I hope everyone has been enjoying the holiday season. In between overindulging in yummy food and preparing to ring in the New Year (is it really 2012 already?), I wanted to take a moment to highlight a few timely tidbits.
Hurry! Renew your NASPP membership for 2012 (if you aren’t an NASPP member, join today). Don’t miss out on any content; make sure you renew your membership before you head off to those New Year’s Eve parties!
Slow week in the office? Looking for something fun to pass the time this holiday week? Be the first to measure your global tax withholding practices in our new Compliance-O-Meter. In addition, you can participate in the Question of the Week Quiz. If you haven’t been playing all year, this is a great time to start: scores reset next week and it’s a whole new game!
In the News…
Last week I blogged twice about the drama over the payroll tax cut and whether or not it would be extended past January 1, 2012. On Friday, December 23rd, the House and Senate both passed a measure extending the cut for two additional months, through February 29, 2012. President Obama signed off on the extension the same day, ending the controversy for now. This means that there are no imminent changes to the social security tax withholding rate; it will remain at 4.2% as we advance into the New Year. The payroll tax cut is certain to be an area of debate in the next couple of months, so stay tuned for more on this topic.
I wish everyone a safe and happy New Year. See you in 2012!
Yesterday, I blogged about the uncertainty around the expiration of the social security payroll tax cut that has been in place for 2011. Hours later, House Republican leaders agreed to basically the same deal they had rejected just two days prior, providing temporary resolution to a last minute debate.
The agreement includes extending the social security payroll tax cut for another two months, through February 29, 2012. This means the social security withholding rate would remain at its present 4.2% for now; government leaders will have two months to figure out a longer term plan. The House of Representatives, in a pro forma session, could pass the bill as early as today, December 23, 2011, after which the Senate would do the same. If an objection is raised on the floor of the House, then House speaker Boehner would summon Congress back for a formal vote next week. Never say never, but Thursday’s events made considerable progress towards securing an extension of the payroll tax cut.
Over the past week there has been a struggle in Washington over whether or not to extend this year’s payroll tax cut (also known as the payroll tax holiday), and, amongst other things, continue unemployment benefits for the jobless. In today’s blog I summarize the issues.
In a Nutshell
Last year around this very time, President Obama signed into law tax legislation that, for one year, reduced the rate of social security payroll tax withholding by 2 percent: from 6.2% to 4.2% (see the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). With Obama’s approval coming late in the year, and the payroll tax cut to take effect for 2011, payroll processors around the nation scrambled to adjust social security withholdings to the new rate by the deadline of 1/31/2011. In effect for only a year, the payroll tax cut is scheduled to expire on 12/31/2011 – about 9 days from now. This means that effective January 1, 2012, the social security withholding rate will revert back to 6.2%.
Not so Fast…
With the payroll tax cut set to expire next week (on the heels of an election year, amongst other things), our branches of government cannot agree on how to handle the situation. Many argue it wouldn’t look good in an election year to raise taxes, especially with so many Americans still facing economic struggles. The payroll tax cut is only one component of the issue at hand – other affected areas include the extension of unemployment benefits for the jobless.
What’s a Government to Do?
On December 17, 2011, in an unusual Saturday vote, the Senate voted to approve a $30 billion package that included extension of the payroll tax holiday for another two months. The Senate theorized that a two month extension would allow time for all parties to reach a mutually agreeable longer term fix. It seemed possible that the payroll tax holiday would continue, at least in the short term. The “victory”, however small, was short lived. Only 3 days later, House Republicans rejected the Senate bill, placing the future of the social security payroll tax cut in jeopardy. If no agreement can be reached and finalized by December 31, 2011 (and Senate action is unlikely, since the Senate has left town for the year), social security rates will increase to 6.2% on January 1, 2012.
A Holiday in Limbo
With only 9 days left in 2011, and a holiday season in full swing, uncertainty fills the air. While the House does have options available that would allow them to essentially change their minds and affirm the Senate bill, whether they will pursue those options is uncertain. So the clock ticks towards 2012 with one thing certain: that payroll withholding processors need to be prepared for either outcome.
It’s renewal time! All NASPP memberships expire on December 31; renew your membership today so you don’t miss out on the NASPP in 2012.
It’s the season for giving. My gift to you this holiday season (drum role) is a handful of tips to guide you through your upcoming ESPP purchase as it relates to non-U.S. plan participants.
