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Monthly Archives: April 2010

April 29, 2010

The Last Word


Over the past week the final verdict came in for two of the cases I blogged about on April 15th.

First, former CEO of KB Home, Bruce Karatz, was convicted for concealing the company’s backdating scheme and faces up to 80 years in federal prison. Mr. Karatz was found guilty on four counts including making false statements on a quarterly report filed with the SEC and making false statements to the company’s outside accounting firm, but was acquitted of 16 other counts including three counts of securities fraud (the most serious charges against him). Mr. Karatz, in pleading non-guilty to all charges, had claimed that he was falsely targeted as part of the governments crack-down on illegal back-dating. With only four out of 20 charges resulting in a conviction, it looks like even the testimony against him from the former KB Homes HR Director, Gary Ray, wasn’t enough for the SEC to get the big win they were looking for on this one. (See this Rueters article.)

Alternatively, former Maxim Integrated Product’s CFO, Carl Jasper was found guilty on eight out of 11 counts against him. Mr. Jasper had claimed that the backdating scheme was above his pay grade (so to speak) and that former CEO, Jack Gifford, was an unstoppable force heading up the practice. (See this Business Journal article.)

Both Mr. Karatz and Mr. Jasper intend to challenge their convictions.

Options Prevail!

Almost exactly one year after rejecting a proposal to ban stock options to senior executive officers (See this Associated Press article.), Pfizer shareholders got a second opportunity to vote on a very similar proposal. Once again, the proposal to eliminate all future option grants to executive officers was overwhelmingly rejected.

This year, the proposal was being brought by activist shareholder Evelyn Y. Davis, who obviously favors restricted stock over options, blaming the recent fluctuations in the market on “shenanigans” stemming from the granting of stock options. Coincidentally, shareholders did vote to give themselves an advisory vote on executive compensation, adding Pfizer to the list of companies engaging in some type of “say on pay.” (See this Yahoo! Finance article.)

I was thinking about this vote when I saw our own Broc Romanek’s April 17th Advisor’s Blog entry on He brought it to my attention that the Council of Institutional Investors published a checklist of the “Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Compensation”. On that list is a call for stock options to be linked to performance, an approach to granting options that Ms. Davis seems to have missed.

If you’re looking for the best information available on executive compensation, you’ll be excited to know that your registration for the 18th Annual NASPP Conference includes a special bonus access to the 7th Annual Executive Compensation Conference! If you aren’t already registered, don’t miss out on the $200 discount that we are offering through May 14th. Register today!


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April 27, 2010

RSUs and Your General Ledger–Part 2

Journal Entries for RSUs–Part 2

Last week I reviewed the journal entries necessary to account for compensation expense related to RSUs and the company’s tax deduction.  This week, I finish up this topic by looking at the journal entries to account for the issuance of shares when the award vests and shares are withheld to cover the employee’s tax obligation. 

The Scenario

To refresh your memory, here is the scenario that we are working with:

An RSU for 1,000 shares is granted when the FMV is $4 per share. The RSU vests in full when the FMV is $10 per share (resulting in an aggregate taxable gain/tax deduction of $10,000) and is paid out upon vesting. The employee’s combined tax rate is 26.45% (to keep it simple, assume the employee is maxed on Social Security and isn’t subject to state income tax). The total tax withholding on the release is $2,645. The shares withheld will be rounded up to 265 shares, resulting in an issuance of 735 shares. The excess withholding will be deposited with the employee’s federal tax payment. The stock has a par value of $.01 (this is very important–the journal entries for a no par stock are slightly different).

Share Issuance and Withholding

To account for the issuance of stock and share withholding upon vest:

  • The company records a credit to common stock for $10 (1,000 shares x $.01 par value) for the shares issued upon vesting. At the same time, the company records a debit to common stock in the amount of $2.65 (265 shares x $.01) for the shares that are withheld to cover the taxes. The net result of these two entries is an increase to common stock of $7.35 (which corresponds to the net shares issued upon vesting).
  • The company records a credit to current taxes payable of $2,650 (this is the employee’s tax liability, including the excess for the fractional share that was rounded up).
  • The company records a debit to APIC for $2,657.35. This is the offsetting entry that balances the above three entries. To calculate it, add up all the credits, and then subtract all the debits. It represents the par value for the net shares issued and the tax withholding. These amounts come out of APIC because they aren’t paid in cash.

