The NASPP Blog

Monthly Archives: November 2012

November 29, 2012

Stock Plan Health Check

As 2012 draws to a close, I can’t help but reflect on the fact that it’s been another relatively quiet year in terms of regulatory developments. This has hopefully meant more time focused on projects and refining administration practices, and less time spent trying to figure out how to implement new legislation. With year-end around the corner and no burning developments (we’ll see what happens with the fiscal cliff issue), now is the perfect time to perform a “health check” on compliance procedures.

A sanity check on compliance procedures is something every company should be doing with regularity. In some cases we have legislation that mandates this type of check (Sarbanes-Oxley 404, for one), but even then the areas of focus are not all-encompassing. Ideally it would be great to identify the key areas of administration for your equity programs and develop a corresponding checklist that can be utilized on a periodic basis as a reminder for areas that need monitoring. Think of it like preventative care for your stock plans. Why not do this now, before the next era of regulatory changes places further demand on our time?

I advocate the idea of a checklist because not all compliance shortcomings are alike. Many failures come not from lax day to day procedures, but from oversights and things long forgotten. For example, there is much fanfare around the adoption of a new equity plan, and the corresponding registration of the shares allocated to the plan on a Form S-8 is something that is usually not forgotten. However, what happens years down the road when the plan is no longer in use? For shares remaining in a defunct plan, the company needs to remember to un-register those shares with the SEC. This is certainly not a day-to-day or even annual occurrence for most companies, but is something that could easily be added to a checklist to ensure no oversight occurs.

Another reason to have a defined checklist? Increased global audit and enforcement. It just seems plainly better for a company to proactively identify and rectify any potential errors or missteps rather than leaving it up to being caught by an external party. Interestingly, when it comes to global tax compliance, the 2012 NASPP/PwC Global Equity Incentives Survey observed a downward trend in the frequency of annual compliance reviews conducted by companies. 57% of companies reported conducting annual compliance reviews in 2011 (and that number was even higher in prior years). In 2012, only 34% of respondents reported performing annual compliance reviews. What’s alarming about a trend like this is that on the flip side, the level of audit activity by regulators is is increasingly strong, and in some cases, continuing to rise. France, for example, is considered one of the most challenging jurisdictions from a tax perspective, and in the 2012 survey it ranked second highest in terms of the percentage of companies audited (17%). Now is not the time to let go of compliance monitoring.

Checklist Tips

The concept of a checklist is likely an all-familiar one in our stock compensation world. I’m not proposing something that’s necessarily novel. However, I notice that most often the “checklists” are oriented towards a specific set of procedures or tasks, like processing an ESPP purchase or RSU release. I don’t often see a full checklist oriented towards across-the-board compliance, and this is an area where I think plan administration could be made much easier. So what would I include in my checklist? Some things you won’t want to miss:

Plan Management (Plan Reserves, Registration, Fungible Shares and Reconciliation): Ensure reconciliation occurs in all aspects of maintaining shares under the equity plans. This includes registering initial shares, validating plan balances on an ongoing basis, tracking plan reserve increases, and taking action when the plan is no longer in use. This could serve as a stand-alone category on a checklist, with many areas to monitor.

Handling Exceptions: I could write a whole another blog on tracking exceptions. You know the situation: some anomaly occurs mid-quarter (unexpected acceleration of a grant? unusual termination conditions or modifications?) and then, with no formal process to keep track of the change, it’s forgotten. Adding a few steps around tracking these exceptions to your checklist would save volumes of work down the road trying to recall what occurred and alleviate fears about forgetting something.

There’s only so much I can include in today’s blog. I hope you will consider the notion of adopting a checklist that you can use to broadly monitor compliance on a regular basis. There are a number of focused checklists in our Administrative Tools and Year-End portals that may give you an idea on the types of things to track.


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November 28, 2012

NASPP To Do List

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. 


November 27, 2012

Proxy Advisor Policies for 2013

Both ISS and Glass-Lewis have published updated corporate governance guidelines for the 2013 proxy season.  The good news for my readers is that, in both cases, there aren’t a lot of changes in the policies specific to stock compensation; I think that Say-on-Pay is a much hotter issue for the proxy advisors right now than your stock compensation plan.  Here is a quick summary of what’s changed with respect to stock compensation.

For more on the ISS and Glass Lewis updates, see the NASPP alert “ISS and Glass Lewis Issue Policy Updates for 2013.”