Administering an ESPP can be tricky. This can be further complicated, however, when your plan includes foreign participants. Here are some recommended procedures to incorporate into your international ESPP processes.
Eligible “compensation.” Educate local payroll as to what constitutes eligible “compensation” under your plan. Then, audit local payroll ledgers to ensure that contributions are being withheld from the right source of income.
Conversion information. Communicate to plan participants (and local accounting/finance departments) when contributions will be converted during the purchase period, what source will be used to convert contributions and the actual conversion ratio used to convert contributions.
Intended recipients. Double-check intended recipients for all correspondence about your plan. Employees in countries that are not eligible to participate in your ESPP should never receive information about the plan.
Documentation. Customize communications so that they incorporate special procedures for countries where non-standard arrangements exist, e.g., an Israel trustee plan, and omit all references to U.S. tax withholding and reporting obligations from any non-U.S. communications.
Contribution file. Determine how ESPP contributions have been transmitted to you, e.g., in local currency or U.S dollars prior, to uploading them into your system.
Software use. Input exchange ratios into your software system where possible and let your system calculate currency conversations for you. Then, audit the converted currencies in your system using another source, e.g., a spreadsheet or Microsoft Access file.
Additional recommendations for “all-purpose” ESPP procedures can be found in the December 28, 2009 blog, “Last-Minute ESPP Audits.”
The end of the year is usually the busiest time of the year for gift giving, both holiday gifts and charitable gifts, as folks are overcome with the holiday spirit, aided perhaps by the need for tax deductions. It is not uncommon for executives (who are typically affiliates for Rule 144 purposes) to gift company stock, instead of or in addition to cash. These gifts can have special implications for Rule 144 purposes.
The most recent issue of The Corporate Counsel highlighted some of the Rule 144 pitfalls that still apply to gifts. According to the article, when an affiliate gifts stock to a non-affiliate, the donee “stands in the shoes” of the donor until the stock has been held by both for a combined period of at least six months and up to 12 months. For up to six months, the non-affiliate donor must meet all the requirements of Rule 144 (except the holding period, provide that the stock is control stock only and not restricted securities). From six months to 12 months, there are no restrictions if the issuer is current in its Exchange Act reporting.
The time the donor has held the stock is tacked onto the donee’s holding period. For example, where the donor had held the stock for two months prior to the gift and the company is current in its Exchange Act reporting, the donee only has to comply with Rule 144 (other than the holding period requirement) for four additional months.
Another trap exists for the donor, who must aggregate his/her sales of stock with those of the donee for purposes of comply with the Rule 144 volume limitation. This requirement applies for six months after the gift (12 months where the issuer is not a reporting company or is not current in its Exchange Act reporting).
Model Rule 144 Compliance Letters
In response to requests, Jesse Brill recently crafted six very helpful model Rule 144 gift compliance letters that lay out for donors and their donees the restrictions and procedures that still apply in six key gift giving scenarios (including the need to keep track of and report back to the donor any sales for one year following the gift, for example).
These letters were recently sent as a bonus to all 2012 subscribers to The Corporate Counsel. If you are not a subscriber to The Corporate Counsel (or have not yet renewed) you can gain immediate access online to the gift compliance letters by taking advantage of the no-risk trial. (Almost all of our member companies and law firms are long-term subscribers to The Corporate Counsel. If you know of someone who is not, you may wish to pass on to them the 50% off new subscriber offer, which they can take advantage of by writing 50% off on the order form.)
With the new Forms 1099-B that will be issued for the first time next year, the process for reporting sales of stock on Schedule D has changed significantly. In today’s blog, I take a look at the new procedures.
But First, New Form 8949
The biggest change to the process is that taxpayers now have to report every sale of stock on Form 8949, which was introduced for the first time this year. The instructions to the form will be included in the instructions to Schedule D, which were not available as of one minute ago, when I started writing this blog entry. Luckily, however, Andrew Schwartz of BNY Mellon Shareowners Services managed to snag a draft of the instructions from the IRS and generously provided it to me. I also had the benefit of listening to Andrew explain how Form 8949 is used when we presented on cost-basis reporting at the NASPP Conference (you can enjoy this benefit as well by purchasing the audio from our session).
