The NASPP Blog

Monthly Archives: April 2015

April 28, 2015

Pay-for-Performance Disclosures: Coming Soon?

It’s beginning to look this is going to be the year of Dodd-Frank rulemaking at the SEC.  We may have the CEO pay-ratio disclosure rules by the end of the year, the SEC recently proposed rules for hedging policy disclosures, and now the SEC appears poised to propose the pay-for-performance disclosure rules this week.

Readers will recall that Dodd-Frank requires the SEC to promulgate rules requiring public companies to disclose how executive compensation related to company financial performance (see my blog entry, “Beyond Say-on-Pay,” August 5, 2010). In his April 24 blog on, Broc Romanek noted that the SEC has calendared an open Commission meeting for this Wednesday, April 29, to propose the new rules.

Broc’s Eight Cents

Broc offered eight points of analysis on this disclosure:

1. Companies can get the data and crunch the numbers. I don’t think that the actual implementation itself will be difficult.

2. But I think what could be particularly worrisome is having yet another metric to figure out what the CEO got paid and trying to explain all of it.

3. You know how companies have different schemes for granting equity, including type and timing. If the rules tend to try to fit everyone into a narrow bucket in order to try to line everyone up for comparability, and a company’s program doesn’t quite fit neatly into it, then the disclosure can get even more complicated.

4. There are two elements: compensation and financial performance. What is meant by “financial performance” for example? Maybe the SEC will just ask for stock price, maybe they’ll go broader.

5. A tricky part likely will be the explanation of what it all means—and how it works with the Summary Compensation Table.

6. I don’t think it will be difficult to produce the “math” showing the relationship of realized/realizable pay relative to TSR and other financial metrics, so long as:

– There’s a tight definition of realized pay

– We know what period to measure TSR (and if multiple periods can be used)

– We know what other performance measures can be included (if any) and if they can be as prominent in the disclosure as TSR

7. Another area of potential difficulty is explaining why there is not a tight or tighter correlation with TSR (“we use metrics other than TSR to drive our compensation; thus, the correlation is not very strong; on the other hand, our compensation is based on Revenue Growth and EBITDA Margin, and as Exhibit II demonstrates, the correlation is very significant”).

In addition, Dodd-Frank has no requirement for a relative ranking, and companies will need to decide if TSR and Pay should be put in some type of relative context (“relative to our peers, our realizable pay was well below the peers; so even though compensation is not tightly aligned with stock price performance the last 3 years, we did not pay our bums very much).

8. I think what may be the most difficult to address is a requirement to discuss what the Compensation Committee plans to change—and why is it now that it has performed the analysis?

Let’s Make It a Dime; Here’s My Two Cents

I’m not sure that the problem with executive compensation is that companies aren’t disclosing enough information about it.  Isn’t this what the CD&A is for?  Isn’t this why the stock performance graph is included with the executive compensation disclosures?

Moreover, does anyone think that any company will just come out and say that their executive compensation is not based on or tied to company performance in any way?  I’m just not sure that public companies need one more disclosure to try to convince their shareholders that the amount of compensation they are paying to their executives is justified by the company’s performance.

– Barbara

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April 27, 2015

NASPP Chapter Meetings

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

Seattle: The chapter hosts an evening social in appreciation of its members. (Monday, April 27, 6:00 PM)

Houston: The chapter hosts a presentation on “How to Plump Your Piggy Bank: Cost Savings Strategies for the Stock Compensation Professional.”  The meeting will be followed by a social.  (Wednesday, April 29, 4:00 PM)

Las Vegas: Narine Karakhanyan of Equity Methods presents “New Trends in Equity Design and How They Will Impact You.” (Wednesday, April 29, 11:30 AM)

Orange County: Tara Tays of Deloitte Consulting presents “A Look at LTI and ESPP Design Practices Among California Companies.” (Wednesday, April 29, 11:30 AM)

Silicon Valley: Marlene Zobayan of Rutlen Associates, Carol Pleva of Atmel, and Veena Bhatia at Gilead Sciences present “The Top 10 Do’s and Don’ts of Mobility.” (Wednesday, April 29, 11:30 AM)

Dallas The chapter hosts the 3rd Annual Southwest Roundup: Equity Compensation Workshop. This all-day event features keynote by Kristin Kaufman, author of Is This Seat Taken? It’s Never Too Late to Find the Right Seat, and presentations on employee communication, executive compensation, and industry trends and best practices. (Friday, May 1, 8:30 AM)


April 23, 2015

Ask the Expert: Accounting Questions Answered!