The Fractional Share

How the company handles the fractional share that results when shares are withheld to cover the taxes can impact the above entries. I went with the scenario that is most common according to the NASPP’s 2007 Domestic Stock Plan Design and Administration Survey (co-sponsored by Deloitte). Here’s how the entries might differ if the company handles the fractional share differently:

  • If the shares withheld are rounded down, the employee will have make up the difference in cash (usually accomplished through payroll withholding). This will show as a debit to cash and the debit to APIC is reduced accordingly.
  • If the shares withheld are rounded up and the excess payment is refunded to the employee, this will show as a credit to cash. (In accounting speak, when dealing with the company’s cash account, credits are a reduction and debits are an increase. I am certain the accountants do this just to keep us English majors completely confused–it’s probably revenge because we got to take more interesting courses in college. I don’t care; I’m still glad I was an English major.)

 Correction: Math Error in Last Week’s Entry

One reason I was an English major is because I am severely mathematically challenged, even when using a calculator.  This was proven out by last week’s blog entry, in which I managed to multiple $4,000 by 40% and come up with $1,000.  The correct debit to deferred tax expense (and credit to the DTA account) to write off the deferred tax asset should have been $1,600.  This error also caused the amounts in the subsequent entries to be incorrect.

If you read the blog entry early on–before Tim Oakes of Curtis Consulting Group was kind enough to help me with my math–and were confounded by the math, I’ve since corrected it. The entries should make infinitely more sense now.

Early-Bird Discount for NASPP Conference
We are offering a $200 discount on NASPP member registrations for the 18th Annual NASPP Conference that are received by May 14.  This is your last chance to save on the Conference–we won’t extend the deadline for this rate.

The Conference will be held from September 20-23 in Chicago.  Last year’s Conference sold out and we expect even more attendees this year.  

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 22, 2010

Supplemental Wages

Withholding on Equity Compensation

For equity compensation transactions that are subject to U.S. federal income tax withholdings, companies can choose to withhold at either the employee’s W-4 amount or the supplemental wage flat rate of 25% for the first $1,000,000 of supplemental wages paid to the employee within a calendar year. As Barbara mentioned in her entry on Excess Tax Withholding, most companies choose to withhold at the flat rate for supplemental wages simply because it is easier than tracking employees’ W-4 rate and applying it. A definition of supplemental wages, the withholding requirements, and examples can all be found in IRC Regulation §31.3402(g)-1.

The Difference $1 Million Makes

In the context of U.S. income tax withholding on equity compensation, $1 million within a calendar year is a threshold for how employers should withhold on supplemental income. Below that amount, a company can choose to withhold at the 25% flat rate or the employee’s W-4 rate. After that amount, a company must withhold at the 35% flat rate.

This means that cumulatively, all supplemental wage payments made in the same calendar year are combined to determine the total supplemental wage payments made to each employee. After an individual reaches $1 million, the flat rate changes from 25% to 35% and the choice to withhold at the employee’s W-4 rate is no longer available. Because equity compensation is considered supplemental wages, stock plan management teams need to be prepared to withhold at the higher level once an employee crosses this threshold.

Supplemental Wages

So, exactly what are supplemental wages? While there are a number of examples specific listed in the Code, many are not. The definition of supplemental wages is “all wages paid by an employer that are not regular wages.” I know, not a lot of help, right? Fortunately, the most common types of supplemental wages are given as examples including cash bonuses, noncash fringe benefits, equity compensation, and commissions. It’s a good idea for stock plan managers to meet with their payroll contacts to confirm that the cumulative year-to-date supplemental wage amount for each employee is being correctly calculated and communicated to the stock plan management team.

Remind Me Again When I Need to Do This?

It sounds pretty simple, right? If a company has paid $500,000 in supplemental wages to an employee, and that employee realizes income from an option exercise in the same calendar year for another $500,000, then the stock plan management team must be prepared to withhold at the 35% flat rate for any additional equity compensation income in that year.

But, what happens if that option exercise is $700,000 instead of $500,000? The IRS has offered companies two methods to handle that situation. If one particular payment (e.g.; one specific option exercise) straddles the $1 million threshold, companies may either withhold at the 35% flat rate for the entire payment or withhold at 35% for only the portion of the payment that exceeds $1 million. So, in my (very simplified) example, the company could withhold on the entire $700,000 RSU vest at 35% or apply the 35% withholding rate to only the $200,000 that exceeds the first $1 million.