Form 8949 will include information that used to be reported on Schedule D, including the description of the property that was sold (column a), the date acquired (column c), and the date sold (column d). It will also include information that will still be reported on Schedule D, including the sales price (column e on both forms), cost basis (column f), and any adjustments to the gain or loss (column g). Finally, it includes a code that explains the reason for the adjustment to the gain or loss (column b).
When reporting sales of stock, employees will report the cost basis as reported on Form 1099-B in column f. If this basis isn’t correct (see the Nov 18, 2010 blog entry “Pave the Way for Cost Basis Reporting Now“), then employees will report code B in column b and will report an adjustment in column g. If there is no basis reported on the Form 1099-B, then employees will report the correct basis in column f, but won’t report anything in column b (code) or column g (adjustments).
Multiple Forms 8949
Employees will fill out separate Forms 8949 for the following transactions:
Sales for which a basis is reported on Form 1099-B
Sales for which a basis is NOT reported on Form 1099-B
Sales for which a 1099-B is not issued (e.g., if your broker relies on Rev. Proc. 2002-50 to not issue a Form 1099-B for same-day sales).
Form 8949 has two parts, one for short-term capital gains and one for long-term gains, so employees could have to include up to six of these forms with their tax return.
What About Schedule D?
Rather than reporting each individual sale on Schedule D, this form is now just an aggregate of the individual transactions reported on Form 8949. This is where employees will subtract their cost basis and any adjustments from their sale price to determine their actual gain, which is reported in column h.
Things Could Change
Note that today’s blog entry is based on a draft of the instructions. I don’t expect any significant changes in the final instructions, but you just never know with the IRS.
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.
Each study was comprised of U.S. public companies across a variety of sectors. Frederic W. Cook’s study spanned 240 companies, and The Conference Board (et al) surveyed 334 companies.
Size Does Matter
In general, one “rule of thumb” was confirmed: that “compensation levels vary primarily based on company size, while the structure of compensation is influenced by both company size and industry.” (Frederic W. Cook). Both studies presented similar results regarding the prevalence of director equity compensation by industry. While not every industry had a clear trend in terms of cash to stock ratios, the financial services industry clearly utilized the least amount of equity (less than 45%) in its compensation approach, and the technology sector utilized the most: approximately 70% of director compensation in this industry is stock based, according to both reports. When it comes to the blend between cash and stock compensation, it turns out company size does seem to be a factor, more so than industry. Larger companies were more likely to have a mix of cash, stock awards and stock options. Smaller companies reflected a more cash heavy compensation mix.
Stock Awards Rule!
The dominant equity compensation vehicle in use for directors across the board (no pun intended!) is full value stock awards (or units). Stock option grants to directors are minimal in most industries (utilized by less than 20% of retail, financial services and industrial companies, according to Frederic W. Cook). The technology sector’s trends were a bit different: companies in this industry predominantly issue stock awards as part of the compensation mix, yet, about 42% of them also issue stock options to their directors. That’s probably not surprising, given that the technology sector has long been assertive in emphasizing various forms of stock benefits as a component of overall compensation.
The Trend Continues: Stock Ownership Guidelines
We’ve previously blogged about the continuing uptick in the number of companies adopting share ownership guidelines for executives and directors. Both studies reported that a majority of respondents (greater than 50%) had stock ownership guidelines for directors in place. According to The Conference Board (et al), the most widely utilized type of guideline is that based on a multiple of the director’s annual retainer. One study noted a smaller related emerging trend – the implementation of a retention ratio or holding period in combination with their ownership guidelines. About 15% of companies analyzed in the Frederic W. Cook study reported having some form of retention ratio or holding period; with 12% utilizing such ratios or holding period in direct conjunction with their ownership guideline policies. This is a trend to watch, and seems very likely to continue to gain momentum.
Risky Behavior and Stock Options The study, which is summarized in the article “The Making of a Daredevil CEO: Why Stock Options Lead to More Risk Taking,” published by Knowledge@Wharton, looked at companies that had recently experienced an increased risk and evaluated which companies took steps to mitigate that risk based on the percentage of their managers’ compensation that is in stock options and the in-the-moneyness of the options.
The researchers found that firms where managers held more stock options took fewer mitigating actions. They felt that this is because once stock options are underwater, the value of the options can’t get any lower. When you think about it, with full value awards, there’s always upside potential but there’s also always downside potential–until the company is just about out of business, the value of the stock can always drop further. But once an option is underwater, it doesn’t matter how low the stock price drops, the option can’t be worth any less. As a result, managers in the study that held more options were less incented to take actions to keep the stock price steady.
