December is one of my favorite months, largely because it’s such a festive month. In the last month of our calendar year, we never seem to run out of excuses to celebrate, party, and generally just have fun. It’s no different with our NASPP chapters – December is filled with holiday events. If you’re an NASPP Facebook fan, you already know that we’ve been displaying photos from the various chapter holiday parties (Are you in one of them? You just might be…). Judging from the pictures I’ve seen, it seems like it’s been a good time all around. For my last blog of 2012, I figured I’d join in the party bandwagon and share NASPP holiday highlights.
If you’re not following us on Facebook, this would be a great time to “Like” the NASPP and get caught up on the action.
Emily Cervino of Fidelity and Elizabeth Dodge of Stock & Option Solutions at the San Francisco event.
The winning trivia team at the San Francisco holiday event included: Paz Dizon of Telsa, Nancy Kobs and Barbara Klementz of Baker & McKenzie, and Brenda Corona and Lori Serrano of Intuitive Surgical.
Orange County chapter board members Stacey Lombardi, Michelle May and Matt MacDougall at their holiday event.
Bucky Swift of Snell & Wilmer (an industry adviser for the Phoenix chapter), Kerri Harlow of On Semiconductor, Josh Hemmati of On Semiconductor (and chapter vice president) and Nathan O’Connor of Equity Methods at the Phoenix chapter holiday party.
This is my last blog entry of 2012, so I thought I’d have a little fun with it.
My Favorite Words One thing I enjoy about working in stock compensation is that I get to use a lot of fancy words. Some of these words are so fun to say that I wondered if I could sneak them into my non-work conversations. Here are a few examples that you can use to impress your family and friends at holiday gatherings:
Escheat: “If no one wants that last cookie, I’m going to escheat it.”
Disgorge: “Disgorge my Eggo!”
Commensurate: “The gifts Santa brings are commensurate with your behavior over the past year.”
Fungible: “Darn it! None of the lights on any of the ten strands on the tree are fungible.”
Bifurcate: “If you kids don’t get along, I’m going to bifurcate you and no one will get to play with the toy.”
Pro rata: “This bottle of wine is running low–shall I pour everyone a pro rata distribution and then open a new bottle?”
Expiry: “What is the expiry on the return period for this hideous sweater that Aunt Edna gave me?”
What are your favorite stock compensation terms? 10 pts to anyone who emails me a favorite word with an example of how to use it correctly in a non-work context.
Things To Do on the NASPP Website That Count as Work But Are More Fun Than Actual Work Even thought it’s the end of the year, the week between Christmas and New Year’s can often be a little slow. Many folks are on vacation and those that remain behind can fall victim to a holiday-induced malaise. With that in mind, I have compiled the following list of things to do that count as work but are more fun than your actual job, just case you need it next week.
Write a “Stump Your Peers” question for the Question of the Week challenge. You might even learn something in the process. (Here’s a tip: find the answer first in a document on the NASPP website, then write the question.)
The Award for the Best Holiday Ecard… Goes to Maslon Edelman Borman & Brand for being innovative, engaging, and touching all at the same time. Check it out today; the stories behind the words of wisdom are as interesting as the quotes themselves.
Happy Holidays The NASPP Blog will be taking next week off to enjoy the holidays. I hope you all have a great holiday season and look forward to seeing you in the new year!
I know many retirees look forward to starting a new, carefree life free of winter weather, the 9 to 5 grind, and high tax brackets. One such retiree in Connecticut with similar hopes encountered a setback and learned the hard way about state-to-state mobility nuances after the New York State Division of Tax Appeals upheld the assertion that his stock option related income (and other deferred compensation income) received after retirement should be partially allocated to the state of New York, even though he resides in Connecticut.
State-to-state mobility is not a new topic. We know that states are becoming more assertive in claiming tax revenues associated with wages and benefits earned during the period of time the employee worked in their state, regardless of when the benefit was actually realized or paid. In many states, the employee never needs to reside there – only work there – in order for allocation claims to surface. In the appeals case at hand, an American Airlines employee resided in Connecticut during his employment and after his retirement. During his period of employment with the airline, he worked both in and outside of New York. He was granted a variety of stock options during his employment relationship with the airline (grants were awarded from 1996 – 2001, and again in 2003). The employee retired in 2005 and exercised his stock options in 2006. The state of New York maintained that a portion of the income from the transaction should be allocated to New York, reflecting the employee’s time worked there. Like many other states, New York does have regulations requiring that non-residents pay income taxes on wages that are earned in the state (regardless of residency). There are a few exclusions on taxing non-residents mandated by federal law, such as that no non resident can be taxed on qualified retirement distributions. As a result, New York wanted the taxes from stock option gains based on the number of days worked in New York between the date of grant and the date of retirement. This translated to about two-thirds of the gains being taxable in New York.
