The NASPP Blog

Monthly Archives: March 2012

March 29, 2012

The Short Term Millionaire

In my very first NASPP blog, I chose a topic that was particularly passionate for me: employee communications. I like all the aspects of communicating with employees about their stock plan benefits. I recently came across an article that touched on an interesting fact: most people who achieve “millionaire” status (from stock options, lottery wins, working hard for a long time, inheritance, and several other ways to obtain a large sum of cash) don’t maintain that status for long. In fact, an analysis of IRS data on millionaires revealed that between 1999 and 2007, 50% of millionaires only stayed so for one year, and at the end of the 9 tax years, only 6% of those who were millionaires back in 1999 remained millionaires.

I know you’re just to the point of asking what an analysis of millionaires has to do with employee communications. I’ll get to that in just a minute. Back to the millionaire analysis – it struck me that many people work so hard to make money, and I was floored to see that so many fell off the millionaire bandwagon so quickly after achieving that status.

This data didn’t parse down executives vs. mid and lower level employees within organizations – this was an analysis of all millionaires filing tax returns in the U.S. during that period. However, if we were to look at organizations, I’d be willing to bet the amount of downfall from millionaire status incrementally increases the lower you go within the organization (my opinion only, I have no facts to back this up). Regardless, I began thinking about how we spend so much time putting together stock plans, educating employees on the mechanics of the plans, and even in some cases providing tools that allow employees to “model” future outcomes. I’m guessing many employees plug in some high stock prices and start dreaming about a windfall of cash. That raises a question from me: why do we spend so much time preparing, maintaining, and generally communicating about stock plans if the windfall is going to be so temporary? Yes, of course we don’t have control over what the employee will do with the money – certainly responsibility for squandering a chunk of it would fall squarely on the employee’s shoulders. But for those who are offering broad based stock plans, I ask the question – should more be done to help employees manage their rewards, or at least direct them to resources that can help them do so? As a communicator, I sometimes am frustrated that companies generally are advised to stand squarely outside the realm of “financial advice.” I realize most organizations don’t have trained financial planners, so an edict to stay clear of advice seems appropriate. However, there must be a way to offer a more integrated communication program to employees. Perhaps this type of communication can occur closer to the timing of a stock option exercise or large restricted stock vesting.

I know there are many firms that provide a wealth of stock plan services, including financial planning. Many issuer firms rely on these companies to assist in the financial planning arena, and employees seem to find this of benefit. As a communications nut, I would love to see more evolution in employer messaging, with increased talk about the full gamete of resources available to help employees manage the full life cycle of their stock plan grants and awards, which includes the financial planning component. I’m not suggesting that companies offer financial advice – but we tend to stay away from mentioning these resources in our communications like it’s a taboo topic. We highlight all the tools that will help employees imagine wealth (calculators, modeling scenarios, etc.). Why not pay some attention to what happens when they really do receive a windfall? After all, companies are giving the benefits to employees – shouldn’t we also help them figure out how to handle the upside?

I threw in a poll, because I want to know how you feel about companies taking steps to offer more communications on the financial planning resources that may be available to stock plan participants.


Online Surveys & Market Research

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March 27, 2012

Hot or Not, Round 2

Today, we continue last week’s game of “Hot or Not,” this time with a focus on global stock plans.  In the global stock plans space, we got a lot of great proposals that I’m sure we’ll include in the program–no question about it. But there were a few topics that are on the bubble.  I’ve included a short survey listing the global topic ideas that I’m not sure about below; your job is to select the topics you would attend a panel on.

Hot or Not?
Round 2: Global Topics

Online Surveys & Market Research

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 we keep an ongoing “to do” list for you here in our blog. 

– Barbara 

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March 22, 2012

Capped Stock Options: The Next Generation?

I’m not ashamed to admit that I’m not an accounting expert. I have complete and utmost respect for those who are in the trenches of accounting for stock compensation, and even more admiration for those who actually enjoy it. As a result of being an accounting “simpleton”, I appreciate it when an article crosses my desk that explains accounting concepts in interesting and understandable terms. On that note, last week we received an article titled “Using Capped Options to Collar Volatility”, published by Radford and now posted to our Stock Plan Expensing portal, that seemed to highlight a new trend in stock option expensing: the “capped” option.

A Volatile World

One thing I do know about stock option expensing is that the increased volatility of our stock markets has, in many cases, increased stock option valuations. As a result, companies are searching for new ways to conquer a delicate task: minimize stock option expense without impacting the “perceived” value that employees associate with their equity awards. (“It’s worth what I think it’s worth.”)