ISS Updates

I don’t think ISS made any changes that directly apply to stock compensation, but there were some changes in their general policies on executive and CEO pay that may have an impact on your stock program:

  • Peer Groups: ISS assigns each company to a peer group for purposes of identifying pay-for-performance misalignments in CEO pay. The determination of company peer groups has been an ongoing source of much consternation; many companies disagree with the peers ISS assigns.  In the past, peers have been determined based on GICS codes, market capitalization, and revenue. The new policy involves a lot of technical mumbo jumbo about 8-digit and 2-digit CICS groups that I don’t understand, but the gist that I came away with is that companies’ self-selected peers will somehow be considered in constructing peer groups. I’m not convinced this will be the panacea companies are looking for, but hopefully it will be an improvement.
  • Realizable Pay: Where ISS identifies a quantitative misalignment in pay-for-performance, a number of qualitative measures are taken into consideration before ISS finalizes a recommendation with respect to the company’s Say-on-Pay proposal. Under the 2013 policy, for large cap companies, these measures will include a comparison of realizable pay to grant date pay. For stock awards, realizable pay includes the value of awards earned during a specified performance period, plus the value as of the end of the period for unearned awards. Values of options and SARs will be based on the Black-Scholes value computed as of the performance period. If you work for a large-cap company, you should probably get ready to start figuring out this number.
  • Pledging and Hedging: Significant pledging and any amount of hedging of stock/awards by officers is considered a problematic pay practice that may result in a recommendation against directors. My guess, based on data the NASPP and others have collected, is that most of you don’t allow executives to pledge or hedge company stock. But if this is something your company allows, you may want to get an handle on the amounts of stock executives have pledged and consider reining in hedging altogether.
  • Say-on-Parachute Payments: When making recommendations on Say-for-Parachute Payment proposals, ISS will now focus on existing CIC arrangements with officers in addition to new or extended arrangements and will place further scrutiny on multiple legacy features that are considered problematic in CIC agreements. If you still have options or awards with single-trigger vesting acceleration upon a CIC (and, based on the NASPP and Deloitte 2010 Stock Plan Design Survey, many of you do), those may be a problem if you ever need to conduct a Say-on-Parachute Payments vote.

Glass Lewis Updates

Glass Lewis, in their tradition of providing as little information as possible, published their 2013 policy without noting what changed. I don’t have a copy of their 2012 policy, so I couldn’t compare the two but I’ve read reports from third-parties that highlight the changes. 

As far as I can tell, the only change in their stock plan policy is that Glass Lewis will now be on the lookout for plans with a fungible share reserve where options and SARs count as less than one share (the idea is that full value awards count as one share, so options/SARs count as less than a share).  It’s a clever idea for making your share reserve last as long as possible, but, to my knowledge, these plans are very rare (I’ve never seen one even in captivity, much less in the wild), so I suspect this isn’t a concern for most of you.

– Barbara

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November 26, 2012

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

DC/VA/MD: Mark Poerio, Damian Myers, and Helen Lee of Paul Hastings present “Risk Management for Stock Plans.” (Tuesday, November 27, 8:30 AM)

Wisconsin: Bryan Ortwein and Mike Grund of Towers Watson present “Proxies in the Era of Pay for Performance.” (Wednesday, November 28, 11:45 AM)

Phoenix: The 7th Annual Phoenix NASPP Chapter Holiday Party (Thursday, November 29, 6:00 PM).

Attend ShareComp for Free
NASPP members can attend ShareComp 2012, the virtual conference for the share-based compensation industry, at no cost. ShareComp is a 3-D rendered environment with all of the features of a physical conference, without the travel costs and time out of the office.

As a sponsor, the NASPP has secured free registration for our members (regularly priced at $595). Register now using our sponsor pass “VCP” to secure your free attendance at this exciting event. Please feel free to share this sponsor pass with others within your company.

Attend Live on December 12, 2012.  Registration also allows you access for a year after the event.  

Reasons to Attend:

  • 16 hours of live global interactive learning and networking.
  • Best practices for designing, implementing and managing share-based compensation programs.
  • Instructional sessions that will share real-world examples, tactics and lessons learned. 
  • Facilitated Round Tables with experts and practitioners to share industry trends and best practices.
  • One click access to presenters, industry experts, service providers, other attendees.
  • A searchable library, including presentations, Q&A sessions and booth materials.
  • A year of access to the conference centre and the materials that will be regularly updated.

Register online; please remember to use our Sponsor Code “VCP” to secure your free registration.