The retired employee (who I’m guessing probably had no clue that he’d be taxed in New York, since he never lived there and was now well into retirement) challenged the New York Tax Division’s claim to his income taxes on a number of grounds, including that the regulations were unfair to non-residents. Predictably, the New York State Division of Tax Appeals upheld all regulations in question.
They Don’t Know What They Don’t Know
This story is a good reminder that state-to-state mobility is not something that is going away. Even more troubling than learning how to administer the nuances of tracking and allocating income between states is the fact that many employees (regardless of employment status) have no clue about these intricacies. I’m thinking about the retiree that heads off to a warmer state with no state income tax, believing they’ve finally settled into retirement bliss. Moving to a state with no tax rate does not mean the employee is going to avoid paying state income taxes. They could very well owe the state they just left behind. While this may logically be entertained by current employees, and perhaps even those recently terminated, there is an aura around retirement that may cause many retirees to miss this concept in their tax planning.
Tax season is just around the corner, and it may be a good time to take a fresh look at the pool of possible current or former employees who may be subject to these very types of mobility issues and, at minimum, recommend that they take a hard look at the details with their tax planners.
This week I have a couple of additional treats from the smorgasbord of topics related to stock compensation. Enjoy!
FAQs on ISS Peer Groups I guess I wasn’t the only one confused by ISS’s new peer group methodology; ISS has issued an FAQ to explain the new process.
There’s still a bunch of stuff about 8-digit, 6-digit, 4-digit, and 2-digit GICS codes that I don’t understand, but the gist that I came away with is that peers are selected first from within the company’s 8-digit code. ISS constrains which companies can be considered peers based on size (by revenue and market capitalization), so if there aren’t any 8-digit peers that fit within those constraints, then ISS moves to the 6-digit peers, and then to the four-digit peers. ISS will not select peers that match only based on the 2-digit code.
I finally googled “GICS Codes” to figure out what all these digits mean. Standard & Poor’s assigns companies to ten 2-digit industry groups (your 2-digit GICS code). Then within that 2-digit code, you are assigned to a more specific 4-digit code, and within that 4-digit code…all the way down to the 8-digit code. So the companies that share your 8-digit code should be those that most closely resemble you in terms of industry classification.
When selecting among those peers that meet your size constraints, ISS will give priority to companies that are in your self-selected peer group or that have been selected you as a peer, as well as companies that have been selected as peers by your peers or that have selected by your peers as their peers. This sort of feels like that game “Six Degrees of Kevin Bacon.” Note that if you’ve changed the companies in your self-selected peer group since last year, ISS has provided a special form that you can use to notify them of the change; you have until Dec 21 to do so.
What does all of this have to do with stock compensation you ask? Well, not much, because these peers have nothing to do with the burn rate tables published by ISS (those are based solely on 4-digit GICS codes). ISS uses these peer groups only for purposes of determining whether compensation paid to your CEO aligns with company performance. But it’s good to be aware of your ISS peer group because it probably differs from the peers you’ve identified for purposes of your performance awards and other LTI programs. Thus, even though your CEO has awards that vest based on performance, ISS could still find that his/her pay doesn’t align with company performance.
Top Ten Myths on Say-on-Pay A group of academics from Stanford and the University of Navarra have written a paper to debunk myths related to Say-on-Pay. Beside being an interesting topic, the paper has the advantages of being short (only 14 pages, including exhibits) and is written in fairly straightforward English (the word “sunspot” doesn’t appear in it anywhere).
My favorite myth is #6: “Plain-vanilla equity awards are not performance-based.”
