Everyone else is talking about Brexit (the vote in the UK to leave the EU), why should the NASPP Blog be left out of the conversation? For today’s entry, I discuss what Brexit might mean for your stock plans.
The good news is that the vote is advisory, so it isn’t as if the UK has immediately exited the EU. They are still part of the EU for the short-term. The UK government and the EU have to come to an agreement about how the exit plan will work and various experts have indicated that this could take two years or more.
How Will Stock Plans Be Impacted?
By now, we are all too familiar with the EU Directives that impact stock compensation. While the Directives are complicated enough, in and of themselves, if the UK leaves the EU, things could get a lot more complicated. The UK will have it’s own rules that may or may not be the same as the rules in the Directives. A recent alert by Baker & McKenzie summaries a number of areas in which stock compensation offered to employees in the UK could be affected.
Securities Laws: The EU Prospectus Directive (including both the filing requirement and exemptions) will no longer apply in the UK. This could turn out to be better or worse than the way things are now: the UK could require companies offering stock compensation to file a prospectus (probably worse), could provide an exemption for stock plans (probably the same as now for many companies, depending on the requirements for exemption), or could recognize prospectuses filed in the EU (or even in countries outside of the EU, such as the United States) (the same or better).
Data Privacy: The EU Data Privacy Directive would also no longer apply in the UK. The EU has proposed new rules for this directive, so right now, we don’t know what the final rules will be for any countries in the EU, much less the UK. But once the UK has left the EU, they can determine their own rules; maybe these rules would be similar to the rules that the EU adopts, maybe not. One bit of good news is that Baker & McKenzie notes that “It would be surprising … if the UK would not consider consent to be a valid ground to collect, process and transfer personal data.” Since that is how most companies comply with the EU Data Privacy Directive for their stock plans, little may change here.
Discrimination: There are a number of EU Directives that prohibit discrimination against specified groups of employees. Those Directives would also no longer apply in the UK, but the UK would be free to adopt its own rules on discrimination. Baker & McKenzie notes that they do not expect to see substantial changes here.
Social Insurance, Too
An alert by EY notes that Brexit may also impact the social insurance obligations of mobile employees, their employers’ compliance obligations, and the benefits mobile employees are entitled to. Currently, the EU governs how social insurance applies when employees move between countries in the EU. Unless the UK comes to an agreement with the EU that the EU rules still apply to employees moving between the UK and other EU countries, individual agreements would have to be put in place between the EU and all the EU countries. Some of these agreements exist, but they haven’t been updated since the EU established its rules. Many have expired or don’t address how mobility works in today’s world. This could get ugly.
What About Companies that Don’t Have Stock Plan Participants in the UK?
For those companies, there shouldn’t be any direct impact to their stock plans (other than the impact of stock price volatility resulting from the economic uncertainty caused by Brexit). But, if you are a US-based company with a multi-national stock plan, chances are that you have stock plan participants in the UK. In the NASPP/PwC Global Equity Incentives Survey, the UK is second only to the US in terms of countries where respondents have employees and offer stock compensation.
More to Come
I’m sure there will be more implications to think about as the UK’s exit looms closer. At this year’s NASPP Conference, our perennially popular session, “Around the World in 60 Minutes: Key International Updates” will most certainly have a lot to say about Brexit, as will the session “Making Sense of Europe.” Be sure to attend one or both of these sessions so you are up-to-date on how your stock plan participants in the UK will be affected.
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NASPP To Do List
Here’s your NASPP To Do List for the week:
A few weeks ago I shared a couple of infographics I’d seen on ESPP Plans and asked for readers to share more of their visually inspired communications. My thought was that a stock plan picture is indeed worth a thousand words (think of all those plan terms boiled down to a few pictures that a participant can digest.) I’m happy to report that I got answers, and more sample graphics. In today’s follow on blog, you can view them, too.
Restricted Stock at a Glance
Emily Cervino of Fidelity graciously shared a stock plan graphic on Restricted Stock Awards. As soon as I saw it, I realized that the third parties who support issuer stock plans have much to offer when it comes to communications. This takes a lot of the communication burden off the stock plan administrator and directs participants to the provider prepared content for learning.