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November 20, 2012

Nell Minow: Film Critic and Corporate Governance Extraordinaire

Since it is a holiday week, I thought I’d do something a little lighter. For today’s blog entry, I provide some quips and highlights from Nell Minow’s keynote at this year’s NASPP Conference.

Nell is a phenomenal speaker, outspoken, honest, engaging, and funny. She has not one, but two successful careers as a movie reviewer (she mentioned that she was interviewing Ben Afleck the day after her keynote presentation) and as a corporate governance critic, and is embarking on a third career as an ebook publisher. She was the fourth person to join ISS and she currently works for The Corporate Library/GMI, where they rate boards of directors on their effectiveness and sell those ratings to D&O insurers, plaintiff lawyers, investors, etc.

Nell on how she ended up as a both a film critic and corporate governance critic:

When I was in high school, one of my teachers said to me: “You think you’re going to make a living as a smart aleck?” I did not realize that was a rhetorical question; I thought it was career counseling…I managed to find not one but two careers where I do nothing but criticize people all the time.

On the qualifications for being a critic of either films or corporate governance:

The #1 requirement for being a movie critic or a corporate governance critic: an infinite tolerance for failure.

On the challenges of rating executive pay:

The challenges of rating executive pay are kind of like the challenges of rating movies, which is that so many of them are so terrible.

On Say-on-Pay:

I never really thought [Say-on-Pay] was going to be very effective but I’m extremely impressed and delighted that in just two years, Say-on-Pay has become significant enough that you could get a no vote at Citigroup…But let’s face it, anything that is precatory is not going to be very meaningful.

On director pay:

I used to say that we pay directors too much for what they do and not enough for what we want them to do. So I am in favor of serious pay for directors because we expect them to spend serious time on this…But again, as with CEO pay, you want that pay to be tied to performance.

If she were queen for the day:

I would say that no pay plans, particularly stock-based pay plans, have any credibility whatsoever unless they are indexed, preferably to the peer group but, if not, then to the market as a whole. I would make one sweeping change in that direction…If you are not outperforming your peer group, you shouldn’t get paid the big bucks.

Movie recommendations for the holiday season:

Ben Afleck directed and stars in “Argo,” which I strongly recommend…and no one should go see Kevin James in “Here Comes the Boom.”

Nell had a lot of interesting things to say on a lot of topics related to corporate governance. It’s not too late for you to hear her presentation; you can download her keynote and the panel she participated in afterwards (as well as any other session offered at the Conference).  You can purchase just a single session or save with a multi-session package.

Because this is a holiday week, this will be our last blog until next week.  I hope everyone has a great Thanksgiving!

– Barbara

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November 15, 2012

San Diego Chapter Meeting

Robyn Shutak, the NASPP’s Education Director, and I presented at the San Diego NASPP chapter meeting on Tuesday. The topic was “Top Ten Tips for Year-End Reporting” and we presented it in an audience-driven, interactive format. The meeting was held at the beautiful Illumina campus and the weather was sunny and warm. It was a great meeting; here are a few pictures:


James Tozer of E*TRADE Financial. James is the San Diego chapter president and gets credit for organizing a great meeting (not too mention running a great chapter)!


Lisa Murzic, Ginny Bicking, and Cathy Piccus can be confident that they have excellent year-end procedures. Qualcomm was the high scorer in the “rate yourself” portion of the presentation, with over 30 pts!


Nancy Dartez of Prometheus Laboratories has been a long-time member of the NASPP and attendee at San Diego chapter meetings.

Amber and Anne-Celine.JPG

Amber Van Winkle of Jack in the Box and Anne-Celine Woelk of The Active Network. Amber is new to stock plans but did great on her challenge question. Anne-Celine won a jar of jam when I last spoke in San Diego.

Jeannette.JPGPeople came from far and wide to attend! Well, one person, Jeannette Wheeler of OptionEase, came from Orange County. Jeannette is president of the NASPP’s Orange County chapter.
chocolate.JPGChocolate was involved!

Attendees that answered the challenge questions correctly or that were high scorers in the “rate yourself” portion of the presentation took home a chocolate bar.

See all the pictures from the chapter meeting on the NASPP Facebook page.
– Barbara

November 14, 2012

NASPP To-Do List

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. 


November 13, 2012

Oops, Again!

Back in July, I blogged about Barnes & Noble’s grant to their CEO that was in excess of the per-person limit in their plan (“What’s Your Limit?,” July 31, 2012). I thought that was an isolated incident, but now another company has done the same thing, three years in a row! If one more company does it, I think we’ll have to call it a “trend.”