Capping Maximum Value

One way that some companies have addressed the impact of volatility on their stock option expense is to cap the maximum value that particular stock option can deliver to its recipient upon exercise. For example, a stock option priced at $10 with a cap of 400% would mean that the participant could not receive any additional value once the stock price exceeds $40 (yes, I pulled this example from the article – the terms are simple and easier to understand than any alternative I might make up). Using a cap that seems unattainable – and a 400% return would likely exceed the reasonable expectations of most employees – arguably keeps the employee’s perceived value of the stock option intact, while simultaneously reducing expense. According to the experts who wrote the article, the single act of capping an option – even a seemingly high cap of something like 400% – can have a significant downward impact on stock option expense (assuming other variables in the expense calculation remain constant).

Is this a Trend?

Several companies have jumped on the capped option bandwagon, and there are indicators that more companies are on track to issue capped options. In addition to minimizing the expense component of the stock option, a peripheral benefit seems to be some high marks in the shareholder perception aspect of the equation. Shareholders tend to dislike large windfalls, especially when there are no performance requirements attached to a grant. Capping the maximum value a stock option could deliver certainly would help eliminate the prospect of a windfall. Time will tell in terms of staying power of this new trend. We’ve seen a lot of things emerge in recent years, with staying power (performance grants ring a bell?), so I wouldn’t be surprised if this concept gains some traction.

I’m curious to know who has pursued capped options or is considering doing so. Take our poll below and see how you compare to what other companies are contemplating.


Online Surveys & Market Research

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March 20, 2012

Hot or Not?

I have something a little different for today’s blog entry. I’m currently mired in evaluating the 150+ speaking proposals we received for the 20th Annual NASPP Conference. There are definitely a lot of fabulous ideas that I’m sure we’re going to want to include in the program–no question about it. But there are also a few ideas that I’m just not sure about–are they hot or not? So today we’re going to play the “Hot or Not” game. I’ve created a short survey listing the topic ideas that I’m not sure about below; your job is to select the topics you would attend a panel on.

Hot or Not?
Round 1: US Topics

Online Surveys & Market Research

Stay tuned next week, when we’ll play round 2, focusing on global topics.

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 we keep an ongoing “to do” list for you here in our blog. 

– Barbara 

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March 15, 2012

New Incentives to IPO?

For the past few years, the IPO market has behaved like a pendulum, swinging from left to right, from existent, to non-existent, to hot again. I’ve heard the buzz over and over: “this year the IPO market will be hot again”. Certainly with companies like Zynga and Yelp recently taking the IPO plunge, and with savory IPO prospect Facebook in full rumor mode, there are definite signs of life. That’s why a bill making its way through Congress has garnered the interest of those who are keeping an eye on the IPO market.

The “JOBS” Act

Last week the House made a rare bipartisan move in approving the “Jumpstart Our Business Startups”, or JOBS, Act. What is this bill? Well, it’s legislation aimed at making it easier for small businesses to gain access to capital and for startups to go public and continue to grow. One aspect of the bill that caught my eye is a provision that would create a special category of startup companies, called “Emerging Growth Companies”. Classification in this category would mean that a company would gain a temporary reprieve from SEC provisions for up to 5 years, or, until it exceeds $1 billion in annual gross revenue or becomes a large filer. Companies would gradually phase in compliance with SEC requirements, minimizing the cost impact of compliance at the time of the IPO.

What to do When You’re Not Focused on SEC Compliance

Obtaining reprieve from SEC provisions would mean startups could continue to focus on what they are doing best, without the burden of assuming the cost, resources and time associated with complying with all of the SEC requirements imposed on public companies today. More funds could be directed towards their growth momentum, and related activities like hiring talent. This could be a giant incentive for a small company that wants to raise more capital through an IPO, but can’t necessarily afford the typical cost burden of going public.

So is it a Shoo-In?

So far the measure has only been approved by the House of Representatives. The next step is a Senate vote. And while the Senate prepares to receive the bill, companies aren’t sitting idle, waiting for action; just this week executives from more than 700 companies, including Apple and Yelp, sent a letter to Senate leaders encouraging them to pass the legislation.

It almost sounds too good to be true; and yet, it seems like there is a good possibility this legislation may fly. If it does happen, I’m betting the incentives will be enough to entice more than a few companies to accelerate their IPO timelines. For those working in companies on the IPO track, now may be a good time to start preparing for the possibility that you will find that email in your inbox: “We’re going public…and FAST!”


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March 12, 2012

Advanced Issues for Restricted Stock

Last year we offered an Ask the Experts webcast (a program where members submit their own questions on a topic and our expert panelists address them during the session) on Restricted Stock and Unit Awards where we received a record number of questions from all of you. In fact, we received so many questions at the time that we had to stop accepting them! It became very clear to us then that companies are still struggling with how best to manage their restricted stock programs. As a result, the NASPP is pleased to provide you with another opportunity for help in managing your restricted stock programs. On October 8, just prior to the start of the 20th Annual NASPP Conference, we offer a course on “Advanced Issues for Restricted Stock.”

