The NASPP Blog

Monthly Archives: June 2011

June 30, 2011

Tick & Tie

The NASPP’s own Robyn Shutak, along with Jim Vincent of E*TRADE & Leigh Vosseller of Genoptix, gave one of the top presentations I’ve seen on reconciliation best practices. Someone in the audience asked a very fabulous question…what exactly is this tick and tie everyone keeps talking about?

So, here it is, the tick and the tie as it relates to stock plan administration. The term tick and tie (or tic and tie) is a staple for CPAs and other financial or audit professionals. In the most general terms, it’s the numbers equivalent of “dot your i’s and cross your t’s.” I have absolutely no idea where it originated, but at this point it is commonly used to refer to the financial audit process. But, there are some tick and tie steps that can apply to any audit you are conducting in stock plan administration that make it easier to validate your conclusions.


When you are conducting a reconciliation, you will be confirming two or more independent sources of data. If you are using Excel to reconcile or present the audit data, it’s best to consolidate the independent sources onto separate sheets within one Excel file using one sheet for each source. Then, on a completely separate Excel sheet, you can create a summary data from each source, effectively proving that the sources all match. It is from this summary data that the tick and the tie come into play.


Taking the phrase back to front, I’m going to start with tie. Each field on your summary sheet should point back to the original source. For example, let’s assume that have 50,000 shares granted to employees in a specific cost center and you are confirming that between your approval documents and the stock plan administration database. Rather than typing in or copy/pasting the numbers, you actually point back to the field on another sheet where that total is housed. This helps prevent manual mistyping and also provides quick tracking for anyone reviewing the reconciliation.

For better clarity, you can use the comment field to confirm where the data originates or any other information that an auditor might need to know about the data. For an electronic or soft copy review of the data, you can leave the comment field hidden. For a hard copy review, you can make the comment field viewable so that someone looking over the data can tie it back without having to think about where to go.


I am taking a bit of poetic license with this part of the phrase so that it fits a good reconciliation and audit process for stock plan administrators. I think of this as being verifying the validity of data in the reconciliation. Any good reconciliation process includes a final audit by someone who did not contribute to the original data. So, first, there should be a checklist of each essential part of the data that must be reviewed. The person, or people, involved in creating the reconciliation should verify that each item has been reviewed. Then, the person validating the reconciliation should run down the same checklist and sign off on it.

Full Emersion

Now that you’ve stepped into the world of finance, get the full picture with the NASPP’s Financial Reporting for Equity Compensation course that begins on July 14. Learn all the ways that equity compensation data impacts your company’s financial statements in five weekly sessions lead by leading accountants, valuation practitioners, and seasoned stock plan professionals.


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June 28, 2011

A Stock Plan Administrator and a Chicken Walk into a Bar

Last Thursday, I attended the Silicon Valley NASPP Chapter All-Day Conference. For something a little lighter as we head into the holiday weekend, I thought I would provide some illustrated highlights of the event (click on the pictures to enlarge).

But first, a little humor…

A Stock Plan Administrator and a Chicken Walk into a Bar
The day concluded with a lovely cocktail reception sponsored by AST Equity Plan Solutions.  Cocktails and hors d’oeuvres were served with napkins featuring the following joke:

A stock plan administrator and a chicken walk into a bar and each orders a shot of whiskey. Bartender says, “Looks like you had a tough day.” The chicken says, “When I get back to the farm tomorrow, pretty sure the farmer’s going to whack me and I’ll be on the dinner table this time tomorrow night.” The stunned bartender says, “That’s awful–next round’s on me.” After a few more rounds, the bartender places the check in front of the plan admin and the chicken quickly grabs it and says, “I’ve got this… you’ve got that big vesting tomorrow.”

Ten points to anyone who can guess who penned this witticism (tune in next week for the answer). 

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Barbara Richley, Madori Playford, and Jacobin Zorin cheerfully greet attendees at the registration desk.


A panorama of the afternoon general session.  As you can see, the chapter had a great turnout for this year’s program.