Here’s what’s happening at your local NASPP chapter this week:
San Diego: The chapter’s annual holiday social & networking event. (Tuesday, December 11, 11:30 AM)
Ohio: Tammy Negrillo, Stephanie Linn, and Scott Walter of Deloitte present “2012 Deloitte Global Equity Plan Survey: Sharing Value–U.S. and Global Employment Tax Issues Around Equity Compensation.” (Thursday, December 13, 11:00 AM)
San Francisco: The chapter’s annual holiday event, featuring a stock plan trivia contest led by Emily Cervino of Fidelity and Elizabeth Dodge of Stock & Option Solutions. (Thursday, December 13, 3:00 PM)
NY/NJ: Chris Young and Andrea Malagoli of Buck Consultants present “Equity Effectiveness–Addressing the Gap Between Perceived Value and Actual Value in Equity Plan Design.” (Friday, December 14, 8:30 AM)
Perusing our NASPP Q&A Discussion Forum, it’s interesting to see the various trends in terms of hot topics and where companies seem to be struggling the most in administering their stock programs. We don’t keep official statistics about the types of questions asked, but one constant trend I see is the dominance of questions around taxes, taxes, taxes. In today’s blog I identify some of the key areas of uncertainty for issuers and helpful resources to address them.
Too Much Mobility
Let’s face it: it’s more common for a company to be spread across the country or the globe than not these days. With expanded presence comes mobile employees, and multiple jurisdictions that would love to get their hands on tax revenues. For a long time the term “mobility tracking” often conjured images of remote, distant countries around the globe. While that clearly is an area of challenge and still an ever hot topic in administering equity plans, we’re definitely seeing lots of questions around domestic mobility (state-to-state within the U.S.). Some of the more common inquiries stem around employees moving from one state to another and the question of which state rules to follow in terms of withholding, and who gets those dollars. The answer is not necessarily black and white, and can largely depend upon the individual states involved (and their regulations), where the employee was located when a key event occurred, such as vesting or exercise. Some key tips to remember are:
You only have to withhold in a particular state if you have an office there. No office, no withholding required, at least for stock compensation. So if your mobile employees are also remote employees, this may simplify the process of figuring out where to send tax dollars.
When in doubt, call on the local payroll contacts in the state in question. If you’re working in the corporate office in California, your California payroll folks may not be fully aware of the nuances involved in withholding taxes in Pennsylvania. However, if you also have an office in Pennsylvania and local payroll contacts, it’s definitely worth a consultation with them on mobility issues.
Leverage your third-party payroll provider for assistance. While they may not be mobility experts, they should be well versed in the withholding requirements for each state. Knowing the basics can go a long way towards figuring out next steps.
Consult with an expert. If you have a large mobile population, or significant tax dollars involved, it may be worth consulting with a third party expert who is familiar with the ins and outs of mobility tracking. There are several firms who will even handle the calculations for you, as events occur.
Access available information, such as the articles in our State Taxes or Global Stock Plans Portals. If you’re an NASPP member, access is free, so why not use those as a starting place?
As with any compliance issue, there is always the risk/reward analysis. Things like the number of states involved, the aggressiveness of the states in pursing tax revenue, the number of employees and tax amounts are all considerations in determining a withholding practice for mobile employees.
Terminations and Other Situations
One thing to remember is that one size does not fit all then it comes to taxation. It’s easy to assume that jurisdictions (domestic and global) may have similar practices or requirements when it comes to certain situations, such as termination, but that’s not always the case. In the U.S. we don’t distinguish between a terminated employee or an active employee for stock related withholding purposes. In fact, even terminated employees receive a W-2 documenting their stock compensation income, even if they haven’t worked for the company in the calendar year of the taxable stock event. Then, you go outside the U.S., to a country like the U.K., where tax withholding does change for terminated employees. In the U.K. the rate is reduced to a flat rate that is less than standard withholding rate for active employees. So employes with terminations in that jurisdiction need to be attentive to ensuring tax withholding rates are changed for terminated employees. I’ve seen companies “forget” this, and have to go through the painful process of processing refunds to terminated employees. Judging from the number of questions about withholding in the U.K. for terminated employees, this is still an area where companies need a sanity check. Here are a couple of tips for monitoring tax compliance when scenarios change:
If you have a third party expert, use them. Don’t skimp when it comes to compliance. I like to say a penny spent today is a dollar saved down the road; investing in compliance should pay off – the penalties for non-compliance would likely be far greater. One thing you’ll want to double check with your expert is how changes in circumstances will affect withholding. I recommend a standard set of questions that you use to explore the requirements with your provider that includes identifying any nuances for terminations, divorce, death and other scenarios.
Build a solid process to monitor circumstantial changes on a real time basis. It’s easier to give back money for over-withholding than it is to seek out money for under-withholding, especially if you’re dealing with former employees. Still, it’s even better to get it right from the beginning. This will undoubtedly require careful coordination with other internal business partners, like H.R. and local contacts.