During this program, we will go beyond the basics and tackle some of the more technical areas companies are still struggling with –from acceleration of vesting upon retirement to compliance with IRS tax deposit requirements. Below I offer examples of two topics that you can be assured will be covered comprehensively during this course.

Deferral Elections and Restricted Stock Units

An issue that comes up frequently with deferral elections and RSUs is what to do when an employee who elected to file a deferral election in connection with the receipt of his restricted stock unit award terminates employment prior to their deferral date. The appropriate course of action in this circumstance is:

a. Immediately convert the units to shares of stock and release them to the employee.
b. Advise the employee to contact the IRS for assistance with their 409A questions.
c. Review the plan to see if the deferral date stands or is accelerated upon termination.
d. Revoke the deferral election and notify the IRS immediately of this revocation.

The impact of a termination prior to the RSU deferral date is unique to each company and stock plan, therefore, you should always review your plan to see whether you should accelerate the deferral date and release the shares to the employee immediately, or keep the original deferral date and release the shares to the participant at the date originally elected–both, of which, have tax implications that also need to be addressed and managed.

Accelerated of Vesting Upon Retirement

Companies that allow for the acceleration of vesting upon retirement under their restricted stock programs know that the administrative burden of managing these plans can be pretty tricky. One problem area with a plan that provides for acceleration of vesting upon retirement is:

a. Reporting and collecting tax because the tax event precedes the vesting event.
b. Reporting and collecting tax because the tax event follows the vesting event.
c. Reporting and collecting tax because the tax event occurs at termination of employment.

Restricted stock is taxable for income and FICA tax purposes when the award is no longer subject to a substantial risk of forfeiture. Where an award provides for acceleration of vesting upon retirement, this occurs when the recipient is retirement eligible even though the award may not have vested yet. The same rule applies to restricted stock units, but for FICA tax purposes only (RSUs are subject to income taxes apply only when the awards are paid out, regardless of when the risk of forfeiture subsides). So, for plans that provide for accelerated vesting upon retirement, the tax event precedes the vesting event, which, again, presents challenges that need to be addressed and managed.

The NASPP’s Advanced Issues for Restricted Stock course will help you respond to these challenges, and any of the other technical aspects of managing a restricted stock program that may be troubling you. Register for the NASPP’s Advanced Issues for Restricted Stock program now before the early-bird discount expires on April 13!


March 8, 2012

Global Updates in a Nutshell

One of the aspects of stock plan management that I’ve always found particularly challenging is keeping on top of “global” developments. We keep ourselves plenty busy trying to stay abreast of U.S. requirements for administering our stock plans, and when you layer in a foreign jurisdiction, or two, or a dozen, or more, now you’ve got a handful. The work has multiplied.

This week brought a few changes or updates on the global horizon, and in today’s blog I’ll summarize them in case you’re interested.

A SAFE Update in China

For Companies offering equity compensation to employees who are PRC nationals in China (and I know that there are many of you that do), approval from the State Administration of Foreign Exchange (“SAFE”) has been required since 2007 (via Circular 78). The process for obtaining SAFE approval has been long and cumbersome for many companies. For those companies who have, are contemplating, or are in process of seeking to gain such approval, some good news has emerged: in February, Circular 78 was replaced with a new Circular 7, effective immediately. Circular 7 seems to simplify the process of obtaining SAFE approval for equity compensation plans, including provisions that reduce the documentation required, expand the entities and people covered in the application, and cover more award types. There are some great alerts with more details on this topic in our Global Stock Plans portal. Be sure to check them out – included is information on action items that may be necessary even if you already have previously obtained SAFE approval in China.

Expanded Reporting in France for Qualified Plans

For those of you with French-qualified stock plans, new reporting requirements went into effect on January 31, 2012. Included is expanded reporting for stock option exercises. The bottom line: for stock options exercised on or after January 31, 2012, the new requirements apply. For details, visit our Global Stock Plans portal.

Adoption of IFRS: Urban Legend?

The talk about the possibility of the U.S. adopting IFRS as its accounting standard has started to sound like an urban legend in my book. Okay, well not really, but it was fun to describe it that way. It does seem like there is a lot of talk about “when” the SEC may have a timeline or more guidance on if and when IFRS will be implemented (and usually it remains just “talk”, since no SEC decision on the matter has been made). According to the Journal of Accountancy, the SEC’s Chief Accountant, James Kroeker, indicated at a conference in February that the SEC is on track to issue a decision in the next few months. A precise deadline has not been publicized and it seems that won’t happen until the SEC gets much closer to completing their report on the issue. This is something to keep an eye on over the next 6 months or so. Stay tuned.