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Keith Pearce of Intel, Fred Whittlesey, Jason LeBovidge of Fidelity, and Emily Cervino of the CEP Institute present on perceived value and stock compensation. I learned why perceived value differs from fair value; the formulas are different.  Perceived value = signal value (more on this in a future blog) + cash value; fair value = time value + intrinsic (cash) value.  For at-the-money stock options, time value is the largest component of fair value, yet employees don’t even consider this when they value options. 


The Equity Methods and AST Stock Plan Solutions booths in the exhibit hall.  Equity Methods sponsored lunch and AST sponsored the closing cocktail reception.   

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The afternoon included a game show presented by Joe Purdy of Solium Transcentive, Angel Toussaint of Oclaro, Rachel Murillo, and Christine Zwerling: “It’s Time to Play: Stock Plan Checkup–Is Yours in Good Health?”  Here the audience races to respond to a question as they compete for prizes. 


Sinead Kelly and Barbara Klementz of Baker & McKenzie and Jon Burg of Radford listen intently to a question from the audience in their session, “Claw-Back Provisions in the US and Around the Globe”



Members of the Silicon Valley Chapter Board and Program Committee, who did such a great job with this event: Jean Wong, Lydia Terrill, Inta Abele, Karen Hertz, Britta Puschendorf, Madori Playford, Elizabeth Dodge, John McCann, and Jacobin Zorin.

Board members not pictured:  Barbara Richley, Jon Burg, and Carol Rose-Guerin.

Additional exhibitors and sponsors included:

Charles Schwab, UBS Financial Services, Fidelity, E*TRADE Corporate Services, Solium Capital, Stock & Option Solutions, FRS Equity Strategies, and Morgan Stanley Smith Barney (not pictured).

Financial Reporting Course Starts in Two Weeks
The NASPP’s newest online program, “Financial Reporting for Equity Compensation” starts in just two weeks. Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS, to tax accounting.  Register today–don’t wait, the first webcast is on July 14.

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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June 23, 2011

Chasing Taxes

Today I am really looking attending the NASPP’s Silicon Valley Chapter All-Day in Santa Clara. If you are joining us, be sure and say hello to me! If you are missing out on the action today, don’t let your opportunity for the 19th Annual NASPP Conference early bird rates also slip through your fingers. Tomorrow is your last chance to get in on the special discount on registration.

Six Years of Savings

San Francisco did end up approving short-term relief from city tax on equity compensation through December 2017. But, there are a couple catches. First, the exemption from the city’s 1.5% payroll expense tax on stock options only applies to companies immediately following an IPO. Second, the relief only kicks in after the $750,000 in taxes has been paid. According to this article from the San Francisco Examiner, only a dozen or so companies are poised to actually be impacted by this tax break. Still, there is talk about what changes to city taxes might be proposed for the 2012 ballot. So, for now, public companies in San Francisco must still pay the payroll expense tax on equity compensation–unless they are eligible for other payroll tax exemptions.

You Can Run, but You Can’t Hide

Speaking of paying taxes, I also caught this article from We’ve been hearing that both the IRS and states are and will continue to focus on taxes due on equity compensation. This article indicates that states may be looking specifically at domestically mobile employees and several will soon be enacting legislation to provide specific formulas for calculating the portion of income deemed to be earned in-state.
This is both good news and bad news. Obviously, there is the administrative burden of achieving compliance with respect to mobile employees. If states are taking a closer look at the sourcing of income from equity compensation, companies need to be moving faster toward full compliance. The good news is that one of the hurdles to achieving real compliance is defining exactly what compliance means in certain jurisdictions and it looks like more states will be making that clear. The problem does still remain, however, that states are not legislating the same formula–an issue also present in global mobility compliance. Our expert panelists covered all the complexities of domestic mobility in the recent NASPP webcast, State Mobility: Don’t Be Grounded by Your Mobile Employees. If you weren’t able to join in the live webcast, the transcript and materials are both available for review.

