The NASPP Blog

Monthly Archives: February 2013

February 28, 2013

The Payroll Partnership

This week’s NASPP webcast on Understanding Payroll Administration Related to Equity Compensation drew a great turnout, which suggests that the relationship between stock administration and Payroll is something that stock professionals aren’t taking lightly. In today’s blog I offer a few tips for enhancing the synergy between the two functions.

1. Replace ad hoc transaction reporting of option exercises with a routine, fail safe process. How often do you communicate exercises to Payroll? Consider a daily process that will let Payroll know with certainty whether actionable activity occurred or not. Communicating even when “not” provides a confirmation that no action is needed for that day. One best practice includes dropping a daily “transaction” file to a shared network folder, rather than simply emailing it to a designated contact. This is the fail safe part of the process. Sending an email to someone creates more possibility that transactions may be overlooked if the email recipient is absent from the office. Having a secure location accessible by all backup personnel will help avoid oversights or missed activity.

2. Send as much as possible to Payroll before year-end
. Year-end is Payroll’s crunch time. Even though stock transactions can occur right up through 12/31, most activity for the year can be reported to Payroll far earlier. Take advantage of Payroll down times to send information and perform reconciliation, rather than attempt a big batch process in January. Payroll will thank you.

3. Watch out for close proximity transactions. If you have multiple transactions occurring in the same time frame, be sure any transaction data sent to Payroll provides clear guidance on the order in which the data is to be entered to Payroll’s system. For example, if a person has a stock option exercise and RSU vest within days of each other, be sure that Payroll knows which to enter first, and replicates the data in the stock system. Absent this guidance, assumptions could be made on the Payroll side that result in entries that do not match up to the stock system.

4. Follow up with former employees routinely to capture address changes. The company’s obligation to report stock plan related income to the IRS doesn’t cease with employment. Reportable ordinary income for former employees is captured on a Form W-2 at year-end, just like active employees. One challenge with this requirement is that former employees not only may need to be reactivated in the Payroll system (particularly if the transaction occurs in a calendar year where they had no other income from the company), but may forget to inform the company of address changes. Don’t wait until year-end to track down former employees – build a process to follow up periodically so that Payroll has plenty of time to ensure the person’s record is active and accurate. Placing a reminder message on the employee section of your vendor web site may be an option (explore this with your service provider) – when the former employee logs in, they see a message reminding them to keep their address information current with the company.

The materials and transcript from this webcast will be available soon (consider this blog a preview if you missed the webcast). As a reminder, our monthly webcasts are free to all NASPP members. Next month’s webcast (March 20th) will delve into one of the more complicated aspects of accounting for stock plans – journal entries and the general ledger.


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February 27, 2013

NASPP To Do List

Important 21st Annual NASPP Conference Deadlines

  • Speaking Proposals NASPP Conference speaking proposals are due this Friday, by March 1. We view this as a test: if you can’t get your speaking proposals in on time, you also probably aren’t going to be able to get your presentation materials in on time.  
  • Early-Bird Registration: For those of you that are not hoping to speak at the Conference, the deadline for early-bird registration ends a week from Friday, on March 8. This deadline also will not be extended. Don’t pay more than you have to for the Conference; register by March 8.

Here’s the rest of your NASPP “To Do List” for the week:

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


February 26, 2013

The $16K Per Day Mistake, Part 2

Last week I provided an overview of how the Hart-Scott-Rodino Act applies to stock compensation (“The $16K Per Day Mistake,” February 19, 2013). This week I answer some of your burning follow-up questions about the HSR Act.

How Do the “Size of Party” Thresholds Apply to Executives?

You will recall that when an individual engages in an acquisition that causes his/her company stock holdings to be somewhere between $70.9 million and $283.6 million, the acquisition is only reportable if one party to the transaction has annual net sales or assets exceeding $14.2 million and the other has annual net sales or assets exceeding $141.8 million.

But how do these thresholds apply to a human being? That is a good question.  The executive is usually going to the be smaller party and the company is usually going to be the larger party, so the $14.2 million threshold is probably the operable number to worry about for the individual.

My understanding–which I would describe as “sketchy, at best”–is that unless the individual happens to have financial statements (unlikely), he/she creates a pro forma balance sheet to determine his/her assets. The net annual sales test typically wouldn’t apply, but it can sometimes and includes certain types of investment income or revenues of entities that the individual owns. And, some assets don’t count for purposes of the assets test. As I explained last week, I think the key take-away here is that if an individual’s stock holdings exceed $70.9 million, it’s time to get the lawyers involved and let them figure this out.

Can Stock Price Appreciation Cause an Executive to Be Subject to the HSR Act?