As a stock plan manager, make sure you know how your company wants to withhold on single transactions that straddle the $1 million supplemental wage threshold. Also, get a solid understanding of how your stock plan administration software handles this situation.

For more information on tax withholding on equity compensation, visit our Tax Withholding and Reporting portal on the NASPP site.

Discount on Conference Registration

Don’t forget to register for the 18th Annual NASPP Conference.

If you missed the early-bird rates, it’s not too late to get a discount. We are now offering a $200 discount on registration through May 14th. You can even get an additional 10% discount by participating in the 2010 Domestic Stock Plan Design Survey before our final extended deadline tomorrow, April 23rd.


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April 20, 2010

RSUs and Your General Ledger

Journal Entries for RSUs

A question that comes up with some regularity here at the NASPP is what the journal entries are for RSUs where shares are withheld to cover the taxes due upon vesting. Often enough that it would be handy to have a resource that I can point to that describes the entries. So, in this week’s and next week’s blog entries, I use an illustration to explain the journal entries for an RSU from grant to release.

The Scenario

An RSU for 1,000 shares is granted when the FMV is $4 per share (a total expense of $4,000). The RSU vests in full when the FMV is $10 per share (resulting in an aggregate taxable gain/tax deduction of $10,000) and is paid out upon vesting. The company’s tax rate is 40% and the employee’s tax rate is 26.45% (to keep it simple, assume the employee is maxed on Social Security and isn’t subject to state income tax). The total tax withholding on the release is $2,645. The shares withheld will be rounded up to 265 shares, resulting in an issuance of 735 shares. The excess withholding will be deposited with the employee’s federal tax payment. The stock has a par value of $.01 (this is very important–the journal entries for a no par stock are slightly different).

This week we start with the easy stuff–the entries to account for the expense recognized for the award and the company’s tax deduction. Next week we’ll tackle what should be easy, but was actually harder to figure out–the entries for the shares issued upon exercise and the share withholding.

Compensation Expense

To account for the compensation expense recognized over the period the award vests:

  • Debit to compensation expense for $4,000 and a corresponding credit to additional paid-in-capital (APIC) in this same amount. This would not be a single entry, but would be divided into separate entries for each interim period during the award’s service period. For example, if the award were granted at the beginning of the company’s fiscal year and vested at the end of the year, the company would make four separate pairs of entries for $1,000 each.

Company Tax Deduction

To account for the tax deduction the company expects to receive when the award is paid out:

  • Debit to a deferred tax asset (DTA) account for $1,600 ($4,000 x 40%) and a corresponding credit to a deferred tax benefit (which is a tax expense account) in the same amount. This entry will reduce reported tax expense for the period. Same as with the compensation expense entries, this entry is divided into separate entries for each interim period.

To write off the DTA and account for the company tax deduction upon vesting of the awards and release of the underlying shares:

  • Debit to deferred tax expense of $1,600 (the amount of the previously recorded DTA) and a credit to the DTA account of $1,600.
  • Debit to current taxes payable of $4,000 (the tax savings the company realizes as a result of the $10,000 tax deduction), with a credit to current tax expense of $1,600 and a credit to APIC of $2,400. Only the DTA recorded while the award was expensed reduces tax expense; the rest of the tax savings is treated as APIC.

Tune in next week for the rest of the story…

Last Chance to Participate in the Domestic Stock Plan Design Survey
This week is your last chance to participate in the 2010 Domestic Stock Plan Design Survey.  You must complete the survey by Friday, April 23–we absolutely will not be able to extend this deadline. 

New Early-Bird Discount Announced for NASPP Conference
For those companies that weren’t able to get their registration for the 18th Annual NASPP Conference in by the early-bird deadline, we are offering a $200 discount on registrations received by May 14.  This will be your last chance to save on the Conference–we won’t extend the deadline for this rate.

The Conference will be held from September 20-23 in Chicago.  Last year’s Conference sold out and we expect even more attendees this year.  

Finish the 2010 Domestic Stock Plan Design Survey by April 23 and you can receive an additional 10% off the Conference.