Tax Planning

If you are looking for more information on taxes and equity compensation, the NASPP Conference has several great sessions. One I’m particularly looking forward to is: Death, Taxes and Senior Executives: Estate Planning and Retirement Programs.


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June 21, 2011

Backdating: OK After All?

Now that the scandal, media frenzy, investigations (internal and external), prosecutions, and shareholder litigation seems to be winding down, a recently published academic study suggests that backdated options may not have done much harm to shareholders after all.

Is Backdating Executive Stock Options Always Harmful to Shareholders?
The study, “Is Backdating Executive Stock Options Always Harmful to Shareholders” authored by a team of five academics, posits that backdating isn’t the problem it was perceived to be because:

  1. The real cost of stock options to shareholders is dilution, which is disclosed via diluted EPS. This calculation takes into account the strike price of the option, whether backdated or not, therefore, shareholders were aware of the potential dilution caused by backdating.
  2. The reduced exercise price is more valuable to employees than the company’s cost for the discount. Thus, companies that granted backdated options may have been able to grant smaller options that were less dilutive than the options they would have granted if the options had been at-the-money at grant.

A Case for Discounted Stock Options

I was excited to see the paper, not because I think backdating is okay, but because I am a fan of discounted options. Under ASC 718, discounting an option doesn’t necessarily result in a dollar-for-dollar increase in the fair value of the grant. This makes discounted options a bargain from a compensation standpoint: the expense for the discount is less than the value delivered to employees (for this same reason, I’m not a fan of premium-priced options). The paper does conclude that there are situations where discounted stock options can be beneficial to both the company and employees.

Unfortunately, the very real obstacle of Section 409A still stands in the way of actually granting discounted options and, from a tax-revenue perspective, there are some valid reasons to discourage discounting (see my blog entry “Discounted Stock Options: Inherently Evil or Smart Strategy?,” March 16, 2010), so I don’t see this changing any time soon, study or not.

Flaws in the Study

There are also a number of flaws in the study. First, the study assumes that the company never realizes a tax deduction for ISOs and that ISOs have to be subject to vesting requirements–any Level I CEP candidate knows that both of these premises are false. In addition, the study assumes that stock options never qualify as performance-based compensation under Section 162(m). The authors in general seem to be very confused as to the operation of this area of the tax code.

Word of the Day

I did learn a new word when reading this study: “Pareto-improving,” which refers to something which harms no one and benefits at least one person. The authors conclude that, at least in some situations, backdated options can be Pareto-improving. I still haven’t figured out what sunspot equilibria are, though.

Only a Few Days Left for NASPP Conference Early-Bird Rate
The 19th Annual NASPP Conference early-bird rate expires this Friday, June 24.  This deadline will not be extended–register for the Conference today, so you don’t miss out.

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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June 16, 2011


Managing a global equity compensation program entails helping your non-U.S. employees overcome the significant barriers to understanding and accessing their stock compensation. Non-U.S. employees may have to absorb information in a language they aren’t comfortable with and embark on a business relationship with a U.S. broker in addition to the more universal challenge of conceptualizing compensation that does not come in the form of a simple paycheck.

One of the issues that only your non-U.S. participants will face is keeping their W-8BEN current with their broker. I say keeping it current because most, if not all, brokers have incorporated the submission of an initial W-8BEN into the account activation process.

Backup Withholding

Brokers are required to ask for a SSN–or taxpayer ID–when individuals open a new account. If the SSN is missing or incomplete, brokers must process backup withholding, which is 28% through 2012, on any transaction. However, a W-8BEN is a form that establishes an individual (or organization, really) is both not a U.S. resident or citizen and not subject to tax on income that would otherwise be taxable in the United States. Most importantly for your non-U.S. employees, the W-8BEN confirms that shares sold through their U.S. brokerage account are exempt from backup withholding.

Once and Again

Once a person has a U.S. taxpayer ID or SSN, it’s permanent. Being exempt from backup withholding, on the other hand, is not a static status. Therefore, a W-8BEN expires at the end of the third calendar year after it was completed and a new one must be signed in order to continue to be exempt from backup withholding. No matter how the W-8BEN is completed, this can be confusing. A broker can remind employees of an impending expiration, but not to force them to complete it.