No, an executive will not become subject to the HSR Act merely because the value of his/her stock holdings increase above the threshold; only an acquisition of stock triggers the filing requirements.

For example, say that an executive owns company stock worth $60 million.  Now let’s say the stock price subsequently increases so that the executive’s holdings ultimately have a value in excess of $70.9 million. The increase in value would not trigger the HSR Act filing requirements.  But, now the executive’s holdings are above that minimum $70.9 million threshold, so any acquisitions the executive makes from here on out have the potential to trigger the filing requirements (unless, of course, the value of the executive’s stock declines below $70.9 million or the size of party thresholds aren’t met).

Which Stock Plan Transactions Could Trigger HSR Act Filings?

Any stock plan transaction in which executives are acquiring common stock or other voting securities, regardless of whether or not the executive voluntarily engages in the transactions. Typically this would include the following transactions:

  • Exercise, but not grant, of employee stock options
  • Grant of restricted stock
  • Settlement, but not grant, of RSUs
  • Exercise of SARs that are settled in stock
  • Purchase of stock under an ESPP
  • Acquisition of stock under a dividend reinvestment program (but not acquisition of dividend equivalent rights–those would not result in an acquisition of voting stock until settled)

Can the Company Pay the Filing Fees?

As I noted last week, the HSR Act filing fees are substantial, starting at $45,000.  This is an individual obligation, so the fees apply to the executive.  If the company reimburses the executive for the fees, that should be disclosed in the Summary Compensation Table.

– Barbara

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February 21, 2013

Penalties and Interest

Whether you’ve been in stock compensation for a short time or for years, you’re likely aware of the IRS regulations that require the timely deposit of taxes withheld from employees by employers. We often hear about the fact that penalties and interest may apply when tax deposits are late, but I rarely hear discussion about the specifics of just what those penalties and interest consequences translate to in real dollars and cents. Sometimes it’s good to have a context for just how much impact practice failures can have, so in today’s blog I will attempt to define the true financial consequences for missing tax remittance deadlines.

I’m in Stock Admin…Do I Really Need to Care About IRS Penalties?

In short, the answer is yes. Although the stock administration function in the organization typically does not, by virtue of job description, have a direct role in remitting tax withholdings to the IRS, the function certainly can have a material impact in generating those withholdings. The most common area where stock plan activity puts payroll deposits at risk of penalties is where those transactions (either as stand alone, or, in combination with the company’s other tax withholdings for that day) are in excess of $100,000 on a single day, triggering the requirement that those dollars must be remitted to the IRS within one business day. As a result, you should care about what happens if Payroll (or whomever is tasked with interfacing with the IRS) cannot meet the deadline in a timely manner. If the stock administration function has any role in the delay, then eyes are likely to turn towards to you as potentially significant dollars are spent on penalties and interest. It’s one thing to know that there are some abstract penalties involved, but when you put a quantity to it, the significance of it starts to set in.

Dollars and Sense

Here’s the bottom line about what could be levied by the IRS for late tax deposits:

  • Interest: Any underpayment of taxes due may trigger interest. Typically, the amount of interest is equal to the Federal short-term interest rate plus 3%. The 3% may increase to 5% in cases where the underpayment was in excess of 100k for periods after the IRS issues a notice of proposed deficiency. I’m told that it may be possible to avoid the interest part of the consequence if any underpayment of FICA or Federal tax withholdings is corrected by the due date of the Federal Form 941 relative to the period in which the underpayment error occurred.
  • Penalties: First off, the amount of the penalty will directly correlate to just how late the taxes are deposited with the IRS. If the deposit is made within 5 days of the deadline, the penalty is 2%. For periods more than 5 days to not more than 15 days, the penalty increases to 5%. Deposits more than 15 days late are subject to a 10% penalty. The amount could potentially increase to 15% if not paid within a certain time frame after the IRS notifies the company of the penalty.

Yikes! What’s a Stock Administrator to Do?

There are certain transaction types where the IRS has given directive that allows the company ample time to receive funds and make a deposit. For example, in the case of a non-qualified stock option exercise, the funds are due to the IRS within one business day of the settlement of the exercise (if a broker trade was involved, and provided the settlement occurs within 3 days of the exercise). This allows the company to actually receive the funds, and then turn around and remit them to the IRS. I should clarify that this interpretation stems from an IRS 2003 Field Directive that basically says that in absence of other guidance, the IRS auditors won’t challenge deposits made within that time frame (there is no regulation that actually says taxes can be paid on T+4). Most companies now operate in reliance on that directive.