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 15, 2010

I Wasn’t In Charge…I Wasn’t Aware…I Didn’t Know it Was Illegal

When it rains, it pours. After months of ho hum news on options backdating, we see four colorful backdating cases come across our desks: the Comverse Technology storythat Barbara blogged about on Tuesday, Maxim Integrated Projects, Brocade Communications, and KB Homes.

Dead Men Tell No Tales

Former Maxim Integrated Solutions CFO, Carl Jasper, finds himself facing civil securities fraud charges that he deliberately attempted to mislead investors and knowingly signed off on false financial statements. His defense is not, like many, that he was unaware of the backdating. Rather, Jasper’s defense is that it was out of his control. He contends that former CEO, Jack Gifford, conducted more than a bit of arm-twisting in the orchestration of the whole backdating practice at Maxim. Instead of “I was not aware,” his defense is “it was out of my control.” What’s more, Mr. Gifford is regrettably unavailable to confirm or deny Jasper’s defense, as he passed away in 2009. (See this article.)

This story and the Comverse saga illustrate that if you’re being forced to go along with something you know is wrong, sometimes your best alternative is to just walk away. Otherwise, you could find yourself accountable for wrongdoing when the person who actually made the decision is either dead or remains a fugitive. Not a happy thought.

Déjà Vu

The first CEO to be convicted by a jury in the backdating crackdown was re-convicted on March 26th. A federal jury found former Brocade Communications CEO, Gregory Reyes, guilty of 9 out of 10 counts against him (finding him not guilty of only the charge of conspiracy). Although Reyes was originally convicted in 2007, the conviction was thrown out on the basis of prosecutorial misconduct. (See this Bloomburg article.)

Reyes’s defense has been that it was the finance executives who were in charge of complying with accounting rules and they failed to tell him that the backdating Reyes was a part of was illegal. The defense didn’t work the first time, and it didn’t work at the retrial. In fact, as a bit of irony, the crux of the overturning of the 2007 conviction was that the prosecutor stated that the finance department didn’t know about the backdating, Reyes did, while only calling the one person in the finance department willing to confirm. It’s a convoluted web of finger-pointing. Ultimately, I think the courts have grown weary of assertions that executives were unaware that their actions were illegal.

Never Look Back

Closing arguments are under way in the trial of former KB Home CEO, Bruce Karatz, who had been using the standby backdating “I had no knowledge of any wrongdoing” defense. Recently, however, the former KB Homes HR Director, Gary Ray, threw a wrench in the gears by testifying against Karatz. According to Ray, Karatz told him to “put the best interests of the company ahead of the truth” and cover up the instances of backdating. Even more colorful, Ray testified that Mr. Karatz told the company’s chief legal officer, “We don’t look back. We’ve never looked back. It’s not something we do in this company.” (See this LA Times article.)

The moral? I guess it goes both ways. First, we can see that adequate controls will (eventually) uncover fraudulent practices. On the other side of the coin, trying to keep the knowledge of illegal practices within the company isn’t the best safety net and, ultimately, isn’t in the best interest of the company nor the individuals involved.

Today is the Day!

Barbara keeps a great “To Do” list at the end of each of her blog entries, but I want to really highlight the early-bird discount deadline. It’s today! Register now to get in on the $300 discount for our 18th Annual NASPP Conference.

If you want a spectacular deal, complete the 2010 Domestic Stock Plan Design Survey for an additional 10% off registration.


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April 13, 2010

Stock Option Slushies

Just when it feels like we’ve put the stock option backdating scandal behind us, another story comes along that catches our attention. The current option backdating flavor of the week is Comverse Technology: an action-packed story that involves option slush funds, an executive on the lam, and disgorgements in the millions of dollars.

Comverse Technology:  Value Added Option Backdating
Comverse Technology engaged in the usual backdating procedures under which the CEO and CFO would “cherry-pick” (the SEC’s words) grant dates by looking back at historical stock prices and choosing a date with a low price. The compensation committee minutes were then backdated to reflect that the grants had been approved on that date, even though the committee did not meet to approve the grants until later (sometimes as much as six months later). Snore, right? What self-respecting backdating company didn’t do this?