Devry Makes Repeated Grants in Excess of Plan Limit
A recent lawsuit against Devry alleges that the company granted options to its CEO in excess of the per-person limit included in its stock plan for Section 162(m) purposes for three years in a row. The total number of excess shares granted to the CEO is almost 160,000 (34,100 shares in excess of the limit in 2010; 20,200 in 2011; and 105,425 in 2012).

Devry has several stock plans and it’s a little hard to tell which plan the options were granted out of. Ultimately, though, it doesn’t matter because, with the exception of their 1994 plan, which, according to their June 30 2012 Form 10-K, is no longer in use, all of the plans limit the number of option shares that can be granted to an individual to 150,000 per year.

Unlike Barnes & Noble’s limit, which was over a three-year period, this is a nice, clean annual limit, so it seems a little surprising that no one at Devry noticed the error. Even more surprising that they managed to make the same error three years in a row.

According to their 10-K, Devry currently has two plans that they grant options out of (a 2003 plan and a 2005 plan). As far as I can tell, based on the Form 4 reporting the grants, the options granted to the CEO were granted out of just one plan (although I can’t ascertain this for certain). I believe that the limit applies only to options granted under the plan in which it is stated. Thus, if a portion (no more than 150,000 shares worth) of each year’s options were granted under one plan with the remaining portion granted under the other plan, it seems to be that neither plan limit would have been exceeded and there’d be no problem under Section 162(m).

Don’t Be My Next Blog Entry!

This is such an easy mistake for shareholders and the IRS to find. The per-person limit is clearly stated in your plan, which is filed with the SEC–there’s list of exhibits in your 10-K telling readers which filing it is included in. And all of your executives’ grants are reported on Form 4 filings. At “The IRS Speaks” panel at this year’s NASPP Conference, Deb Walker of Deloitte pointed out that Section 162(m) is one of the first areas IRS auditors target, because it is an area where there are a lot of compliance failures that are relatively easy to uncover. Make sure your company doesn’t make this mistake; compare all grants to your executives against the per-person limit in your plan. Do this every time an executive is granted an option.

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November 12, 2012

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

Chicago: Tammy Negrillo and Tara Stafford present on Deloitte’s 2012 global equity plan survey (Tuesday, November 13, 7:30 AM)

Michigan: Alicia Mladsi and Erin Newell of Solium provide an overview of this year’s NASPP Conference. (Tuesday, November 13, 9:00 AM)

San Diego: Barbara Baksa and Robyn Shutak of the NASPP present tips for year-end reporting. (Tuesday, November 13, 11:30 AM)

Dallas: Sharon Dougherty of Pioneer Natural Resources, Denise Ledbetter of Maxim Integrated Products, and Gregory Wolter of Marsh & McLennan Companies moderate a discussion on “Managing Your Equity Compensation Plans – Best Practices and Administrative Tips.” (Wednesday, November 14, luncheon)

Twin Cities: Guest panelists from Wells Fargo, American Stock Transfer, Computershare, E*Trade, Schwab and Morgan Stanley will discuss performing due diligence with transfer agents and plan administrators, followed by cocktails and networking. (Thursday, November 15)

Boston: Fred Whittlesey of Compensation Venture Group and Terry Adamson of Aon Hewitt will present “Value and Valuations: Making Sense of Long Term Incentive Data.” (Friday, November 16, 8:30 AM).

Robyn Shutak and I hope to see our friends in San Deigo on Tuesday. It will be the most fun you’ve ever had discussing year-end reporting–there will be chocolate involved!

– Barbara


November 8, 2012

The Election is Over, Now What?

The election is over, and I have to say I am thrilled. No, I’m not talking about the outcome (I’ll withhold my opinions there, since this is not a political blog, though I will say I think election night set a record in terms of the number of banter-by-text messages I exchanged with many friends and family.) I’m referring to the fact that I don’t have to hear a campaign ad every 30 seconds, everywhere I go, for a long, long time. Regardless of your political affiliation, I’m guessing you may agree. So now what? As I moved into the first day post Obama re-election, I found myself wondering about what was next. What’s going to happen to all those tax holidays? How about the impending fiscal cliff? Some of these things affect stock compensation directly, others peripherally. In today’s blog, I explore the impact of the election on some of these key issues, as relates to our world of stock compensation. I apologize in advance because it’s a long one this week, but sometimes it just ends up that way.

What’s What?