Let’s face it: it’s hard to be a jack-of-all trades in equity compensation. In some ways we need to take on that role, because we have to know at least a little bit about a lot of things. The saying “you don’t know what you don’t know” really applies, and with that comes a quest to continue to learn about the many different areas that fit together to make up the components of administering an equity incentive program. One thing I’ve found incredibly helpful over the years is to have access to industry experts – for all those things I don’t know about a particular topic. On that note, I recently caught up with Elizabeth Dodge of Stock & Option Solutions, an expert in most things related to accounting for equity compensation. Keep reading to find out some of the things she wished more people would ask her!

Ask the Expert

Before I touch on some of the accounting things that companies should be thinking about, I want to remind everyone that one of the most popular type of NASPP webcasts is the Ask the Expert series of webcasts. Essentially, a topic is picked and people can submit questions to the panel of experts in advance of the webcast. The presentation is a compilation of questions and answers. This has always been a popular webcast format for us, and I can see why. It’s a great opportunity for people to get perspective on their real life questions. Our next Ask the Expert webcast will be next week on April 29th. It’s an accounting topic, Ask the Experts: Accounting for Equity Compensation. The deadline has passed to submit questions, but if you have burning accounting questions, it’s possible others may have submitted yours.

Forfeiture Rates and Disclosure Mistakes

In preparation for next week’s webcast, I caught up with Elizabeth to ask her some of my burning questions. You can hear her full interview (it’s short – about 10 minutes long) in the latest episode of our Equity Expert podcast series. All episodes are free to NASPP members and non-members.

I asked Elizabeth about forfeiture rates and whether companies should be using multiple forfeiture rates to haircut their accounting expense. Elizabeth’s bottom line answer was that if companies want to use two forfeiture rates they can do so – one for executives and one for everyone else. But ultimately the forfeiture rate is a game of estimates, and it’s likely not accurate anyway. In her opinion, there’s no need to spend eons of time and energy breaking dissecting things using multiple forfeiture rates (anything more than two rates).

My next question centered on common mistakes she sees companies make in accounting for non-employees. Elizabeth reports that this is an area where she sees lots of mistakes. One reason for this may be technology limitations, as many systems were designed based on older accounting guidance that required accelerated attribution of the accounting for non-employees (pre-FAS 123(R), now ASC 718). Current accounting regulations permit but do not require accelerated attribution of expense. What’s most important now is that companies (in an ideal world) use the same methodology for recognizing expense across the board – for both employee and non-employee grants. So if companies are using straight line expensing for their employee grants, they should use straight line expensing for their non-employee grants. The same applies if the accelerated attribution approach is taken. Some systems may still default to the accelerated attribution method of accounting for non-employees, even if the company is using straight-line accounting for employee and non-employee awards. This is an area of caution in ensuring non-employee grants are accounted for properly.

To hear more of Elizabeth’s tidbits, including common mistakes she sees in ASC 718 disclosures, check out her full podcast interview. And don’t forget to join Elizabeth and her co-panelists in answering many more accounting questions in next week’s Ask the Experts webcast.


April 22, 2015

NASPP To Do List

Last Chance for NASPP Conference Early-Bird Rate!
The early-bird rate for the 23rd Annual NASPP Conference expires this Friday, April 24.  The Conference will be held from October 27-30 in San Diego.  Don’t miss this chance to save on registration!

