The NASPP Blog

Monthly Archives: November 2011

November 29, 2011

ISS Policy Updates for 2012

Today’s blog looks at ISS’ corporate governance policy updates for 2012, which were issued on November 17.

Ho Hum

While normally ISS’ annual release of policy updates is a relatively exciting, blog-worthy event, this year’s release feels anti-climatic (at least with respect to their compensation policy–maybe there’s some really hot updates to their policies on, say, hydraulic fracturing and recycling–I wouldn’t know) because they previewed the changes several weeks ago (see my Nov 15 blog, “ISS Previews Policy Changes“).

As far as I can tell, the final policy doesn’t really differ much from the proposed policy. In fact, given the short comment period on the proposal and the quickness with which the final policy was released, I have to wonder if they received many, if any, comments and if they did much with the comments. Unlike the IRS, FASB, and the SEC, ISS doesn’t publish/summarize the comments they received or address how those comments were taken into consideration.

Policy Changes for Stock Compensation

As summarized in my previous blog, really the only policy change that directly impacts stock compensation is that when newly public companies first submit a stock plan for shareholder approval for Section 162(m) purposes, ISS will now conduct a full review of the plan. In the past, they basically rubber-stamped these proposals.

This might be big news for LinkedIn, Yelp, Groupon, Zynga, and other recent and anticipated IPOs (and their compensation consultants), but for most of my readers, who have been public for a while now, this isn’t that groundbreaking.


The changes with regards to how ISS evaluates pay for performance also seem to have been adopted largely as proposed. ISS will now determine peer groups based on market capitalization, revenue, and GICS codes, rather than just relying on GICS codes. This could make it difficult for companies to determine who is in their ISS peer group on their own, thus making it hard for companies to predict how they’ll compare against their peers.

ISS will compare a company’s TSR and CEO pay rankings in the peer group and the CEO’s total pay relative the peer group median. Where merited, ISS will also perform a qualitative analysis. This will include a number of factors, the most interesting of which to me is that ISS will look at the ratio of performance to time-based equity awards (I assume this is limited to awards issued to the CEO, but this isn’t completely clear to me from ISS’ summary of the updates). As my readers know, there were several companies this year that modified time-based awards held by their CEO’s to vest based on performance conditions (see my May 3 blog, “Eleven and Counting“). I have to believe these two developments are connected and we can expect ISS to push for more performance-based vesting–at least for CEOs–in the future.

Burn Rates

The updated burn rate tables are not included in the summary of the changes–last year ISS didn’t release these until mid-December so I guess that’s when we’ll get them this year. Is it just me, or does it seem like ISS is releasing these tables later and later?

More Information

For more on the ISS policy changes, see memos by Morrison & Foerster and Exequity.

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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November 22, 2011

ESPP Millionaires

Do you know how much return participants in your company’s ESPP have realized on their investment? Recently, I ran across a blog about how Apple’s ESPP has produced millionaires and it got me thinking about how that sort of information might be used to promote an ESPP.

Apple ESPP = Millionaires
In the blog (“$1.1 Million for Apple Employees,” Forbes, 10/19/11), author Troy Onink estimates how much money Apple employees that have participated in the ESPP for the past seven years have made, coming up with just over $1 million per employee.

Onink does make a mistake in his assumption:  he assumes that each employee is contributing $25,000 per year to the plan. He bases this on the $25,000 limit, but he is apparently a little fuzzy on how the limit works–as my readers know, in a plan with a 15% discount (which Apple’s plan offers), the most an employee could contribute per year is $21,250 (and this assumes an appreciating stock price, contributions would be limited more severely in a declining market). Moreover, according to Apple’s Form 10-K, contributions are capped at 10% of compensation, so employees earning less than $212,500 per year can’t contribute the maximum under the statutory limit anyway. An employee earning, say, $150,000 per year can only contribute $15,000.

Which means that Apple’s employees probably haven’t made quite as much through the ESPP as Onink thinks. Nevertheless, regardless of how much Apple employees contributed to the ESPP, the 635% return that Onink calculates is still applicable. Even with contributions capped at 10% of compensation, that’s nothing to sneeze at.

What About Your ESPP?

If you were writing a similar article about your own company’s ESPP, do you know how much money your employees have realized on their ESPP? For example, if an employee enrolled in your ESPP seven years ago, bought stock on the first purchase date, and still held that stock today, how much would it be worth?

More important, is the amount an impressive return? Because if it is, I think I’d mention that in the materials promoting the ESPP. Frankly, if I were the stock plan administrator at Apple, I think I’d be passing out copies of this article to everyone not currently enrolled in the plan.