Those are the highlights on the global front this week. As I mentioned above, there are resources in our Global Stock Plans portal that go further into these updates – well worth a few minutes of time.

– Jennifer

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March 6, 2012

Rebuttal to Senator Levin

Back in August, I blogged about Senator Levin’s most recent efforts attacking the tax deduction companies claim for stock options (“Senator Levin, Still Trying,” August 9, 2011), then in September, I blogged about a study on CEOs that made more than their companies paid in taxes, which was clearly aimed at supporting Senator Levin’s position (“Corp Taxes and CEO Compensation,” September 16, 2011). Now, with the news that Facebook may be entitled to a significant tax deduction as a result of stock options awarded to founder, Mark Zuckerberg, Senator Levin gave a speech in Congress about the evils of tax deductions for stock options and again introduced legislation to limit the company tax deduction (“Senator Levin Calls for Congress to Close ‘Facebook’ Tax Loophole,” by Carl Franzen, TPN, March 1, 2012).

The Rebuttal to Senator Levin
When I read this stuff, I get so frustrated I lose the ability to speak coherently and just sputter out half-sentences of outrage. Luckily, however, the folks that write the Executive Pay Matters blog at Towers Perrin are much more articulate than I am. On January 23, James Scannella pointed out a number of weaknesses in Senator Levin’s arguments (“Is It Time for a Change in the Tax Treatment of Stock Options“). A few highlights from the blog:

  1. The company is only getting a tax deduction because the executive is paying tax on the same income–making the transaction, at worst, tax neutral for the U.S. government. It’s even possible that the executive is paying tax at a higher rate than the company would.
  2. It isn’t necessary for compensation to be paid in cash for it to result in a tax deduction; there are other instances where non-cash compensation results in a tax deduction that no one seems outraged about.
  3. It also isn’t uncommon for the accounting expense for compensation to be misaligned with the tax expense. The two sets of rules serve very different purposes. This, in and of itself, isn’t a argument that the tax deduction is wrong or a loophole.

Scannella also points out that, in Towers Watson’s experience, decisions regarding how and how much to pay executives are rarely driven by the timing or amount of the company’s tax deduction. Just as ASC 718 wasn’t the end of stock compensation, this legislation probably wouldn’t be either. And it could have the effect of steering more companies towards service-based restricted stock, a result that shareholders probably wouldn’t be too keen on.

Join the NASPP Staff
Looking for a unique opportunity to join a dynamic and fun staff at an industry-leading organization?  The NASPP has a opening for a Programs Director–check out the posting in the NASPP job board.

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 we keep an ongoing “to do” list for you here in our blog. 

– Barbara 

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March 1, 2012

5 Reasons to “Like” the NASPP on Facebook

You may have noticed a recent increase in our activity on Facebook. We know many of you have social media accounts, and we’re really enjoying the ability to disseminate information and interact on a less formal and real time basis. If you haven’t yet “liked” us on Facebook, I offer in today’s blog 5 reasons why you should.

Top 5 Reasons, Plus a Bonus!

1. Be “in the know”. When it comes to important announcements, we’ll usually post to Facebook first, before the information makes it onto our web site. A perfect example is our recent announcement about the location and dates of the 20th Annual NASPP Conference, which will be held in New Orleans from October 8-11, 2012. The announcement was on Facebook before we posted the information to our site. We will be continuing this trend of bringing our “news” to Facebook early on, so this is a great way to be the first to find out.

2. Stay on Top of Industry Developments. If word of a significant event comes our way, we’ll tweet it and post it to Facebook. We did this during the past couple of weeks when the Payroll Tax Cut was extended. We can’t promise that we know everything, but those all-important matters that cross our desk will certainly be posted.

3. Another Resource in the Toolbox. We come across many articles and other content that we post to our web site. Many times we’ll share those links on our Facebook page. We also post links to current blogs and other content.

4. Interact with your Peers. We have great forums on our web site to discuss the serious topics related to stock compensation. On Facebook we can expand the discussion to be of a more “interactive” nature. You may have seen us posting some discussion questions to facilitate interaction. We’ll be continuing this trend, so come join the conversation.

5. You Can Post Too! Comment on your peers’ postings and even post statements of your own. We have a great community of stock plan professionals, and the more interaction we have, the stronger our community will be.

Bonus reason: Ah, so many reasons, so little time. I offer an additional reason: see the fun side of stock compensation. We often post pictures from industry events, so browse our albums for familiar faces. My personal current favorite is that of our own Executive Director, Barbara Baksa, posing as a CEPI super hero at our last conference.

I hope I’ve shared enough great reasons why you should hurry over to Facebook and click that “Like” button. Why not take 15 seconds now and do it?

– Jennifer

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