The NASPP Blog

Monthly Archives: April 2011

April 28, 2011

Data Privacy

California is serious about privacy–so serious that it’s an “inalienable right” in the California constitution. This should give consumers–and employees–in California an extra bit of confidence that their own personal information won’t fall into the wrong hands. It does, however, create some rather frustrating experiences when a California resident actually wants his or her personal information to be transferred out of the state. For example, if you are a resident of California you may find yourself at an out-of-state bank branch talking to a perfectly nice teller who insists you don’t have an account until you admit you are from California at which point he will say, “Oh…California. Why didn’t you say so?” In this respect, California may have more in common with the EU or Japan than with the rest of the United States.

Aside from the quirky anecdotes that data privacy laws provide, there are serious considerations for companies with international (or California) subsidiaries. HR, payroll and equity compensation practices must ensure that the very essential, but also very private, employee data is transmitted without violating applicable laws. Payroll considerations can be accomplished with relative simplicity compared to equity compensation by virtue of local payroll processing. The distinct difference for HR and stock plan management is that most companies want to house relevant information in one central location or database.


Just like my fun bank experience, this is an instance when employees should want to have their information transmitted–after all, it’s going to create a tangible asset for them. But, operating on the idea that you have a right to access the necessary information to create and manage grants for your employees isn’t enough. In many locations, employees must actually consent to have their personal information sent to you and also sent on to the broker who will ultimately facilitate transactions for them.


The burden for ensuring your company policies compliant with data protection laws hopefully falls on your legal team. However, ensuring that equity compensation practices adhere to the policies is an ongoing consideration for stock plan management teams. Here are three important areas to consider when it comes to data privacy:

Incoming data -exactly what information about employees you collect and house in your stock plan administration database and how you access that information

Outgoing data – each instance where individual private information must be transmitted out of the stock plan administration database

Communications practices – when and how you are sending personal information back to your employees

Once you have established that your current practices are compliant, keep data protection in mind any time you are going to engage in a one-off situation involving the transmission of personal information. If you are in a merger situation, have opened a new office, or are partnering with another department to perform a data audit, these are all examples of situations where taking a moment to confirm that you are maintaining compliance with data privacy laws is a good idea.


The NASPP’s Global Stock Plans portal has several matrices that include data privacy issues companies should consider internationally. They can be found along the left column of the portal. We also have an update from Latham & Watkins on data privacy and protection in Germany, the UK, and Spain prompted by the draft Federal Data Privacy Act being considered in Germany. The Act could place more tringent qualifications on obtaining employee consent to collect and distribute personal information.


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April 21, 2011

Tax Free Options and Pay Ratios

San Francisco Treat

For those of you with employees in San Francisco, keep your eyes and ears open for the outcome to the proposal brought before the city officials this Tuesday. If passed, it will eliminate the inclusion of equity compensation from income subject to the city’s payroll tax.

On a side note, while looking for more information on the city payroll tax I found this somewhat disturbing article from earlier in the year. What scares me about it is both the false statement that the federal government doesn’t tax income from stock options and the author’s apparent promotion of company withholding policies that assume tax regulations won’t be enforced.

Pay Ratios

Of course, executive compensation continues to be a focus in the news. From the reports, it really does look like executives’ pay (particularly CEO and CFO pay) is rebounding significantly faster than their companies’ profits are. It’s a difficult balance for companies to retain quality leadership and not make a bad impression on the media and investors. If you are watching this issue closely, is keeping a great list of companies who have failed say-on-pay votes and also those who are combating negative reactions from proxy advisors through supplemental proxy solicitations.

Also, remember that difficult little requirement in the Dodd-Frank Act that companies disclose the ratio of CEO pay to the median pay of all other employees? The AFL-CIO recently launched its improved Executive Pay Watch site which dedicated to drilling down and making public these ratios. I would love to know what calculations they use and how they will ultimately compare to the calculations required in the final regulations once they are out.

I also wonder if a growing focus on the pay differences will be something that companies will need to address with their employees as well. Equity compensation is a major factor in executive pay levels. If your company has a broad-based equity compensation program, communicating the company’s compensation philosophy and practices is an important part of fostering employee satisfaction. As executive compensation practices become increasingly transparent, I think it’s the perfect time to take a closer look at your communication practices as they relate to your equity compensation policy and to initiate a dialogue with your investor relations team to better understand how the company will be managing the public perception of your company’s pay practices.