Backup Plan

If you have non-U.S. employees, it’s important to coordinate with your broker on how to handle expiring W-8BENs. Your broker can help you identify and target employees with communications. You can even set up a post-transaction verification process to try and catch employees with expired W-8BENs before backup withholding is actually remitted to the IRS. However, you should still have a backup plan for how your company will handle situations where backup withholding has passed the point of no return. Once tax withholding has been remitted to the IRS, the only person who can get the funds back is the individual. Having a protocol in place for how much hand-holding the company will do.

Back Again

In order for your employee to recover backup withholding, she or he must file a tax return, which means a SSN or tax ID is required. Your employee may complete a Form W-7 and submit it along with the tax return, which would most likely be the Form 1040NR-EZ if the backup withholding is the only reason your employee is filing.

If you have more questions about managing a global stock plan, find the answers you need in the NASPP’s Global Stock Plans portal.


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June 14, 2011

ESPP Matchup

I recently completed an analysis of how ESPPs in the western United States compare to plans nationally and I thought my readers might be interested in how the results came out. I’ll be presenting the data during my panel “Pumping Up Purchase Plans: Re-Thinking the ESPP” at the Silicon Valley NASPP Chapter All-Day Conference, but I thought I’d give you a sneak peak.

ESPP Match-Up: The West vs. the Rest
The data I’m comparing is from the NASPP’s 2007 Domestic Stock Plan Design and Administration Survey (co-sponsored by Deloitte). I asked Deloitte to run a special cut of the data that just includes companies in the west and I compared that to the national data we published. While the data are several years old, I don’t think ESPP design has changed significantly.  We’ll know for sure later this year, when we publish the results of our 2010 Domestic Stock Plan Administration Survey. Hopefully you participated, so you’ll have access to the results.

First, a Note About the Participants

Of the companies in the western region:

  • 71% are high-tech companies (vs. about 46% high-tech for the national data).
  • 74% are companies in CA and 12% are companies in WA. The remaining companies are in CO, OR, ID, NV, WY.
  • 21% are Fortune 500 companies.

Now, For the Results

93% of respondents in the western region that offer an ESPP, offer a Section 423 plan, compared to only 77% of respondents nationally.  Because the incidence of Section 423 plans is so high in the west (and non-423 plans so few), the remaining data I present here are for Section 423 plans only.

Of those western region companies that offer a Section 423 ESPP:

  • 89% offer a 15% discount (compared to 79% nationally)
  • 81% base their purchase price on the lower of the beginning or ending FMV (compared to 66% nationally)

22% of western region companies have a 24-month offering period (compared to 19% nationally). Six-month offering periods are also more prevalent in the west (58% of western region respondents compared to 48% nationally).

So what offering length is used more frequently nationally than in the west? A whopping 18% of respondents in the national data have a three-month offering period, compared to only 9% of respondents in the western region. I had no idea three-month offerings were so popular nationally–I actually went back and checked the data again, just to make sure. Yep, 18%. That’s almost as many respondents as offer a 24-month offering at the national level (although it’s still less than half the number of national respondents that have a six-month offering). 12-month offerings are also slightly more popular in the national data than in the western region (11% nationally vs. 8% in the western region.)

Given that ESPPs are more frequently used and more generous in the west, does that translate into higher levels of participation? You bet it does! 48% of companies in the western region report participation levels of greater than 50%, whereas, in the national data, only 29% of companies report achieving this level of participation.

Learn More at the Silicon Valley NASPP Chapter All-Day Conference

If you are thinking that you’ve heard my whole presentation, so now you don’t need to come to the chapter conference next Thursday, June 23–think again! This data represents only three slides in my panel’s presentation, so we have lots more to “re-think” about ESPPs. (Spoiler alert: We still think ESPPs are a great idea.) There will be lots of other great panels throughout the day and you can’t beat the price of admission–register by this Friday, June 17, for the early-bird rate. I hope to see you there.