Risk and In-the-Moneyness
Interestingly, and in line with this theory, the study also found that when managers’ had in-the-money options they took more mitigating action than when their options were underwater. If there was some spread in the options, the managers were motivated to preserve that spread and thus took action to keep the stock price from dropping. But where there was no spread, the managers were more incented to take risks (presumably in the hopes that the risks would pay off and the stock price would increase).
This is all very interesting; I’ve often wondered (probably here in this blog even) why the media and investors have a bias for full value awards over stock options–I think this is the first plausible explanation I’ve heard for that bias. But here in the NASPP Blog, we view studies like this with a healthy level of skepticism–it’s odd but I’ve never seen a study that didn’t prove the researchers’ initial hypothesis–so I wouldn’t scrap your option plan in favor of full value awards just yet (if you haven’t already done so).
A Nail in the Coffin for Premium-Price Options
I’ve never been a fan of premium-priced options because the reduction in expense is less than the premium, which, to my mind, makes them an inefficient form of compensation. I prefer discounted options, which provide a benefit that exceeds the additional expense to the company.
If this study can be believed, premium options would also discourage executives from taking steps to mitigate risk (whereas discounted options would presumably have the opposite impact). Maybe regulators and investors need to reconsider their bias against discounted options (although, in the case of the IRS, this bias may have less to do with concerns about risk taking and more to do with tax revenue–see my March 16, 2010 blog, “Discounted Stock Options: Inherently Evil or Smart Strategy“).
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.
This time of the year always puts me in a state of reflection, thinking about what was accomplished and looking forward to next year. Contemplating next year means setting goals and objectives, both professionally and personally. Have you completed your 2012 planning?
I’m always in favor making things as fun as possible. Setting professional goals and objectives doesn’t have to be a chore! For this week’s blog, I offer three ways to spice up your stock programs in 2012.
1, 2, 3 Ideas
1. Work the Concept of “Perceived Value” into your Stock Plan Communication Strategy. One thing I learned from the session on Maximizing the Perceived Value of Equity Compensation at this year’s Annual Conference, is that the act of giving an employee a stock option is not what motivates them. What motivates the employee is their own perception of what the grant is worth. If the value of that stock option goes up and there’s gain, the employee then feels grateful to the company and works harder. This is called reciprocal behavior, and is a key to how recognizing the role of perceived value can help achieve the intended value proposition. To better align with this concept, companies need to lessen efforts focused on trying to “explain” the value to the employee, and focus on strategies that address the employee’s perception that “it’s worth what I think it’s worth”. Key drivers in achieving plan effectiveness are employee perceptions, behaviors and culture.
2. Bridge the Generation Gap. Most of today’s workforce populations are diverse. Not just culturally and geographically, but age-wise as well. It’s been said before, but I’ll say it again: there is no one-stop method to communications that is guaranteed to meet your employee population’s needs. Using multiple mediums targeted to your company’s various demographics is a must. One generation may be starting to embrace email, while others (think Generation Y) view email as a tool of yesterday! Email blasts alone to your stock plan participants are likely not going to cut it in 2012 and beyond. Start thinking about adding new modes of communication, such as text messaging, social media, and a focus on short, concise messages.
3. Implement a New Technology. We may not be in a position to create an iPhone or Android app for stock plan management (now that would be cool!), but there are many other ways to demonstrate that we’re hip and cutting edge. One idea would be to find a technology to implement in 2012. A great way to generate ideas in this area would be to talk with your IT group to see what technologies they’re implementing in the coming months; there may be an opportunity for you to tap in to something already on the road map. One idea I recently heard about was a company that is exploring implementing a secret Facebook group for their ESPP participants. Employees could receive Facebook updates and information real-time, accessible via multiple technologies (computer, phone, etc.). Competitive concerns were alleviated by making the group secret, such that no-one else could view it or have access.
I’m sure there are many other interesting ways to enhance stock programs in the coming year. Take our poll below to see what others are contemplating for 2012!
On Another Note: A Follow Up
Last month I blogged about the question of whether or not insider trading should be legal. In mid-November, CBS aired a segment on the show 60 Minutes about stock trades made by congressmen/women using inside information. I was surprised to learn that their trades were not in violation of any laws. If you’re interested, view the story here.