Financial Reporting for Stock Plan Professionals

Finally, I want to highlight the NASPP University’s upcoming course, Financial Reporting for Stock Plan Professionals. If you want to test your skills and see if this course is right for you, we’ve got a short financial reporting quiz to help gauge your financial reporting skills. It’s not too late to take advantage of the early-bird rate on this course!


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April 19, 2011

Backdating, Auditors, Lotteries, and Employee Performance

Today’s blog looks at a couple of random topics that showed up in my recent Google alerts: 1) options backdating and lawsuits against auditors and 2) yet another study on stock options and employee performance.

Are Your Auditors Going to Get Fussier?
Option backdating stories are few and far between these days, but a new development showed up in my Google alert this week. A federal appeals court has ruled that investors can move forward with a lawsuit against Ernst & Young over Broadcom’s option backdating scheme. The ruling reverses a lower court decision dismissing the case.

The lawsuit alleges that Ernst & Young should have investigated deficient and missing documentation relating to Broadcom’s option grants. At this point, the lawsuit has a long way to go–the ruling just allows the suit to proceed, there has been no finding or judgment against E&Y and perhaps there won’t ever be. Nevertheless, I think it’s intriguing that the lawsuits over option backdating have now extended to auditors. I’ve talked to many a stock plan administrator who has felt a bit put upon with respect to the documentation requested by their auditors, and that was before the options backdating scandal. I imagine the documentation requests have already gotten more onerous and, if this lawsuit goes much further, I can only anticipate that auditors will tighten up the documentation requirements even further.

Stock Options=Lottery Tickets=Grateful, Hardworking Employees
The debate over whether stock options incent employee performance slogs on. The latest rebuttal is the paper, “Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large US Company” by management professor Peter Cappelli and Martin J. Conyon, senior fellow at Wharton’s Center for Human Resources.

The study posits that stock options motivate employees to work harder, but not in the way employers most likely hope. Instead of working harder to increase the stock price before they exercise, employees view options more like lottery tickets. But, if they get “lucky” and are able to exercise for a profit, employees will work harder in the period following their exercise–often for over a year–in gratitude to the company for the payout they received.

The study examined exercise patterns and job performance of 4,500 managers at a large U.S. public company (unnamed). While the sample size of employees certainly seems large enough, the results would be more interesting to me if the study had looked at more than one company. The authors don’t seem to acknowledge the differences that education (both in terms of the stock plan and company financials) and corporate culture might have on how employees view their stock options and how that influences their performance. It would also be interesting to know if the results translate to restricted stock or RSUs, which guarantee a payout to employees.

It’s Not Too Late for the Online Fundamentals
The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” began last Thursday, April 14, but it’s not too late to participate. All course webcasts have been recorded and archived for you to listen to at your convenience.  This is a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.

Online Financial Reporting Course–Only Two Weeks Left for Early-Bird Rate
There are only two weeks left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles.  Register by April 29 for 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 


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April 14, 2011

Is This Insider Trading?

Yesterday, I had the opportunity to participate in a Computershare FreeSMARTS webcast with my NASPP colleagues Danyle & Robyn on insider trading compliance policies. Preparing for this webcast gave me the perfect excuse to peruse some of the policies available on the web. Our sister site, has a fantastic list of example policies in the Insider Trading Policy practice area.

One aspect of the insider trading policy that stock plan managers might be expected to participate in is employee education and communication. I’m a big fan of quizzes to supplement standard education practices, particularly because they provide a means to gage the effectiveness of your program. Insider trading is an area that is perfect for a situational quiz–one that gives employees a situation and asks whether or not it is a case of insider trading. This type of a quiz is very much like an interactive FAQ and requiring employees to stop and actually consider their answers helps them apply the concepts to their own jobs and circumstances.

Today I want to share with you a bit of what I uncovered in the process of preparing for this presentation: offers a quiz on insider trading that serves as a general knowledge poll. These are questions that all of your employees should be able to answer, including the question on penalties for insider trading. It’s important for every employee to understand the potential sanctions that are the teeth behind insider trading regulations.