First, I leveraged an expert for today’s blog, Bill Dunn of PricewaterhouseCoopers. He’s spent a good part of the past several months doing presentations, including one at our recent NASPP Annual Conference, on the impact the election would likely have on a number of issues, like taxes (if you attended the conference, you have the slides from Session 6.2: “Election 2012! The Campaign Trail and Equity Compensation,” and if you didn’t attend or did and would like to hear the presentation, you can obtain the materials/audio on our web site.) Bill is the perfect source to add flavor to today’s blog, and I’ll refer to several of his insights and comments.

Let’s start by examining the makeup of Washington. The outcome of election 2012 was basically that the American people ratified the status quo. President Obama has won another four years in the White House, the Republicans still control the House, and the Senate remains in Democratic hands. In terms of the balance of power, we are in essentially the same place as we were before the election.

With the status quo in place, I asked Bill about what significant events would occur in the coming months, relative to taxes and equity compensation. Here’s what I learned:

  • Bush era tax cuts are set to expire December 31,
    2012. Also set to expire are the current tax holidays, like that on FICA (which was temporarily reduced to 4.2%, down from 6.2%).
  • Automatic government spending cuts go into
    effect in 2013, cutting the defense budget amongst other things.
  • The combination of the two points above result in a
    worst-case scenario known as the “fiscal cliff”: reduced government spending
    and increased taxes. Predictions include possibility of recession if
    changes are not made.

The retained balance of power in Washington presents
challenges in dealing with the fiscal cliff and future tax policy because:

The President could sustain a veto

The House will control tax legislation, and

Either party could filibuster
(non-reconciliation) bills in the Senate

With huge tax and spending changes on the horizon, one primary concern is the abruptness of the change. You have a “perfect storm” of huge spending cuts coming together with huge tax increases all at once. So what’s on the table for each party in terms of a path to resolve this potential crisis? Most agree that some action is needed. Bill shared some
perspective on both parties’ stated views on the topic:

Democrat View:

  • Propose selectively eliminating the “Bush Tax

Increase Ordinary income tax rate (top rate from
35% to 39.6%)

Long-term capital gains increase from 15% to 20%

Qualified dividends increase from 15% to 39.6%

Associated supplemental income rates would
increase (28% up to $1M (from 25%), 39.6% for $1M+ (up from 35%))

Republican View:

  • No tax increases

Scenarios, Scenarios

With divided view points on how to
handle tax policy in Washington, what
are possible outcomes and when? Here are a few plausible scenarios:

  • Postpone action by extending all the tax cuts
    and suspend spending cuts until Congress comes up with a solution in 2013
  • Temporary compromise on rate action before
    December 31, 2012

In this scenario, results would likely be skewed
towards Democrats’ terms and result in tax increases for upper income taxpayers

Qualified dividends might stay aligned with
long-term capital gains rates, perhaps at a rate of 20% for certain taxpayers

Tax rates could also rise for upper-income
taxpayers, but with redefinition to increase threshold ($1M?)

  • Republicans could hold fast to their anti-tax
    increase pledge, presenting the “fiscal cliff”

But maybe only until enough pain is felt by both
parties, enough blame is given to one party, or the government suffers a
promised downgrade in its debt rating by Moody’s.

Why Do I Care?

As a stock plan professional, the obvious question is “Why
do I care about all this government policy stuff?” While I’d like to just turn
my head for several months until something changes, I realize that the issues
on the horizon are significant and problematic for our economy and
taxpayers.  As stock plan professionals,
we are directly involved in withholding ordinary income taxes and informing plan
participants about our withholding obligations. I’m not going to get into the
debate on “what” tax topics should be presented to employees (that’s for you
and your counsel to dissect). What I will suggest is that there is a vastly
different tax landscape slated for 2013 and beyond. If Congress does not take
action to make changes or extend tax cuts/holidays by December 31, 2012, these changes
will come to fruition, at least until further action is taken.  I don’t recommend advising employees on the
timing of making a transaction (leave that to their advisers), but if the tax cuts expire, it’s likely that
some (if not all) participants will experience a material difference between
executing a stock transaction in 2012 vs. 2013 in terms of the tax impact. As a

  • If
    no action is taken to change rates or extend tax cuts, be ready for the
    possibility of increased transactions towards year-end.
  • If
    action is taken to change tax rates or extend tax cuts, then
    stock plan professionals will need to be prepared to implement new or extend existing withholding

With a lot of uncertainty around what the future will hold
in terms of tax policy, one thing is certain: be prepared for changes, lots of
them. Not only will plan administrators likely have to adjust withholding rates, but the education
message to participants will need to be tweaked. For these reasons, I do care
about the impending fiscal cliff and how Congress intends to move forward.



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