Other transactions, such as those involving the vesting of restricted stock awards or units, do not have such a settlement period (at least not one clearly defined by the IRS – there simply is no guidance in this area). For this reason, most companies operate on the assumption that taxes must be deposited within one business day of the vesting date (when combined withholdings for the company are in excess of 100k on the vesting date). Since in most cases, the amount of tax due isn’t actually known by the company until the date of the vest (and this may be late in the day, after the stock market closes, depending on how you define the fair market value to be used in the calculation), it’s very challenging to meet the IRS’s requirement for one-business day deposits of those amounts in excess of $100,000. In considering the potential interest and penalties for failing to deposit on time, many companies have adopted the practice of estimating their tax deposits and then doing a subsequent true-up. One piece of advice: if you’re going to estimate taxes due – overestimate rather than underestimate. If you overestimate you avoid all potential penalties and interest. If you underestimate, you still may trigger penalties and interest. According to our NASPP Quick Survey (May 2011) on Restricted Stock Units and Awards, 38.9% of companies say they deposit restricted stock tax wtihholdings timely based on an estimate (compared to only 9.5% who were depositing on time using the actual liability instead of an estimate). Estimating deposits requires cash flow planning on the part of the company, but is a proactive way to avoid getting into a penalty situation with the IRS.

The Bottom Line

In short, failure to make timely tax deposits can become a costly situation for companies, particularly when repeat offenses or overly large deposits are involved. This is not an area where a simple $50 or $100 fine is slapped per occurrence. With penalties equivalent to a direct percentage of the tax deposit amount, and interest rates of more than 3%, the dollars can add up quickly. These consequences further underscore the need for Payroll and the Stock Plan function to have a close working relationship. To learn more about the inner-workings of Payroll and how to better forge that relationship, you may be interested in our upcoming webcast (February 26th) on Understanding Payroll Administration Related to Equity Compensation.


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February 20, 2013

NASPP To Do List

Important 21st Annual NASPP Conference Deadlines

  • Speaking Proposals NASPP Conference speaking proposals are due a week from Friday, by March 1.  With the Conference in September, we are on a tight schedule this year and cannot make any exceptions to this deadline, no matter how dire the circumstances. If you feel the flu coming on, plan accordingly.
  • Early-Bird Registration: For those of you that are not hoping to speak at the Conference, the deadline for early-bird registration ends on Friday, March 8. This deadline also will not be extended. Don’t pay more than you have to for the Conference; register by March 8.

Quick Survey on Globally Mobile Employees
Take our quick survey on globally mobile employees. With just eight questions, we’re serious about the “quick” part–you can complete the survey in less than five minutes!

We Have a Winner!
Congratulations to Elizabeth Dodge of Stock & Option Solutions! Elizabeth won our raffle for the free registration to the CEP Symposium. 


Here’s your NASPP “To Do List” for the week:

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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February 19, 2013

The $16K Per Day Mistake

We recently posted an alert about the filing thresholds under the Hart-Scott-Rodino Act increasing.  The alert reminded me that this is a topic I’ve been meaning to blog about for a while now.

The HSR Act

The Hart-Scott-Rodino Antitrust Improvement Act was enacted to provide the Federal Trade Commission and the Department of Justice with advance notice of large mergers and acquisitions by requiring the entities involved in the transaction to file reports with the FTC and the DOJ. 

What does this have to do with stock compensation? I’m glad you asked! It turns out that the HSR Act applies to individuals as well as corporations.  If an individual’s holdings in a company’s stock exceed the filing thresholds, that individual is responsible for making the required filings with the FTC and the DOJ. 

The Filing Thresholds

Any acquisition that does not cause an individual’s holdings to exceed more than $70.9 million is exempt from the filing requirement. 

Any acquisition that causes an individual’s holdings to exceed $283.6 million triggers the filing requirements.

Stuck in the Middle With You

Transactions that cause an individual’s holdings to fall somewhere in between these two thresholds trigger the filing requirements only if the smaller party in the transaction has annual net sales/assets exceeding $14.2 million AND the larger party has annual net sales/assets exceeding $141.8 million.

If you aren’t confused about this, you are probably a lawyer that specializes in antitrust laws.  The rest of you are likely wondering how these “size of party” thresholds apply when individuals are acquiring company stock. I’ll provide some more information on this next week. For now, however, I think the key takeaway is that if an executive at your company is in danger of acquiring more than $70.9 million in company stock, it’s time to get the lawyers involved so they can figure all this out. 

Thresholds Increase Annually

The size of transaction and the size of party thresholds increase every year (they just increased as of February 11 of this year). 