But, Comverse added their own creative twist. They also created an options “slush fund” (also the SEC’s words) by submitting options grants to fake employees for comp committee approval. These grants were then held in a special account in the stock plan database. The name on the account was originally “I.M. Fanton,” which we thought stood for “phantom stock options,” but Adam Kasfield of Courthouse News Service says was for the play “The Phantom of the Opera.” I guess whoever set up the account was a movie buff, because the name on the account was later changed to “Fargo.”

The “slush fund” options were re-allocated to Comverse employees at the descretion of the then CEO.

All Settled?

At this point, the SEC’s case against Comverse has been settled. The company itself seems to have cooperated enough with the SEC’s investigation to escape with minimal penalty, but the former CFO and General Counsel consented to judgements in excess of $2 and $3 million, respectively, and are barred from serving as officers of public companies.

In an interesting twist, the former CEO is a currently a fugitive–he never returned from a family vacation outside the United States. Who would have thought stock option backdating would lead to such drastic measures (although apparently Comverse was involved in some other accounting irregularities that may have contributed to the ex-CEO’s escapism)?

Why Now?

So why has this come up now? Because, on top of everything else, a Section 16 claim has been filed against a corporate insider at Comverse that received some of the “slush fund” options.

The insider exercised the option and sold the underlying stock within a period of less than six months after the grant. If the grant had been properly approved, this would have been fine. But since the grant wasn’t properly approved, and since the shares underlying the grant were not held for six months, the grant is considered a non-exempt purchase for Section 16(b) purposes. As such, it can be matched against the sale (and any of the insider’s other sales in the six months before or after the grant date) to trigger short-swing profits recovery. The profits in this case are $4,000,000.

The Moral of the Story

I think we already know most of the lessons that can be learned from this: don’t backdate options, don’t create option slush funds–or, if you do, at least use account names that aren’t so obvious. And, if you receive suspicious grants and you are subject to Section 16, wait at least six months before you sell the underlying stock. But, even with these ho-hum lessons learned, this has been a far more action-packed blog than the topics I usually write about.

Read the SEC Complaint Against Comverse.

Domestic Stock Plan Design Survey Extended
Due to overwhelming demand, we have extended the deadline to participate in the 2010 Domestic Stock Plan Design Survey until Friday, April 23.  But don’t wait any longer–we absolutely will not be able to extend this deadline again. 

Just a Few Days Left for Conference Early-Bird Discount
You only have until this Thursday, April 15, to take advantage of the $300 early-bird discount on the 18th Annual NASPP Conference.  The Conference will be held from September 20-23 in Chicago.  Last year’s Conference sold out and we expect even more attendees this year.  Don’t count on the early-bird deadline being extended–register today!

Finish the 2010 Domestic Stock Plan Design Survey by April 15 and you can receive an additional 10% off the early-bird rate.

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 8, 2010

What is Tax Time Telling You?

April 15th is looming and many of your employees will be scrambling to get their taxes filed. Since crunch time exaggerates confusion, this last push will really highlight the top issues your employees face when it comes to reporting their equity compensation.

Keep a Tally

It’s a busy time of year. I know you have a lot going on, and fielding tax questions from employees only makes it busier. But, give this a try, anyway. Keep a tally of the types of questions that you get from employees who are trying to file their tax returns. Better yet, see if you can bring your HR teams in on the count (or at least get feedback from them). This is the best feedback on your communications efforts that you can get from your employees. They may love your seminars, you may have high participation rates, you may even have 100% grant acceptance. But, when it comes down to actually getting the right numbers onto the right tax forms, employees absolutely must have absorbed what you’ve been telling them. If you see a particular type of question come up more often than any other, then you know what information to tackle in the coming year. If you get too many questions to even begin to keep track, then tax time is telling you to step up your game and get communicating.

More Choices Mean More Issues

If you have multiple equity compensation vehicles (say, an ESPP, NQ options, and RSUs), employees have a lot to sort through when tackling their tax returns. If they sold shares during the year, they need to understand how to find the cost basis of those shares and whether they are reporting income or capital gains. If you find that a significant number of questions center around employees’ inability to distinguish between their different pieces of equity compensation, then maybe tax time is telling you to reconsider the mix as well as the choices. Even just limiting tax payment methods can reduce the confusion.