The Marriage of Video and Infographics
Bruce Brumberg of myStockOptions.com pointed out to me that infographics don’t have to exist on their own. myStockOptions.com has an entire suite of free videos that incorporate infographics. They are publicly available, so feel free to take a look! I’ve included the link to one on Stock Options: NQSO Taxation.
Charts Count Too!
Last but not least, Terry Adamson of Aon Hewitt suggested that good charts can be effective visuals, too. His team has a suite of charts that allow participants to compare their performance awards to the performance of peer companies. Here’s a sample:
What’s Your Inspiration?
Are those creative juices flowing yet?
Inc. magazine recently published some eye popping statistics about visual content. While the statistics were oriented towards marketing, I think many apply to stock plans – after all, communicating with participants is very much about marketing the aspects and features of your stock plan as a benefit. Some of the tidbits about visual communications included in the article:
The average person gets distracted in eight seconds, though a mere 2.8 seconds is enough to distract some people.
81 percent of people only skim the content they read online. (Usability expert Jakob Nielsen has written that the average user reads at most 20 to 28 percent of words during an average visit.)
People form a first impression in a mere 50 milliseconds.
An estimated 84 percent of communications will be visual by 2018.
An estimated 79 percent of internet traffic will be video content by 2018.
Posts that include images produce 650 percent higher engagement than text-only posts
If your stock plan communications are still very text heavy, it’s time to explore how infographics, video, and charts can take those communications to a more effective level.
And, I’m perfectly willing to do another follow on to this topic as interest warrants – I’d love to hear from some of you issuers about what you’re doing to include visual content in your participant messaging. Thanks to all those who shared their visuals with us!
The good news from the FASB just keeps coming. First, the simplification of ASC 718 and now the board has decided to include awards granted to nonemployees under the scope of ASC 718.
Well over a decade ago, before even the adoption of FAS 123(R), the FASB decided that awards granted to nonemployees (except outside directors), were fundamentally different than awards granted to employees and should be accounted for differently. “What,” you say, “that’s crazy! Why would they do that?” I agree, it’s totally crazy and I can’t explain why the FASB does anything that they do. Really, stop asking me to explain their behavior.
The upshot of this decision is that awards to nonemployees were subject to variable/mark-to-market/liability treatment until vested. And the accounting for situations in which individuals changed employment status were so complicated that no one really knew how it was supposed to work.
The FASB’s Decision
Around the same time that the FASB decided to simplify ASC 718, they also directed the staff to investigate whether it would make sense for awards granted to nonemployees to be included within the scope of ASC 718. Now, a year and a half later, they have decided that this does make sense.
This means that once the amendment is finalized, awards granted to all nonemployees (consultants, independent contractors, leased employees, etc.) will be accounted for in the same manner as awards to employees. No more complicated accounting when individuals change employment status (unless the individual’s awards are modified in connection with the change in status, in which case, modification accounting is still required). And there’s a bunch of even crazier stuff companies were supposed to be doing for nonemployee awards once the awards were vested and to account for performance conditions that no one seemed to know about; now we never need to know about that stuff.
Companies that are currently accounting for awards granted to nonemployees will use the modified retrospective method for the transition (which we are all now familiar with once again, because we had to figure it out for the simplification project, see “Update to ASC 718: Transition“).
Not So Fast
We still have a long ways to go on this. First, the FASB has to issue an exposure draft of the proposed amendment, we all have to read it and comment on it (oh joy), the FASB has to consider all our comments (or at least pretend to), the staff has to draft the final amendment, the FASB has to vote to approve it, and companies have to adopt it. So you aren’t going to be changing how you account for awards to nonemployees anytime soon.
Thanks to Elizabeth Dodge of Equity Plan Solutions for bringing this to my attention and to Ken Stoler of PwC for translating the FASB’s accounting-speak for me.
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ASU 2016-09 Early Adopters
Check out PwC’s analysis of the 44 companies that have already adopted the update to ASC 718.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Here’s what’s happening at your local NASPP chapter this week:
Boston: Steve Antuna of Guidespark presents a discussion that will focus on employee communication challenges, trends, and best practices for helping employees understand complex topics. (Thursday, June 23, 8:30 a.m.)