Bounce it off of someone else. Although each company should do their own due diligence when it comes to tax compliance, leveraging the experience of other practitioners can be a great resource. Don’t be afraid to turn to your peers – at an NASPP chapter meeting, via the NASPP Q&A Discussion Forums, in educational settings and through other industry events. As a whole we all become more educated the more information we share.
Taxation has been a topic of much discussion for as long as I can remember, and likely will remain that way into the distant future. There are just too many jurisdictions, volumes of requirements, and then frequent changes. This is a recipe for an active discussion forum for a long time to come. Keep those questions coming: the more we collaborate together, the more we continue to progress in building a well oiled tax compliance machine.
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.
By now, you are probably finishing off any remaining leftovers from Thanksgiving. On that theme, I have a few leftover items for the blog and now seems like a good time to use them up. Sort of like making a casserole out of turkey, mashed potatoes and stuffing, but not quite as tasty.
Update on Proxy Disclosure Lawsuits On November 6, I blogged about plaintiffs’ attorneys that are now bringing lawsuits alleging that companies’ disclosures related to their stock plan or Say-on-Pay proposals are inadequate (“Martha Stewart and Your Proxy Statement“). The lawsuits seek an injunction to delay the shareholder votes on these proposals (which, in effect, delays the annual meetings); companies targeted by these attorneys are faced with settling and paying out plaintiffs’ attorney fees in the six figures (up to $625K) to avoid a delay.
Last week, Mike Melbinger provided an update on this issue in his Compensation Blog on CompensationStandards.com. To date, 20 companies have been targeted and at least six have settled, meaning that they agreed to make additional disclosures and pay fees to the plaintiffs’ attorneys. At least one company (Brocade Communications) also had to delay the vote on their stock plan proposal (although they did hold their annual meeting on time). At least three companies (Clorox, Globecomm Systems, and Hain Celestial) got courts to reject the injunction. And Microsoft got the law firm that filed the complaint (Faruqi & Faruqi, which has initiated most of these suits) to withdraw it. The article “Insight: Lawyers Gain from Say-on-Pay” Suits Targeting U.S. Firms,” published by Reuters on November 30, has a good summary of the various suits.
This is an opportunity for you, as a stock plan administrator, to demonstrate the value that you bring to the table. Make sure that your legal department is aware of the potential for these lawsuits, so that if your company is targeted, they aren’t caught offguard. You also might want to forward the memo we’ve posted from Orrick to legal (“New Wave of Proxy Statement Injunctive Lawsuits: How to Win & Prevent Them“), which include thoughts on strengthening your disclosure so they will be more likely to withstand one of these lawsuits.
IFRS: Hot or Not? An article published on November 13 in Accounting Today (“SEC Still Has Reservations about IFRS” by Michael Cohn) reports on comments by SEC officials at FEI’s 31st Annual Current Financial Reporting Issues conference on where the SEC stands on IFRS. The upshot is that SEC researchers have identified a number of concerns with adopting IFRS in the US and that the SEC is still taking a wait and see approach. Some of the areas the researchers looked at were the cost of conversion, whether or not IFRS makes sense for US capital markets, the interpretative process, the impact on private companies, investor understanding, and what our exit strategy might be if the US adopts IFRS and it backfires. Based on this report, I’d say we still have a long ways to go before we are under IFRS (or some sort of equivalent) here in the US.
Of course, things may change now that there will be a new chair at the SEC.
Even the SEC Makes Mistakes The next time someone finds a typo in something you’ve written, you can point out that you are in good company. In his blog for Allen Matkins, Keith Bishop notes a number of errors on the Form 10-K posted to the SEC website (“The SEC’s Form 10-K: ‘In Endless Error Hurled,'” April 11, 2012), including cites to regulations that don’t exist and outdated instructions. I feel a lot better now about the myriad typos I’m sure can be found in my blogs. If the SEC isn’t perfect, how can the rest of us be expected to be error-free?
More Than You Ever Want to Know About Stock-for-Stock Exercises I spent an hour or so today drafting a 1,200-word essay in response to a question in the NASPP Discussion Forum about stock-for-stock exercises. I’m so pleased with my response that I wish I had another use for it. But I don’t, so I’m mentioning it here in the hopes that a few more people will read it. If you want to understand what a tax-free exchange of property is (and what it isn’t), check out Topic #7391.
Shout-Out Finally, a shout-out to Sara Spengler at Facebook for suggesting the Thanksgiving tie-in for today’s blog entry.