Walk the Line

A difficult issue that stock plan management teams deal with is exactly how to help an employee understand their equity compensation well enough to file a correct tax return without actually offering tax advice. I think the best way to avoid the two extremes of either giving out too much information or frustrating employees by just sending them away unassisted is to have standard communications and samples ready. You can get buy-off from your legal department on the communications, desiminate them to HR locations, and make them available on your intranet. This helps to control the message that’s going out to employees and will save you time when you can direct an employee to a resource instead of walk them through the information personally.

If you find that you are getting a significant number of employees begging for tax help beyond what is in your standard communications, tax time may be telling you that employees need tax advice resources. Check with your legal team and your current service providers to see if you can direct employees to a list of financial advisors that understand equity compensation.

NASPP Resources – Be a Part of the Solution!

We now have an Employee Communications portal on the NASPP site. Included in the content are samples of how other companies are helping employees understand their equity compensation. This is a great place to share and learn, so don’t be shy about submitting your own communications. You can submit via the Employee Communications portal, or by contacting me directly. You can find my contact information in the NASPP On-line Member Directory.

Speaking of April 15th…

Don’t forget that the best prices for the 18th Annual NASPP Conference as well as the Practical Guide to Performance-Based Awards pre-Conference course will disappear after April 15th.

And There’s Always Tomorrow!

If you signed up to participate in the 2010 Domestic Stock Plan Design Survey, but haven’t completed it, yet, don’t forget that the deadline for completion is Friday, April 9th! Remember, anyone who completes the survey will get an additional 10% discount on 2010 Conference registration fee.


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April 6, 2010

Abandoned Property and Stock Plans

One thing I love about this job is that I get to use colorful words that are otherwise challenging to work into everyday conversation. Today’s word is “escheatment.” Such a cool word, yet I never manage to use it in conversations with friends and family. But for this week’s blog entry, I discuss what I suspect is a sleeper issue for many of you: how abandoned property laws can be a problem for your employees–giving me ample opportunity to use the word “escheat” and all its various derivatives (“derivatives” is another cool word).

Escheat, Escheatment, Escheatable, Escheated

Most states are operating with pretty tight budgets these days and are looking for additional sources of revenue. For many states, abandoned property has become one of these sources. For our purposes, the abandoned property we’re concerned with are the shares of stock employees have acquired through their participation in company stock plans. If those shares sit in employees’ account long enough without any action on the part of the employees, especially if employees move and don’t keep their addresses up to date (but sometimes, even when addresses are current), the state may deem the accounts to be lost or abandoned and require the stock to be turned over to the state. The state then sells the stock and pockets the proceeds.

The period of time that the accounts must be inactive and what constitutes an inactive account varies by state. But, in today’s tough economic conditions, many states are stretching these definitions.

How Does This Apply to You?

You don’t want employees to lose stock they’ve acquired through your company stock plans to abandoned property statutes. Your company implemented stock compensation programs to provide a benefit to employees, not to help out with state budget deficits. Allowing plan stock to be escheated to the state undermines this objective. Not to mention, employees are likely to be none too happy about losing their stock and my guess is that you’ll be top on their list of people to complain to.

Beyond that, in some cases the company may even have a fiduciary responsibility to try to prevent the shares from being escheated. When employees are subject to escheatment, they may try to sue the company for their loss. Even where the company ultimately isn’t deemed liable, these lawsuits can be very costly (time and money) to defend.

What Can You Do?

Here are a few things you can do to protect stock plan participants from escheatment:

  • Have a conversation with your brokers and transfer agent regarding their escheatment process. Know how they identify inactive, dormant, and lost accounts and what notifications they provide to account holders in danger of escheatment.
  • Ask your transfer agent and brokers to notify you of pre-escheat listings and review these listings for current and former officers, directors, employees, etc.
  • Ask transfer agent and brokers to code officer, director, consultant, and employee accounts (and any accounts for other individuals affiliated with the company, such as spouses of officers and directors), to make it easier to identify these folks if their accounts end up in escheatment.

For more information on abandoned property laws, listen to the archive or read the transcript of the NASPP webcast “Current Developments Impacting Brokers & Transfer Agents (And What They Mean to You).”

A Personal Plea
This is the last week to participate in the 2010 Domestic Stock Plan Design Survey.  This survey is an important benefit for our members; I will be personally grateful to all of our issuer members that complete it. Plus, you’ll qualify for discounts on the NASPP Conference, membership, and a raffle for an gift certificate.