Take a Lesson from Your 401(k)

The educational materials for your 401(k) plan most likely talk about return on investment and give examples of how much money employees will have when they retire for specified investment levels. Why not do something similar for your ESPP?

You have to be a little careful here–you don’t want to be promoting the ESPP as a retirement plan–estimate a return over a shorter period. (Onink has a blurb about using ESPP proceeds to pay for kids’ college educations. I don’t recommend counting on the ESPP to pay for college, retirement, or anything important.) But you could have an example of how much return employees might have realized if they had enrolled in the plan five to ten years ago (this time frame helps to emphasize that this is a long-term investment). You could also run some numbers using disposition data and calculate the average return employees are actually realizing on their sales of shares acquired under the plan.

Of course, when discussing potential returns, always remember to include a disclaimer about past stock price performance not necessarily being indicative of future performance. I’m betting this disclaimer is included in your 401(k) materials–another lesson we can learn from this plan.

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. 

Happy Thanksgiving!

– Barbara

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November 17, 2011

Zynga: Strong Arm or Smart Move?

2011 has been a year of many things, one being fresh signs of life in the dormant IPO market. One anxiously anticipated IPO on the radar is that of Zynga, the Silicon Valley based online game company. With rumblings of an imminent high value IPO, Zynga is certainly a hot employment ticket. So imagine the surprise when along came last week’s article in the Wall Street Journal that depicted Zynga as a company that gives and then takes away.

What’s the Fuss?
The issue at hand? Employee stock options. Who would have thought that plain old vanilla stock options would become the heart of a controversy? Well, yes, equity compensation has had its share of scandals (ah, but backdating is so 2006). However, this time is different. No one has been arrested, the SEC is not involved, and it appears, by nearly all counts, to be a situation that didn’t violate the law. So what happened?

Pony Up Your Options, or Else!
According to the Wall Street Journal and several follow up articles, Zynga reportedly wanted to avoid a “Google Chef” scenario in which an employee’s stock option gains upon IPO were disproportionate to his contributions and role within the company (the rumor is that a chef at Google made an estimated $20 million upon its IPO from the value of his stock options). In evaluating and re-evaluating employee performance, Zynga CEO, Mark Pincus, reportedly kept a list of employees whom he felt were over-compensated with equity, based upon their current role and contribution to the organization. As Zynga began to feel pressure on its share reserves and an obligation to shareholders to suppress dilution, employees who had been identified as over-compensated were approached and asked to agree to cancel the unvested portion of their stock options. This would allow the cancelled shares to be returned to the plan reserve and become available for future issuance to other employees. The catch? If the unvested options weren’t returned for cancellation, the employee would be fired. Ouch. Many wondered, is that possible? Is it even legal? Though not tested in the courts, the consensus seems to be ‘apparently so’.

What’s the Answer?
A key public opinion question is whether Zynga was justified in its actions. On one side of the argument lies the assertion that Mr. Pincus did what was necessary to fairly balance the load of wealth within the company. After all, compensation is frequently re-negotiated in companies, including pay reductions. The counterargument is that once given, a benefit should not be taken away. If the targeted employees really weren’t performing well, then why were they still around in the first place? Finally, the company could have avoided this situation altogether if it had considered attaching performance metrics to option vesting.

Having worked for companies whose successful IPOs created employee wealth, I can relate to both sides of the situation. Should a stock option with service vesting be an entitlement once granted (assuming the employee remains employed), even if the employee is under-performing, demoted or reassigned? This is a tough question to answer. I do give credit to Zynga for thinking outside the box in finding a solution, right or wrong.

Share Your Opinion
On which side of the argument do you reside? Share your anonymous opinion by taking our poll below, and find out how your peers feel.

– Jennifer

Online Surveys & Market Research

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November 15, 2011

ISS Previews Policy Changes

On October 18, ISS issued a preview of some of the policy changes it is considering for the 2012 proxy season. In today’s blog, I take a look at proposed policy changes relating to how ISS evaluates CEO pay and stock plans submitted for shareholder approval for Section 162(m) purposes.

ISS, CEO Pay, and Company Performance

ISS currently evaluates CEO pay and company performance by comparing the company’s TSR to that of its GICS industry group to identify underperformance, then applying a qualitative analysis of various other factors that relate the CEO’s pay to TSR.