Equity Compensation for Private Companies: The Six Pitfalls to Avoid
This white paper from Certent looks at common mistakes private companies make when it comes to their stock plans, including process pitfalls, spreadsheet gotchas, short-term thinking, and more.

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

– Barbara

April 21, 2015

Employment Status Changes, Part II

Last week, I covered the basic rules that apply for tax purposes when options are exercised or awards pay out after an individual has changed status from employee to non-employee or vice versa.  Today I discuss a few more questions related to employment status changes.

Is it necessary that the consulting services be substantive?

When employees change to consultant status an important consideration is whether the consulting services are truly substantive.  Sometimes the “consulting services” former employees are providing are a little (or a lot) loosey goosey (to use a technical term). For example, sometimes employees are allowed to continue vesting in exchange for simply being available to answer questions or for not working for a competitor.  It this case, it’s questionable whether the award is truly payment for consulting services.

A few questions to ask to assess the nature of the consulting services former employees are performing include whether the former employee has any actual deliverables, who is monitoring the former employee’s performance and how will this be tracked, and will the award be forfeited if the services are not performed.

If the services aren’t substantive, it’s likely that all of the compensation paid under the award would be attributable to services performed as an employee (even if vesting continues after the employee’s termination) and subject to withholding/Form W-2 reporting.

Is the treatment different for an executive who becomes a non-employee director?

Nope. The same basic rules that I discussed last week still apply. The only difference is that I think it’s safe to presume that the services performed as an outside director will be substantive (unless the director position is merely ceremonial).

What about an outside director who is hired on as an executive?

The same basic rules still apply, except in reverse.  For options and awards that fully vested while the individual was an outside director, you would not need to withhold taxes and you would report the income on Form 1099-MISC, even if the option/award is settled after the individual’s hire date.

For options and awards granted prior to the individual’s hire date but that vest afterwards, you’d use the same income allocation method that I described last week. As I noted, there are several reasonable approaches to this allocation; make sure the approach you use is consistent with what you would do for an employee changing to consultant status.

What about a situation where we hire one of our consultants?

This often doesn’t come up in that situation, because a lot of companies don’t grant options or awards to consultants. But if the consultant had been granted an option or award, this would be handled in the same manner as an outside director that is hired (see the prior question).

What if several years have elapsed since the individual was an employee?

Still the same; the rules don’t change regardless of how much time has elapsed since the individual was an employee.  The IRS doesn’t care how long it takes you to pay former employees; if the payment is for services they performed as employees, it is subject to withholding and has to be reported on a Form W-2.

So even if several years have elapsed since the change in status, you still have to assess how much of the option/award payout is attributable to services performed as an employee and withhold/report appropriately.

What if the individual is subject to tax outside the United States?

This is a question for your global stock plan advisors. The tax laws outside the United States that apply to non-employees can be very different than the laws that apply in the United States. Moreover, they can vary from country to country.  Hopefully the change in status doesn’t also involve a change in tax jurisdiction; that situation is complexity squared.

Finally, When In Doubt

If you aren’t sure of the correct treatment, the conservative approach (in the United States—I really can’t address the non-US tax considerations) is probably going to be to treat the income as compensation for services performed as an employee (in other words, to withhold taxes and report it on Form W-2).

What is the US tax reg cite for all of this?

My understanding is that none of this is actually specified in the tax regs—not even the basic rules I reviewed last week.  This is a practice that has developed over time based on what seems like a reasonable approach.

– Barbara



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April 20, 2015

NASPP Chapter Meetings

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

Los Angeles:  Ken Stoler and Grant Peterson of PwC discuss the proposed changes to ASC 718. (Monday, April 20, 11:30 AM)

Sacramento: Ken Stoler of PwC presents “What’s the FASB Doing to Stock Comp Accounting Now?” (Tuesday, April 21, 11:30 AM)

San Francisco: One meeting; two topics! Emily Cervino of Fidelity and Carly Campioni of Radford present “Bringing ESPP Data to Life,” and Becky Bruno of SearchWright presents “How to Polish Your Resume and Shine During an Interview.” (Wednesday, April 22, 11:30 AM)

Denver: John Doyle of International Law Solutions presents “How to Navigate Problem Countries.” (Thursday, April 23, noon)

Ohio: Kaye Thomas of Fairmark Press presents “10 Mistakes Your Participants Are Making With Their Stock Plans You Need To Know About.” (Thursday, April 23, 11:15 AM)

I will be at the San Francisco chapter meeting; I hope to see you there!