Filing Requirements and Penalties

The filings must be completed before the acquisition is closed.  In the context of a merger, there is typically an extended period between when the parties agree to the deal and when it closes, providing time to complete these filings. Where an individual becomes subject to the filing requirements as a result of an acquisition of stock through, say, the company’s stock compensation program, there may not be as much time to make the filing. Thus, monitoring executive’s stock ownership levels with respect to the minimum filing threshold should, at a minimum, be part of your annual procedures.  Where executives are close to the threshold, this should be verified before every transaction.

There are some steep fees that go along with the filings–the minimum filing fee is $45,000. But the penalty for not making the filings can be up to $16,000 per day–three days late and the penalty could already exceed the filing fees.  We are aware of an executive that was fined $500,000 for failure to comply with the HSR Act. Luckily, according to an O’Melveny & Myers memo, first-time offenders are rarely fined, provided that the error was inadvertent and the filings are completed as soon as the error is identified. 

Stay Tuned

Next week I’ll discuss more specifically how the HSR act applies to stock compensation. If you just can’t wait ’til then, see the NASPP’s new HSR Act Portal for more information.

– Barbara

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February 18, 2013

NASPP Chapter Meetings

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

Austin: Jon Burg and Daniel Kapinos of Radford present “Capped Stock Awards: The Next Generation.” (Wednesday, February 20, 11:30 AM)

Michigan: Meridith Fronza and Scott Walter of Deloitte present “2012 Deloitte Global Equity Plan Survey – Sharing Value and U.S. and Global Employment Tax Issues around Equity Compensation.” (Wednesday, February 20, 11:00 AM)

Silicon Valley: Join Barbara Baksa of the NASPP and Susan Garvin of Stock & Option Solutions for a lively debate as they present “Stock Plan Gladiators: Best Practices Worth Fighting For.” (Wednesday, February 20, 11:30 AM)

Los Angeles: David Howell of Plante Moran presents “What’s It Worth? Valuation of Equity Compensation In Private Companies.” (Thursday, February 21, 1:00 PM, webcast only)


February 14, 2013

Latest Trends in Share Utilization

Happy Valentine’s Day, everyone! Love is in the air in many ways, and according to Towers Watson’s most recent study on share utilization in Fortune 500 companies, one area where amore is in full bloom is our industry’s ongoing affair with full value awards. In today’s blog I share some of the key findings of that study.

Full Value Dominance

The Towers Watson study was based on an analysis of 2012 proxy disclosures. Of particular note:

  • Full value awards have not just permeated long term incentive (LTI) programs in the Fortune 500, but they now can claim the title of dominance – representing a whopping 79% of all equity awards granted (based on the fair value).
  • Looking at the number of shares granted, there has been a 33% decline in the use of appreciation awards (e.g. stock options) in the past 5 years, and a 72% increase in the use of full-value awards during the same period.
  • 71% of studied companies granted a mix of full value and appreciation awards in 2011; 23% granted only full value awards (up from 19% in 2010); 3% granted only appreciation awards; 2% granted no equity awards.
  • Run rates continue a downward trend, to a median of 0.9% for Fortune 500 companies in 2011.

The mix of equity in long term incentive plans continues to evolve. What seems certain for now is that full value awards have claimed their stake in the ground and will continue to be the largest component of equity incentive programs for the time being. At the same time, the use of appreciation vehicles continues to decline, but not disappear. Appreciation awards, though smaller in numbers, still remain an important part of the equity incentive mix.

Submit Your Member Profile; Win a Prize!

Submit your NASPP member profile by this Friday, February 15, and you’ll be entered in a drawing for a free registration to the CEP Symposium. You must include a picture with your profile to be eligible for the drawing.

NASPP members that have already submitted their profile can email me to be included in the drawing (but you have to have provided a picture for your profile to be eligible for the drawing).


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February 13, 2013

NASPP To Do List

Early-Bird for Online Fundamentals Ends Friday
Led by the industry’s top professionals, the NASPP’s acclaimed online course, Stock Plan Fundamentals, provides an unparalleled introduction to stock compensation. The course covers both the regulatory framework and day-to-day procedures critical for stock plan management; it’s perfect for anyone new to the field or that needs a refresher.  It’s also a great way to prepare for the CEP Level 1 exam.  Register by this Friday, February 15, to make sure you don’t miss out on the early-bird rate. 

Submit Your Member Profile; Win a Prize!
Submit your NASPP member profile by February 15 and you’ll be entered in a drawing for a free registration to the CEP Symposium. You must include a picture with your profile to be eligible for the drawing.

NASPP members that have already submitted their profile can email Jenn Namazi to be included in the drawing (but you have to have provided a picture for your profile to be eligible for the drawing).

Here’s your NASPP “To Do List” for the week:

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