Under the newly proposed policy, ISS will apply a relative measure that compares the company’s TSR to that of its peers, which will be determined based on market capitalization, revenue, and GICS industry group. ISS will compare the company’s TSR ranking within the group to that of its CEO pay ranking. ISS will also consider the multiple of the CEO’s pay to the peer-group median.

In addition to the relative measure, ISS will apply an absolute measure that tracks changes in the company’s TSR against changes in its CEO’s pay.

The results of ISS’s pay-for-performance evaluation can impact recommendations ISS issues for the company’s Say-on-Pay proposal and stock plan proposals (if a significant portion of the CEO’s misaligned pay is in the form of equity), as well as individual director nominations.

ISS and Section 162(m)

In the past, when stock plans have been submitted for shareholder approval solely for the purpose of qualifying for exemption under Section 162(m), ISS has generally recommended that shareholders approve the plans. Under the newly proposed policy, however, ISS states that they will complete a full analysis of future plans submitted to shareholder vote for this purposes.This will include consideration of the total shareholder value transfer, burn rate analysis (if applicable), and specific plan features (such as repricing and change-in-control provisions).

This may particularly be a concern for newly public companies that wish to qualify performance unit awards for exemption under Section 162(m). Under recently proposed rules, the IRS clarified that the Section 162(m) exemption for post-IPO grants of stock options, SARs, and restricted stock made during a transition period does not apply to RSUs. Thus, newly public companies that wish to grant exempt performance unit awards will need to submit their plans for shareholder approval, triggering a full analysis of the plan by ISS.

Comments and More Information

ISS accepted comments on the policy through the end of October. (We posted an NASPP alert on the policy changes shortly after ISS issued the proposal. If you follow the NASPP on Twitter or Facebook, then you knew about our alert in time to submit comments to ISS.)

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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November 10, 2011

Seen and Overheard!

It was great to see many of you at the NASPP Conference last week. With no shortage of issues to debate, discuss and dissect, there was something meaningful for everyone.

Fresh off the conference, my mind is full of new information. I’ve narrowed my thoughts down to a couple of interesting things that I’ve seen or (over)heard.

Overheard: Say-on-Pay is Still in Infancy

I count myself among the people who were relieved (okay, surprised) to learn that only 40 companies failed to achieve a majority shareholder vote for the say-on-pay agenda item in their 2011 proxy statement. The pessimistic side of me (which is usually far more dormant than the optimistic side) thought the number would have been higher. While it’s good news that the number of say-on-pay failures was low, it’s too soon to truly know how say-on-pay will impact future proxy seasons. Last week’s Plenary Session at the NASPP Conference (“Say-on-Pay Shareholder Engagement: The Investors Speak”) was a fascinating glimpse into the minds of institutional shareholders. For those who missed this session, the panel shared insight into their say-on-pay related analysis and newly emerging policies and practices. A few things I learned included:

  • Aside from companies who failed to garner an affirmative say-on-pay vote from the majority of their shareholders, the next biggest concern is for those companies whose say-on-pay agenda items did receive a majority vote, but with narrow margins (which seems to be loosely defined as less than 75%). Those companies have a degree of vulnerability going into the 2012 proxy season, because there was something about last year’s disclosures, practices or proposals that created some shareholder stir. Those companies need to carefully evaluate what may be of issue and take proactive steps to work with shareholders early.
  • Each institution varies in their say-on-pay policies. In short, they are still evolving in determining their respective approaches in this area. This is new to them, too. As a result, there is no present ‘formula’ or magic method that will universally ensure an affirmative say-on-pay vote from the majority of shareholders. If you have concern, you need to talk to each major shareholder to understand their say-on-pay policies and how they are progressing. If your investor demographic changes, don’t assume that the newest shareholders have the same policies as your other shareholders when it comes to say-on-pay.
  • The institutions want to hear from companies, particularly those with prior vote challenges, and/or those with current proposals/practices that may be potentially problematic or prone to misinterpretation. The key is engaging early – most of the institutions on the panel expressed agitation over being contacted in the days leading up to the shareholder vote. The take away? Reach out early on, before proxy season if possible.

It’s clear that while the say-on-pay fallout from last year’s proxy season may have been less than anticipated, say-on-pay is still in the baby phase. As a result, keeping on top of changes in shareholder attitudes and policies is a must; more so now than ever.

Seen: Time Travel

I took a trip down memory lane this week when a white paper published by Solium crossed my desk. The paper, titled “The NASPP at 19: The Evolution of the Stock Plan Industry”, reviews the past 20 years of regulatory changes, developments, and administration practices. I know we can all attest to the fact that time flies (whether we’re having fun or not!). When I think about the evolution of our industry over the past 20 years, I feel proud of how far we all have come – from the administrators who are now dealing with far more complex stock compensation programs, to the vendors and industry resources that support them. If you want to take a nostalgic journey, view the paper in our Document Library.

