

Types of LOAs

There are two basic types of leaves of absence, those that are protected by the government and those that are not. Pay very special attention to LOAs that offer protection to the employee. Typically, a paid leave (where employees receive part or all of their salary from the company, the government, or through a disability plan) is also a protected leave. These protections may require that stock grants continue to vest, or that they resume vesting upon the employee’s return to work. Maternity, disability, and military leaves of absence may all have a period of time during which the employee’s grants must continue to vest or during which the employee’s grants may not be cancelled. There may also be special local regulations that offer additional provisions for employees who need to take time off.

Now, you don’t need to become a labor law expert, but you do need to make sure that you have a way of identifying when an LOA will impact equity compensation and when it will not. Meet with you HR managers to review your internal list of LOA types. Ask them to identify the LOAs that should result in suspended vesting as well as the length of time an employee may be out on those leaves and still resume vesting upon a return to work. You should also get your legal, benefits, and payroll departments in on this process. Ideally, the end result will be a list of LOA types and their respective impacts to salary, stock compensation, and benefits that can serve as a reference for all stakeholders. Also, don’t forget to build in a regular review of this list and identify who will be responsible for incorporating and disseminating updates.

LOA Notification

You’ve read your company’s policy. You’ve got your list of leaves of absence and know how they should impact equity compensation. Now, how do you know you’re tracking all your LOAs correctly? You need to be sure that you are being informed of leaves in a way that allows you to suspend or cancel the grant appropriately, equally to all participants, and in a timely matter.

Review how you are being notified when an employee begins an LOA that will impact stock grants and when that employee returns to work or is terminated. If notification is coming from different sources, strive for uniformity in the delivery format. For example, some locations may enter the LOA record into your central HRIS database while others deliver the records to you directly. Regardless, work to get the data into the same format so that you can create accurate LOA records in your stock plan administration database. Once you know how you should be receiving notice regarding LOAs, review that process to make sure it allows you to record the LOA and suspend vesting or cancel a grant before any transactions take place on shares to which the employee should not have access.

Audit Your Existing LOA Records

You need to be able to confirm that all grants that should be suspended or cancelled due to an LOA are no longer vesting. Conversely, you do not want anyone who is no longer on leave to have a grant with suspended vesting. Building uniformity into the notification process aids auditability. Confirm the date the LOA should begin, the date vesting is suspended, and the date the leave ends (either by cancellation or a resumed vesting).


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April 7, 2009

Would You Stand Up for Your Principles?

Broc Romanek’s blog on a recent lawsuit filed against McDonald’s caught my eye for its relevance to NASPP members. The former Senior Director of Compensation is suing over her termination, claiming that she was fired for questioning their executive compensation disclosures. The lawsuit alleges that McDonald’s made a number of misrepresentations in its disclosures.

Even White Collar Crime Can Be Interesting

Sure, it’s not quite as pulse-racing as, say, robbing a bank, but never-the-less, I find the details of lawsuits like this to be fascinating (for another lawsuit with a surprise twist, see the recent “In the Courts” column of this month’s issue of The NASPP Advisor) . According to the lawsuit, McDonald’s:

  • Set up a reimbursement/repayment scheme to avoid disclosing golf club memberships for a regional President stationed in Hong Kong;
  • Mislabeled the outgoing CEO as a “transitional officer” so he could keep his health and other benefits, and so the millions paid to him after his last day of work for McDonald’s could be called salary and incentive pay, rather than severance; and
  • Implemented a shareholder-mandated cap on executive severance agreements with loopholes large enough to render the cap meaningless.

I don’t know all the details of the reimbursement/repayment scheme and loopholes in severance cap sound a little run-of-the-mill, but the “transitional officer” label seems quite creative.

The plaintiff (the former Senior Director of Compensation) pushed back on the company’s decisions regarding the disclosures and, ultimately, refused to “sub-certify” them. The sub-certification apparently was required under the company’s SOX procedures. The lawsuit claims that, as a result, she was “isolated, ostracized and ultimately terminated.”

What Would You Do?

The title “Senior Director of Compensation” isn’t that far off from the title many NASPP members hold. This isn’t an isolated situation implicating only a high level executive; it is a scenario that many NASPP members could encounter in their own jobs.

When you see your employer doing something you feel is wrong, do you speak up? How far would you go if you had to? Would you use your company’s whistle-blower hotline? Would you sacrifice your job–especially in the current economy?

We’ll continue to follow this case and let you know how it turns out, maybe in a future “In the Courts” column in the Advisor.

NASPP Conference Hotel Announced
I’m pleased to announce that the 17th Annual NASPP Conference will be held from November 9-12 at the San Francisco Hilton. Reserve your room online or by calling (800) 445-8667 or (415) 771-1400.