– Barbara


April 17, 2015

CIC: The Death of Automatic Accelerated Vesting?

Last week a tiny blurb in the blog caught my eye. What it said was: “Last week, the Council of Institutional Investors approved a policy opposing automatic accelerated vesting of unearned equity in the event of a merger or other change-in-control. The recommended best-practice policy states that boards should have discretion to permit full, partial or no accelerated vesting of equity awards not yet awarded, paid or vested.” What’s the big deal about that? In today’s NASPP blog I’ll explore whether this means the death of automatic vesting provisions in the stock plan for change in control situations.

A Popularity Tug of War

Institutional investors and their advisers haven’t been shy in labeling automatic vesting upon change in control (“CIC”) as a negative stock plan feature. ISS’s new Equity Plan Scorecard (as explained in the EPSC FAQs) puts this type of provision into the “could be negative and work against you” category (my loose liberty taken in interpreting here). In some cases, automatic CIC vesting could be considered egregious and result in an automatic “no” vote against a plan. And yet, according to the NASPP/Deloitte 2013 Stock Plan Design survey, the majority of companies who do allow for vesting acceleration upon a change of control have an automatic provision; far more than the number of companies who have incorporated board discretion into the determination about whether to accelerate vesting on all or some stock options and awards. With the Council of Institutional Investors taking a firm policy stance on the topic, a figurative tug-of-war seems to be more imminent – many stock plans have a feature providing for automatic acceleration upon CIC; the institutional investors are becoming stronger and more vocal in fighting the “automatic” aspect of these provisions. So who will win out? Does this mean that a new wave of stock plan amendments that will eliminate automatic vesting and implement more board discretion over these decisions? Time will tell, but it’s not inconceivable that next time your plan is up approval or amendment, this feature may need to be reconsidered.

Best Practice vs. Practice

If provisions that allow for automatic vesting upon a CIC event are not favorable, then what is? As described in the first part of this blog, a scenario where the company’s board has the ultimate say in whether or not vesting should accelerate appears to be the emerging preferred and best practice. It seems like this would be a win-win – the board would still retain ultimate decision making control, and shareholders would be reassured that automatic vesting is off the table. Given that many plans do currently have automatic vesting provisions, it seems there is some plan amendment work to be done. The timing and mechanics obviously are left to each company to determine based on their own internal factors. If, however, your company is in the process of drafting a new plan, or considering other amendments to the existing plan, the topic of change-in-control provisions may warrant some discussion with your advisers.


April 15, 2015

NASPP To Do List

Last Chance: Global Equity Incentives Survey!
Today is your last chance to participate in the NASPP’s 2015 edition of our Global Equity Incentives Survey (co-sponsored with PwC)!  Don’t miss out–issuers have to participate to have access to the full survey results.

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

– Barbara


April 14, 2015

Taxation When Employment Status Has Changed

For today’s blog entry, I discuss how stock plan transactions are taxed when they occur after the award holder has changed employment status (either from employee to non-employee or vice versa).  This is a question that I am asked quite frequently; often enough that I’d like to have a handy blog entry that I can point to that explains the answer.

The basic rule here is that the treatment is tied to the services that were performed to earn the compensation paid under the award. If the vesting in the award is attributable to services performed as an employee, the income paid under it is subject to withholding and reportable on Form W-2.  Likewise, if vesting is attributable to services performed as a non-employee, the income is not subject to withholding and is reportable on Form 1099-MISC.