– Jennifer

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November 9, 2011

Sights & Sounds at the NASPP Conference

Here are three short videos that Broc Romanek of filmed at last week’s NASPP Conference.

The first video shows the sheer size of the “Investors Speak” panel on Wednesday (2,000 attendees in person and many more online):

A groovy exhibit from E*TRADE in our Exhibit Hall:

We also liked this set-up in the Exhibit Hall from Bank of America Merrill Lynch:


November 8, 2011

Tax Updates

It was great to see everyone at the NASPP Conference last week. One session I look forward to every year at the Conference is “The IRS Speaks“–which I consider to be my chance to get the inside scoop on various IRS projects that impact stock compensation. For today’s blog, I have a few updates from this year’s panel, as well as some other recent tax news.

For highlights of the NASPP Conference, check out my blog entries on November 2 and November 4.

COLAs for 2012
The maximum amount of earnings subject to Social Security tax will increase to $110,100 in 2012 (up from $106,800 this year) (those of you that follow the NASPP on Facebook and Twitter already know this). The tax rate is also scheduled to return to 6.2% (up from 4.2% this year), making the maximum withholding $6,826.20 for 2012 (see the NASPP alert). But stay tuned on this one; President Obama has proposed reducing Social Security tax for 2012. 

Also, if any of you exclude highly compensated employees from your ESPP, note that the threshold for who is considered highly compensated increases to $115,000 in 2012.

BTW–COLAs stands for “cost of living adjustments.”

Updates from “The IRS Speaks
Here are areas where the IRS hopes to issue guidance in the next year or so:

  • 409A income inclusion rules. Note however, that this doesn’t include Code Y reporting. That isn’t likely to happen until some time after the 409A income inclusion rules are finalized.
  • Finalizing the proposed regs that were issued earlier this year under Section 162(m).
  • The treatment of dividends and dividend equivalents under Section 162(m).
  • A model election under Section 83(b) that includes examples illustrating the tax consequences of making (or not making) the election. (Fascinating–I had no idea the IRS even thought there was a need for this.)
  • Guidance on Section 162(m)(6), which relates to the deduction limit that applies to health insurance providers.
  • Something about foreign pension plans under Section 402(b) (I have no idea what this is–sorry, when I hear the words “foreign pension plans,” I tune out).

The panel also covered a number of issues relating to Section 6039 returns for ISOs and ESPPs. I don’t have time to cover them all today, but maybe in a future blog.

In terms of cost-basis reporting, the panel did say that the IRS is considering adding a checkbox to Form 1099-B that would indicate whether the reported cost basis includes W-2 income recognized in connection with the shares. We think this brilliant suggestion from Andrew Schwartz of BNY Mellon Shareowner Services would be a big help in explaining the form to employees, but if the IRS makes this change, it won’t be until the 2012 form comes out.

See a picture of our celebrity tax panel on the NASPP’s Facebook page.

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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November 4, 2011

More from the NASPP Conference

In today’s blog entry, I have a few more scenes from the NASPP Conference.


 In case you were wondering, this is what 2,000 people looks like.


The opening plenary session, “Say-on-Pay Shareholder Engagement: The Investors Speak.” 


 Chapter Excellence Award winners.



 The celebrity tax panel: Steven Tackney and Thomas Scholz of the IRS and Deb Walker of Deloitte. 


Look, I’m a CEP superhero.

More scenes from the NASPP Conference.


– Barbara



November 2, 2011

Scenes from the NASPP Conference

I am writing from the 19th Annual NASPP Conference in San Francisco, which has a great turnout this year–close to 2,000 people! For today’s blog entry, I feature some scenes from the pre-Conference sessions and last night’s opening reception.

DSC03678.JPGEd Hauder of Exequity and Fred Whittlesey of Compensation Venture Group discuss the design of performance-based award plans.

DSC03681.JPG2,000 conference bags don’t take up as much space as you’d think.

DSC03703.JPGThe opening reception was hopping!


The AON team wore their black Scholes jerseys.  It’s a soccer-actuary joke. 


 Ed Burmeister of Baker & McKenzie, who holds the title to the world record for the most NASPP Conference attended.  It’s in the official Guinness Book of World Records.

See more scenes from the NASPP Conference on our Facebook page.
– Barbara