So here’s how the value of participating in the survey stacks up: gift certificate–$50; 10% discount on NASPP Conference–$139; Barbara’s undying personal gratitude–priceless!

18th Annual NASPP Conference
You have just one week left–until April 15–to take advantage of the $300 early-bird discount on this year’s NASPP Conference.  The Conference will be held from September 20-23 in Chicago.  Last year’s Conference sold out and we expect even more attendees this year.  Don’t count on the early-bird deadline being extended!

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 1, 2010

So, You’ve Got a Performance Plan?

The popularity of performance-based equity compensation is growing. If your company is adopting a new performance plan, these are the top 5 things you’ll need to know in order to administer and communicate it to participants.

  1. Performance criteria
  2. Companies can spend a lot of time hammering out the best performance criteria to motivate employees as there are seemingly endless possibilities. The stock plan management team needs to have a very clear understanding of the performance measures being tracked for the grant (e.g., target EPS, milestones, or relative TSR) and how performance will impact the grant (e.g., will it determine the payout date, payout amount, or strike price).

    These unique parameters determine how performance-based grants should be valued and how their expense is amortized. For example, if the performance goals are considered market-based, then the valuation takes the likelihood of vesting based on those conditions into consideration. Expense for awards that are not paid out due to not achieving the market condition is not reversed. You can find more on the valuation and amortization of performance-based grants in the article “Accounting for Performance and Market Awards” from Equity Methods.

  3. Performance period(s)
  4. With performance-based grants, the vesting period and the performance period may not be the same (in fact, it’s recommended that the vesting date be far enough after the end of the performance period to allow for approval of performance goal achievement). Some grants even have multiple performance periods within one grant. If the performance and vesting schedules differ, it is important that each is well-documented and tracked. It may not be possible to track separate periods within the same database, so detailed documentation is essential.

  5. Performance attainment
  6. It will also need to be very clear when performance measurement will take place and who will be responsible for determining the degree to which performance targets have been achieved. In order to qualify as “performance based” grants under 162(m), the compensation committee will need to certify that the performance targets have been met. To facilitate a smooth certification process, the other groups and individuals involved must be ready to report to the compensation committee as cohesively and promptly as possible. It may be just one group or person who can verify the performance target(s); in which case the company should develop a process to insure that that group or individual is prepared to evaluate performance at the end of the performance period. On the other hand, the evaluation may require multiple groups; in which case there should be a process in place to coordinate.

  7. Terminations (and other details)
  8. There are many important grant parameters that are not necessarily unique to performance-based grants. For example, the inclusion of dividends or dividend equivalents, the details of change of control provisions, and how terminations will impact the grants. I highlight terminations because there are additional considerations for performance grants, and because they are the most likely scenario to consider.

    The trickiest termination consideration is what to do about grants where one or more performance periods have been met prior to termination; particularly for termination due to death, disability, or retirement.

  9. Grant input and tracking
  10. After all the details of a performance plan are in place and understood by everyone involved, there is still the challenge of how to get as much of the specifics of plan into the stock plan administration software. Many stock plan administration databases have some degree of tracking and reporting capabilities for performance-based grants. However, due to the amount of variation among existing performance plans, it is likely that there will be some degree of “outside the box” thinking around how to input each company’s performance plan.

    If you are getting ready to input performance grants into your stock plan administration software, be sure to meet with your software provider to determine what can be entered in the database and what must be tracked outside the database or otherwise customized. You’ll need to be sure that you’ve found the best balance between the way the grant reflects in the participant interface, on expensing reports, and even how it impacts plan reserves.


Of course, the best way to have a manageable performance plan is to have the stock plan management team be an integral part of the planning process! The best way for the stock plan management team to get invited to the planning table is to be knowledgeable regarding performance plans prior to the adoption of a new plan.

Whether you’ve just been asked to manage a performance plan or your company is exploring the possibility, we have a fantastic program designed to get you prepared. Offered for the first time this year as a one-day intensive program preceding the 18th Annual NASPP Conference, “Practical Guide to Performance-Based Awards” will give you the substantive knowledge necessary to implement or administer this unique and emerging form of equity compensation.

Early bird rates for the pre-Conference sessions end on April 15th. If you are planning to attend both the Conference and the “Practical Guide to Performance-Based Awards”, you get a double-discount if you register before the early-bird rates for both end on April 15th. Register today!

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