Be sure to mention the National Association of Stock Plan Professionals Conference or group code SPP to obtain the Conference rate. If you have any difficulty securing a room, please contact us at

New Compliance-O-Meter Quiz on Evaluating Your Service Providers
This month’s Compliance-O-Meter focuses on evaluating your service providers.  Take five minutes (really, just five minutes!) to complete the quiz and see how you compare to your peers.

Reason #20 to Renew Your NASPP Membership:  Half-Off Restricted Stock Essentials
NASPP members that register by April 24 can save 50% off the NASPP’s pre-conference session, Restricted Stock Essentials.  With the market slump and the ARRA provisions relating to restricted stock, we predict that more and more companies will be implementing these plans. Make sure you’re ready with our one-day, intensive program covering all the nuts and bolts of administering restricted stock and unit plans. 

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 

April 2, 2009

Economic Stimulus Legislation for 2009

Financial institutions that have been participating in the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP) since its creation under the Emergency Economic Stabilization Act of 2008 (EESA)–which I blogged about back in November–find themselves subject to tighter rules in 2009. We’ve recently seen new rules from the Treasury along with the finalization of the American Recovery and Reinvestment Act of 2009 (ARRA). In this entry, I will break down the top changes from 2009 legislation to-date.

First, there have been two new statements from the U.S. Department of the Treasury:

The first, on January 16, 2008, expands the executive compensation standards of the CPP to additionally require the participating company CEO to:

  • provide annual certification that the participating company has complied with the executive compensation standards of the CPP; and

  • certify, within 120 days of the closing date of the Securities Purchase Agreement, that the senior executives’ incentive compensation arrangements do not encourage unnecessary and excessive risks that could threaten the value of the financial institution.

It also requires the company to keep records to substantiate these certifications for at least six years following each certification and provide these records to the TARP Chief Compliance Officer upon request.

The second statement from the Treasury came on February 4, 2009. In this statement, the Treasury distinguishes between banks participating in any generally available capital access program (like the CPP) and banks needing “exceptional assistance.” Companies that receive exceptional assistance (like AIG) will be required to:

  • limit senior executives to $500,000 in total annual compensation other than restricted stock that may not fully vest until the government has been repaid with interest;

  • fully disclose the company’s executive compensation structure and strategy and institute a “say on pay” shareholder resolution;

  • ban golden parachute payments for the top 10 senior executives; and

  • adopt a policy banning “luxury expenditures”.

Those participating in generally available programs:

  • have the same limit to total comensation for senior executives, but allows for that limit to be waived by shareholder vote and with a full public disclosure;

  • require clawback provisions for bonuses paid to top executives who are found to have engaged in deceptive practices;

  • ban golden parachutes for senior executives that are greater than the value of one year’s compensation (previously, payments of no greater than three years’ compensation were permitted); and

  • adopt a policy banning “luxury expenditures”.

Then, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 was signed into legislation.

The ARRA standards apply not only to institutions that participate in the TARP going forward, but also retroactively to those who are currently receiving TARP funds. In addition to the provisions of EESA and the recent Treasury rules, the ARRA includes the following additional requirements:

  • The Treasury Secretary must review all compensation and bonuses paid to the top 25 highest paid individuals to confirm that such payments were neither inconsistent with the executive compensation provisions of the ARRA nor contrary to public interest.

  • The ARRA limits bonus, retention, and incentive pay for covered employees to the form of restricted stock that does not exceed 1/3 of the individual’s annual compensation and may not fully vest until after the TARP funds have been repaid. The number of employees covered by this limit depends on the amount of TARP funds received by the company.

  • Participating companies must establish a Board Compensation Committee of independent directors tasked with reviewing employee compensation plans.

  • The annual certification required by the February 4th Treasury Rule must be included in the company’s annual filing with the SEC.

  • The claw-back provisions originally under the TARP are expanded under the ARRA to include the top 25 highest paid individuals, requiring the recoupment of any incentive awards that were based on materially inaccurate financial statements or erroneous performance metrics.

However, the ARRA does provide a way for currently participating institutions to exit the TARP. Companies may, with permission from the Treasury Secretary, repay the funds and no longer be subject to the executive compensation standards.

In light of these new rules and the new Act, we have updated our EESA portal. The new and updated Economic Stabilization Legislation portal includes the legislation from the original Emergency Economic Recovery Act of 2008, the new Treasury rules for TARP, and the American Recovery and Reinvestment Act of 2009. Additionally, you will find many helpful memos from top professionals to clarify the latest rules. All of this new legislation is part of the government’s Financial Stability Plan. We have yet to see what the impact will ultimately be to all companies, not just financial institutions or banks participating in the TARP.


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