Only Ten Days Left for NASPP Conference Early-Bird Rate
The 19th Annual NASPP Conference early-bird rate expires next Friday, June 24.  This deadline will not be extended–register for the Conference today, so you don’t miss out.

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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June 9, 2011

Automation 1-2-3

Automation is essential for data management because of its efficiency and accuracy. Any time a person is tasked with manual data entry, there is a significant risk of error. That risk increases exponentially as the data volume increases. These are the three basic steps to building and executing a project plan to incorporate automation into your daily routines.

  1. Identify

  2. The first step towards automation is to identify the data sets that require regular manual manipulation as well as the databases or software systems where the information resides. Processes could be either data entry/transfer (e.g., entering employee demographic information) or the processing and interpretation of data (e.g., share usage projection). This is the time to really brainstorm. Every single process you do can go on your list; each process may include several steps that should be broken down into individual opportunities for automation. Take your list and create a spreadsheet with a list of each process, where the data originates, where it needs to be transferred to, and what departments or outside service providers are involved.

    Take time at this step to get to know each of the database or software systems that your data touches because this knowledge will carry forward to each piece of automation you build. Drill down each system’s capabilities for formatting output of data and accepting data as an upload. If you are manipulating data for analysis, it may be possible to build data output reports that either reduces the manual processes for analyses or provides the data in a format that requires no further manipulation. When starting your automation project plan, you are only looking to understand the potential from each of your data systems; you don’t need to detail the entire business specification at this point.

  3. Prioritize and Build
  4. Once you have identified which data processes are candidates for automation, it’s time to prioritize. A good place to start is to eliminate the processes that require data output formats that your systems can’t accommodate at this time. These items can take a different route as topics to approach with the database architects, whether they are internal or external contributors. Rate the remaining processes on how easy each is to automate as well as how significant the process is. Significance is the more difficult to define because it could mean processes that impact the highest volume of data, represent the highest risk of error, or are components of the most visible data outputs. This helps when determining which pieces of automation to tackle first.

    Once you’ve established your project priorities, build your automation. You don’t need to tackle projects one at a time. You may find that some pieces may build on each other because they use the same original data. Additionally, you may be able to oversee more than one automation project simultaneously if the process requires time commitments from separate groups.

  5. Bust
  6. The final step for automating a process is to break the automation. Well, at least try your hardest to break it. Take each piece of the automation and think of as many situations as you can where data will feed into or come out of that process, even if it’s not what the process was originally intended for. Don’t limit yourself to using correct data, either. It’s important to know what will happen if incorrect or incomplete data sets are used so that you can recognize these problems if or when they happen in the future. Remember, you may not be the only one using the process and it could be the platform for further automation in the future.


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June 7, 2011

IRS Auditing Stock Compensation

In late 2009, the IRS announced a major audit initiative for executive compensation that will ultimately involve at least 6,000 companies (see “IRS Audits: Are You Ready to Rumble?” January 26, 2010). We’re now over a year into that project, so I thought it might be a good time to revisit the subject.

No Need to Be Surprised

If you’ve been wondering what the IRS might audit relating to stock compensation, it turns out that there’s no need to be surprised. The IRS explains what they are looking for relating to stock compensation on their website. Here are a few highlights of what you can expect IRS auditors to investigate:

  • In the case of restricted stock and units, whether there has been a transfer of property (e.g., does the employee have voting and/or dividend rights) and whether there is a substantial risk of forfeiture for the award.  According to Stephen Saxon in the March issue of PLANSPONSOR (“Saxon Angle: Audit Trials“), companies that offer accelerated vesting upon retirement should be especially wary of this issue for their retirement-eligible employees.
  • Whether ISOs and ESPPs meet the statutory requirements, especially the $100,000 and $25,000 limitations.
  • Whether income has been properly reported (on Form W-2 or Form 1099-MISC) and taxes withheld (if required) on all types of stock plan transactions.
  • Whether tax withholding for stock compensation has caused companies to exceed the $100,000 next-day deposit threshold that Rachel blogged about a couple of weeks ago (“Timely Tax Deposits,” May 26), and, if so, if companies complied with the deadline.
  • Recordkeeping practices relating to grants, exercises, and other stock plan transactions.
  • Compliance with Section 162(m)–but that’s a topic for another blog. 