Smart Money recently published an intriguing article on the advantages of making insider trading legal. One of the hypothetical scenarios from this article was among the questions posed to two leading law professors in this follow-up article. The responses to some of these questions demonstrate the difficulty inherent in a vague set of regulations such as what we have with insider trading.

Finally, in reviewing some posted insider trading policies on company websites, Boeing’s FAQs really stood out to me as a stellar example of a short set of questions that clarify what actions might constitutes insider trading. If you are looking to build a quiz, questions like those provided by Boeing are a great place to start.

Of course, you don’t need to create FAQs or quizzes in-house. There are a number of service providers who specialize in HR training, including insider trading, if you have even a relatively small budget for it.


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April 12, 2011

Burn Rates

I was thinking that we might be dealing with a shutdown government this, which, while otherwise not such a good thing, would have provided some interesting fodder for my blog. But it appears to be business as usual at the IRS and SEC, so today I blog about something completely different: burn rate guidelines.

Burning the Candle at Both Ends: Burn Rates and Stock Compensation
“Burn rate,” also referred to as “run rate,” is a mechanism for measuring how much equity a company grants to employees on an annual basis as compared to the equity held by shareholders. It’s a way for shareholders to guage how much their equity is being diluted annually through stock programs in a worst-case scenario (i.e., ignoring any offsets to that dilution, such as forfeitures and repurchase programs).

There’s no legal definition of burn rate, so every investor, proxy advisor, and survey has their own calculation, but the basic formula is the number of shares granted during the year divided by the total shares of common stock outstanding.

Fidelity Investments Announces Use of Burn Rates

Fidelity Investments, a large institutional investor with holdings in many public companies, has announced that it will begin using a burn rate analysis in determining whether to vote for stock plan proposals. The policy establishes the following acceptable maximum burn rates:

  • 1.5% for a large-cap company
  • 2.5% for a small-cap company
  • 3.5% for a micro-cap company

Fidelity will vote against new stock plans and share authorizations if a company’s three-year burn rate exceeds the relevant maximum, unless Fidelity believes there is a compelling justifcation for the high burn rate.

For a great summary of the new policy, see the ExeQuity client alert “Fidelity Issues 2011 Proxy Voting Guidelines” (April 6, 2011). See also, the full text of Fidelity’s policy.

ISS Burn Rates

ISS (formerly RiskMetrics, formerly ISS–how many times can one company change their name) has used a burn rate analysis for as long as I can remember. (I confess, these days, that time period isn’t as long as it used to be, but, in this case at least, is many, many years. 10 points to anyone who knows when ISS first started using their burn rate analysis in evaluating stock plan proposals.)

There are a few key differences between the ISS burn rate analysis and Fidelity’s new policy:

  • ISS burn rates are published by industry and by whether or not the company is in the Russell 3000 index, so ISS has a more than just three burn rate categories.
  • ISS applies a multiplier to full value awards, so one award share granted counts as greater than one share in the burn rate calculation. The multiplier is based on the volatility of the company’s stock.
  • Where a company’s burn rate exceeds ISS’s guideline, the company can still get ISS to recommend voting for their stock plan proposal by making a commitment to keep their average burn rate for the next three years within the higher of: a) 2% of the company’s common shares outstanding or b) the mean plus one standard deviation of its applicable industry burn rate.

Higher Burn Rates Equals More Generous Grants? Not So Fast

ISS’s acceptable burn rates were generally higher this year than last year, so companies may be feeling like they can be a little more generous with this year’s grants. Keep in mind, however, that ISS uses a three-year average in its analysis. Granting more shares this year means that, three years down the road, your average will be higher and, by then, the ISS guidelines for burn rates may be lower.

Online Fundamentals Starts on Thursday–Don’t Miss It!
The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins this Thursday, April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation; it’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register 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 blog. 

– Barbara

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April 7, 2011

Clawbacks Under Dodd-Frank

Clawbacks in the Dodd-Frank Act

The SEC plans to address the clawbacks in Section 954 of the Dodd-Frank Act between August and December of this year. Many companies appear to be waiting to make final decisions on how to apply the clawback requirements until the SEC completes the proposed rules. (There is more information on creating a clawback policy in the NASPP blog entry, Clawbacks and Executive Compensation.)