Nashville: Jennifer Faucett, Waller James Bristol, and Waller Mark Hickman present “Don’t Get Caught in a Trap! IRC Section 409A Basics, Pitfalls, and Best Practices.” (Thursday, June 23, 7:30 a.m.)
Philadelphia: Robert Slaughter of E*TRADE Financial Corporate Services presents “Your Equity Practices Under a Hot Iron.” (Thursday, June 23 8:30 a.m.)
As we reported in the Nov-Dec 2015 NASPP Advisor, Twitter CEO Jack Dorsey announced in October that he is giving 6.8 million shares of common stock that he owns back to Twitter, to be used in Twitter’s stock plan. I started looking into this a little further and found some interesting details.
Not So Fast
Dorsey donated shares he already owned to the plan, unlike other CEOs who have given back outstanding options or awards. Because of this, the shares can’t simply be added to the stock plan. For most companies, the only way to add shares reacquired from investors into a stock plan is to submit the allocation to a shareholder vote.
Why Not Contribute Awards?
It would have been less complicated for Dorsey to have agreed to the cancellation of outstanding options or awards, as other CEOs have done (e.g., see our coverage of LinkedIn CEO Jeff Weiner’s decision to forgo his stock grant in the Mar-Apr 2016 Advisor). These shares can be added back to the plan without shareholder approval. But Dorsey doesn’t have a lot of outstanding awards to give up; he has voluntarily worked without compensation since becoming CEO and, thus, wasn’t granted any awards in 2015. He only has 2,000,000 outstanding stock options.
Enter the Proxy Advisors and Institutional Investors
Of course, submitting the plan to a shareholder vote leads to an analysis of the plan by proxy advisors and investors. It can even lead to a new Equity Plan Scorecard evaluation by ISS. A bit of news that caught my eye was that Twitter had to agree to prohibit repricing without shareholder approval under the plan to secure a favorable vote. Repricing without shareholder approval is a deal-breaker under the EPSC.
My first thought on reading this was “no good deed goes unpunished.” But, on second thought, I’m not sure that’s the case here. I’m not even sure this is a good deed. Rather than submit the proposal as a allocation of shares to their existing plan, Twitter adopted an entirely new plan for just the 6.8 million shares. The amendment to prohibit repricing only applies to this new plan; as far as I can tell, repricing is still permitted without shareholder approval under Twitter’s existing plans (under which any currently underwater options would likely have been granted).
Where’s the Urgency?
I was surprised to note that Twitter had over 110 million shares available in its 2013 plan as of December 31 and that the plan includes an evergreen provision, under which close to 35 million shares were added to the plan this year. It looks like Twitter granted less than 25 million shares last year, so it seems hard to believe that they are going to need those 6.8 million shares anytime soon.
Which makes me wonder why Dorsey donated the shares. Was it just a publicity stunt? A way to increase employee morale? (And, if so, did it work? Better than donating the 2,000,000 outstanding options would have worked?)
Here’s what’s happening at your local NASPP chapter this week:
Seattle: Takis Makridis and Kevin Zhao of Equity Methods present “Innovative ‘Next Practices’ For 2017.” (Wednesday, June 15, 11:30 a.m.)
Silicon Valley: Mark Miller and Dustin Lewis of Deloitte present “Key Design Trends in Global Equity Compensation.” (Wednesday, June 15, 11:30 a.m.)
San Fernando Valley: Dan Shickler of Stock & Option Solutions and Carolyn Fox of Riot Games present “RSU Release Prep: It’s All About Your Checklist.” (Thursday, June 16, 11:30 a.m.)
San Francisco: Lunch and two presentations! First, Dee Crosby of the CEP Institute and I will present findings from the recent joint NASPP/CEPI/NCEO survey on ESPPs. Then, Emily Cervino of Fidelity Stock Plan Services will review employee selling behavior of ESPP shares to look for key drivers of employee ownership. (Thursday, June 16 11:30 a.m.) I hope to see you there!