Things I Sure Hope Won’t Be a Problem

There are a few items highlighted in the IRS’s audit instructions that I sure hope won’t be a problem for any NASPP members–I know you are all too smart to fall for these traps:

  • Back-dated stock options.  No explanation needed on this one.
  • Transfers of options to a related party.  Under this strategy, an executive would “sell” stock options to a family member or trust in exchange for an unsecured, long-term, balloon payment obligation (essentially, the related party just “promises” to pay the executive for the stock option at some point in the future, a long ways in the future).  The idea was to get around the gift tax that could apply if the option were simply transferred to the family member/trust.  This type of a arrangement has been a no-go with the IRS for some time.
  • Not issuing stock upon same-day-sale exercises of an ISO or ESPP.  Although the tax code itself is not clear, the IRS’s audit instructions specifically state that if, rather than issuing stock on a same-day sale, the underlying shares are simply cancelled in exchange for the spread–in other words, a net exercise–the arrangement is subject to withholding for both income tax and FICA purposes. 
  • Issuing loans to executives for option exercises and then later forgiving or reducing the loans.  Public companies shouldn’t be issuing loans to executives at all, much less forgiving those loans.   

Last Chance to Qualify for Survey Results
This week is your last chance to participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte).  Issuers must complete the survey by this Friday, June 10, to qualify to receive the full survey results. Register to complete the survey today–we’ve already extended the deadline once, we can’t extend it again!

NASPP Conference Program Now Available
The full program for the 19th Annual NASPP Conference is now available.  Check it out today and register by June 24 for the early-bird discount–this deadline will not be 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 

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June 2, 2011

Pay for Performance

The United States doesn’t have the monopoly on the demand for “pay for performance” compensation strategies for executives. In countries like Canada and the UK we also see a serious interest in whether or not executive compensation reflects the relative success of the company. The Canadian advisory firm, Global Governance Advisors (GGA), published an interactive pay for performance tool this week that allows Canadian investors–or any interested party–to see how CEO pay stacks up against different performance measures. This week there were also announcements from UK companies Vodafone and Telecoms regarding how CEO pay will be more closely linked to performance going forward.

Ride the Wave

One of the problems with limiting performance measures to internal comparisons is that overall company performance can be seriously impacted by general market performance. When the market is heading down and relative success means less dismal earnings than peer companies, don’t expect much support for failing less than the next company. In an upwardly mobile market, however, when peer companies are also realizing profit increases and positive shareholder return, just providing a more attractive financial report than in prior years may not be enough.

Relative Success

When the overall economic picture is sunny, the link between relative performance and executive compensation is more valued. Shareholders want to know that they have made the right decision to invest in your company’s stock instead of another similar stock–linking your executive compensation to the relative success of your company can provide that added assurance. If every other company in your industry is reporting 50% profit growth and your company is only reporting 10% growth, it’s not so great. Relative performance is absolutely a factor that RiskMetrics considers when making recommendations to shareholders, as CME recently felt first hand. Don’t expect to dance your way out of pay for performance, either. With the new Say on Pay requirements, determining how to align executive pay with company performance going forward is essential. Using a relative measure for performance awards gives them the extra edge when marketing pay packages to your shareholders.

NASPP Conference Pre-Session

Of course, as Barbara Baksa highlighted this week, the NASPP has many Conference sessions lined up that can help you better understand pay for performance strategies, Say on Pay and shareholder approval issues, and executive compensation best practices. But, if your company is initiating or updating performance awards this year, the one thing you won’t want to miss is the NASPP pre-conference session, Practical Guide to Performance-Based Awards on November 1. This extensive one-day program has everything you need to tackle performance awards from creating performance metrics to effective administration and even essential global considerations.


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