Under the Dodd-Frank Act, companies risk delisting if they do not adopt a clawback policy that complies with Section 954 (which is now Section 10D of the Exchange Act). Some of the more difficult aspects of compliance may be in the clawback period (there is a three-year look-back), the potential for little or no company discretion in enforcing the policy, the fact that the executive does not need to be at fault or have contributed to a financial restatement and the actual calculation of compensation that must be recouped.

SEC Enforcement

In 2009, the SEC brought the first enforcement action based solely on SOX clawback provisions. There has been an increase since that case of suits involving clawbacks initiated by the SEC. Last month Beazer CEO, Ian McCarthy, agreed to pay back $6.5 million in compensation under the SEC action against him. (It may not be a coincidence, then, that Beazer’s shareholders voted against pay packages for company executives this year).

Enforcement Snags

The legal aspect of actually recouping compensation under a clawback provision or policy is complex. In the Unites States, enforcement is subject to state wage laws and may or may not be feasible. Presumably, the federal regulations from Dodd-Frank will trump state law, but that is yet another detail to be worked out. Another difficulty for companies to overcome is with respect to di minimis recoupment amounts or clawbacks that would require unreasonable efforts, such as situations where the individual does not have the finances available to repay the compensation.

International Considerations

International considerations for clawbacks are covered in this great matrix from Baker & McKenzie, which differentiates between Dodd-Frank, noncompete, and nonsolicitation clawback practices. In some countries like Canada, Germany, and Mexico, the provisions of Dodd-Frank are likely to be enforceable. However, in many countries like Australia, Japan, Spain, such policies most likely would not be enforceable, particularly if there isn’t an issue of misconduct or individual culpability. There are even situations like in Ireland or the UK where the provisions are likely to be enforceable as long as they were included in the original agreement, which could be a problem for existing equity compensation.


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April 5, 2011

Football, Philadelphia, and Stock Compensation

And now for something a little bit lighter… Last Friday I attended a Philadelphia NASPP Chapter meeting at Lincoln Financial Field–that’s the stadium where the Philadelphia Eagles play.  Yes, that’s right–the meeting was held in press box of Lincoln Financial Field.

The half-day meeting was attended by over 100 NASPP members and other equity compensation professionals.  The presenters included Andrew Schwartz of BNY Mellon Shareowner Services, Kevin McCosker of Pershing, and me on “Cost-Basis Reporting: Issues for Equity Compensation Professionals”; and Emily Cervino of the CEP Institute, Terry Adamson of Aon Hewitt, and David Lanka of Bank of America Merrill Lynch on “Prevailing Over Particularly Perplexing Performance Plans.”

In addition to enjoying lunch with a commanding view of the field from the press box, attendees were also treated to tours of the stadium. Below are a few highlights from my tour.


field reduced.JPGThe view of the field.  The condition of this field exactly demonstrates why I don’t want the Oakland A’s to have to share a field with the Raiders.  Fun fact that we learned on the tour is that the field is a combination of grass and astroturf. The astroturf threads are woven in with the grass.

scoreboard reduced.JPG

Looking up at the stands and the scoreboard from the field.  You feel very small standing on the field.

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Our tour group (the chapter meeting was so well attended, we had to break into groups for the tour) is rapt with attention while our guide presents.  He was very knowledgeable about the stadium but had no opinion on whether the straight-line or accelerated attribution method makes the most sense for awards with graded vesting.

tunnel reduced.JPG

The tunnel that the players use to enter and exit the field.  Just like the one in the Coke commercial–I guess the tunnel doesn’t change much from one stadium to the next.

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Nuclear energy at Lincoln Financial Field? No, just the room where injured players go for x-rays.

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Our tour group in the room where the coaches and players are interviewed after the game.

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Terry Adamson of Aon Hewitt and president of the NASPP Philadelphia chapter in the Lincoln Financial Field press box. Kudos to Terry and the rest of the Philadelphia chapter board for putting together such a great event.  And a special thank-you to Scott McCloskey of Lincoln Financial for arranging for the chapter to be able use this meeting space, to Lincoln Financial and the staff at the field for being such gracious hosts, and, last, but certainly not least, BNY Mellon Shareowner Services for sponsoring the meeting.


Online Fundamentals Starts in One Week–Don’t Miss It!
The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins on April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation; it’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register 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 blog. 

– Barbara

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