Where an award continues vesting after a change in status, the income recognized upon settlement (exercise of NQSOs or vest/payout of restricted stock/RSUs) is allocated based on the portion of the vesting period that elapsed prior to the change in status.

For example, say that an employee is granted an award of RSUs that vests in one year.  After nine months, the employee changes to consultant status.  The award is paid out at a value of $10,000 on the vest date.  Because the change in status occurred after three-fourths of the vesting period had elapsed, 75% of the income, or $7,500, is subject to tax withholding and is reportable on the employee’s Form W-2.  The remaining $2,500 of income is not subject to withholding and is reportable on Form 1099-MISC.

What if the award is fully vested at the time of the change in status?

In this case, the tax treatment doesn’t change; it is based on the award holder’s status when the award vested. For example, say an employee fully vests in a award and then later terminates and becomes a consultant.  Because the award fully vested while the individual was an employee, the award was earned entirely for services performed as an employee and all of the income realized upon settlement (exercise of NQSOs or vest/payout of restricted stock/RSUs) is subject to withholding and is reportable on Form W-2.

This is true no matter how long (days, months, years) elapse before the settlement.  Under Treas. Reg. §31.3401(a)-1(a)(5), payments for services performed while an employee are considered wages (and are subject to withholding, etc.) regardless of whether or not the employment relationship exists at the time the payments are made.

What is the precise formula used to allocate the income?

There isn’t a precise formula for this.  We asked Stephen Tackney, Deputy Associate Chief Counsel of the IRS, about this at the NASPP Conference a couple of years ago.  He thought that any reasonable method would be acceptable, provided the company applies it consistently.

The example I used above is straight-forward; awards with incremental vesting are trickier.  For example, say an employee is granted an NQSO that vests in three annual installments.  15 months later, the employee changes to consultant status.

The first vesting tranche is easy: that tranche fully vested while the individual was an employee, so when those shares are exercised, the entire gain is subject to withholding and reportable on Form W-2.

There’s some room for interpretation with respect to the second and third tranches, however.  One approach is to treat each tranche as a separate award (this is akin to the accelerated attribution method under ASC 718).  Under this approach, the second tranche is considered to vest over a 24-month period. The employee changed status 15 months into that 24-month period, so 62.5% (15 months divided by 24 months) of that tranche is attributable to services performed as an employee. If this tranche is exercised at a gain of $10,000, $6,250 is subject to withholding and reported on Form W-2. The remaining $3,750 is reported on Form 1099-MISC and is not subject to withholding.  The same process applies to the third tranche, except that this tranche vests over a 36-month period, so only 41.7% of this tranche is attributable to services performed as an employee.

This is probably the most conservative approach; it is used in other areas of the tax regulation (e.g., mobile employees) and is also used in the accounting literature applicable to stock compensation.  But it isn’t the only reasonable approach (just as there are other reasonable approaches when recording expense for awards under ASC 718) and it isn’t very practical for awards with monthly or quarterly vesting.  It might also be reasonable to view each tranche as starting to vest only after the prior tranche has finished vesting.  In this approach, each tranche in my example covers only 12 months of service.  Again, the first tranche would be fully attributable to service as an employee.  Only 25% of the second tranche would be attributable to services as an employee (three months divided by 12 months).  And the third tranche would be fully attributable to services performed as a consultant.

These are just two approaches, there might be other approaches that are reasonable as well.  Whatever approach you decide to use, be consistent about it (for both employees going to consultant status as well as consultants changing to employee status).

Read “Employment Status Changes, Part II” to learn about additional considerations and complexities relating to changes in employment status.

– Barbara

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April 14, 2015

NASPP Chapter Meetings

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

Philadelphia: Elena Thomas and Lisa Klevence of Plan Management will present “Implementing Performance Awards without Losing Your Mind.” (Tuesday, April 14, 8:30 AM)

Wisconsin: Jessica Pancamo of BDO presents “Granting Global Equity: Best Practices from Start to Finish and Beyond.” (Tuesday, April 14, 11:45 AM)