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Category Archives: Section 162(m)

December 19, 2017

Tax Reform: The Final Scorecard

The conference committee charged with aligning the Senate and House versions of the Tax Cuts and Jobs Act announced late last week that they have come to an agreement. The final bill is expected to be approved in both the House and Senate this week and then signed into law by the president.

Here’s where the bill ended up with respect to the provisions that impact stock compensation.

Individual Tax Rates: The final version of the bill released by the conference committee largely matches what was in the Senate version, except that the maximum individual tax rate is reduced to 37%. So we end up with seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest rate kicks in at $500,000 of income for single taxpayers but at only $600,000 for joint filers (instead of the $1 million threshold that was originally proposed). The individual tax rates sunset after 2025 and will revert back to the current rates at that time.

Supplemental Withholding Rate: For employees who have received supplemental payments of $1 million or less during the year, the supplemental rate is tied to the third lowest individual tax rate, which will be 22% under the aligned bill. For employees who have received supplemental payments of more than $1 million during the year, the rate is tied to the maximum individual tax rate, which will be 37%.

AMT (for Individuals): This is probably the closest we’ve come to a repeal of the AMT (at least in my memory) but still no cigar. The bill does increase the exemption amounts and phaseout thresholds, so fewer taxpayers will be subject to the AMT. These changes sunset after 2025.

Corporate Tax Rate: Reduced to 21% with no sunset.

Estate Tax: Increases the estate tax threshold to about $11 million; no repeal and no sunset.

Section 162(m):

  • The CFO is once again subject to 162(m).
  • Anyone serving as CEO or CFO during the year is also subject to 162(m) (instead of just the individuals serving in those roles at the end of the year).
  • Once a covered employee for a company, always a covered employee for that company.
  • Stock options and performance awards will no longer be exempt from the deduction limitation.
  • Includes an exemption for compensation paid pursuant to a written, binding contract (such as a stock option or award agreement) in effect as of November 2, 2017, if not modified after that date.

Qualified Equity Grants: The final bill includes a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs: No change to the current tax treatment of stock options, SARs, or RSUs. The provision that would have taxed these arrangements at vest was removed from both versions of the bill before it was passed by House and Senate.

Determination of Cost Basis: No change from current law.  The Senate version of the bill would have required identification of securities sold to be on a FIFO basis but this is not included in the final bill.

– Barbara

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December 5, 2017

Tax Reform: Scorecard Update

The Senate passed its version of the Tax Cuts and Jobs Act late Friday night (well, technically, it was very early Saturday morning in DC).  Here’s a comparison of where the final Senate and House bills stand with respect to the provisions that directly or indirectly impact stock compensation:

Individual Tax Rates

  • The House version of the bill has four individual tax rates: 12%, 25%, 35%, and 39.6%
  • The Senate version of the bill has seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The rates sunset after 2025, at which time they revert back to the current rates.
  • In both bills, the highest rate kicks in at $500,000 of income for single taxpayers ($1 million for joint filers)

Supplemental Withholding Rate

  • For employees who have received supplemental payments of $1 million or less during the year: 35% under the House bill; 22% under the Senate bill.
  • For employees who have received supplemental payments of more than $1 million during the year: 39.6% under the House bill, 38.5% under the Senate bill.

AMT (for Individuals)

  • Repealed under the House bill.
  • The Senate bill doesn’t repeal the AMT, but it does increase the exemption amounts and phaseout thresholds.

Corporate Tax Rate

  • Both bills reduce the corporate tax rate to 20%. The reduction doesn’t take effect until 2019 in the Senate bill.

Estate Tax

  • Both bills increase the estate tax threshold to about $11 million.
  • The House bill repeals the estate tax altogether after 2024.
  • The Senate bill sunsets the increased threshold after 2025.

Section 162(m)

  • Both bills expand the employees subject to 162(m) to once again include the CFO and to include anyone serving as CEO during the year (rather than only the CEO at the end of the year).
  • Under both bills, once individuals are covered employees, they remain covered employees for as long as they receive compensation from the company.
  • Both bills also eliminate the exception for stock options and performance-based pay.
  • The Senate bill includes a transitional provision that would exempt compensation paid via a written binding contract that was in effect as of November 2, 2017. This is broader than the transitional provision that was originally proposed, which would have only exempted arrangements vested as of December 31, 2016. There is no transitional provision in the House bill, so all prior awards would be subject to the new rules under that bill.

Qualified Equity Grants

  • Both bills include a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs Taxed at Vest

  • This provision has been removed from both bills, so there is no change to the tax treatment of stock options, SARs, or RSUs.

Determination of Cost Basis

  • The Senate bill still includes the provision I blogged about last week that requires taxpayers to sell securities of the same type on a FIFO basis (when held in the same account). This provision is not in the House bill.

What’s Next?

As you can see, there are lots of areas where these two bills don’t agree (and this is just the tip of the iceberg—there is even more disagreement in areas of the bills the don’t relate to stock compensation). All of these differences have to be reconciled before the bill can become law, so the bill now goes to a conference committee comprised of members of both the Senate and House that will resolve the differences between the two bills.

– Barbara

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November 16, 2017

What’s the Score?

Late Tuesday, the Senate Finance Committee released modifications to the Senate’s version of the Tax Cuts and Jobs Act.

Nonqualified Deferred Compensation, Stock Options, and Restricted Stock Units

The provision that would have required all forms of NQDC, NQSOs, and RSUs to be taxed at vest has been struck from the bill. That means that 409A still stands (I bet you never thought you’d be glad to read those words) and the tax treatment of stock compensation is unchanged. Hopefully this is the last time I’ll have to blog about stock options being taxed at vest, at least until the next time Congress decides to take on deferred compensation.

Section 162(m)

The provision that would expand the employees covered under Section 162(m) and repeal the exemption for stock options and performance-based pay is still included in the bill (see “Tax Reform Targets 162(m)“). This provision was amended however, to grandfather awards granted before November 2, 2017 that were vested as of December 31, 2016, so long as they aren’t materially modified after November 2, 2017.

Is that language confusing to you? It is to me. I’m not sure how an award could be vested before it is granted. Maybe there are other types of compensation where this is possible but, in the context of stock compensation, what I think it boils down to is that options and awards granted and vested prior to December 31, 2016 will be exempt from the new requirements but anything granted or vesting after that date will be subject to it. So it’s too late to accelerate vesting on stock options to exempt them from the new requirements.

Qualified Equity Grants

The “Qualified Equity Grants” provision that was added to the House bill (see “Another Tax Reform Update“) has also been added to the Senate bill. This provision creates a new type of qualified equity award that would allow employees in private companies to defer taxation of stock options and RSUs for up to five years.

Now that it’s in both bills, I spent a little more quality time with the summary of it and, frankly, I think there are a lot of problems with it. The five-year deferral is measured from the vesting date, even for stock options; the deferral election has to be made within 30 days of the vest date, even for stock options; taxable income is based on the value of the stock at vesting, even if the stock is worth so little at the end of the deferral period that it is no longer sufficient to cover the taxes due; and taxes have to be withheld at the highest marginal income tax rate. I just don’t see this being helpful to private companies.

The Scorecard

For those of you keeping score, here’s the wrap-up of where the two bills stand with respect to the provisions relating specifically to stock compensation:

  • NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 0 (out of both bills)
  • Changes to 162(m): House 1, Senate 1 (in both bills)
  • Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 1 (in both bills)

– Barbara

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November 10, 2017

Groundhog Day

A summary of the Senate version of the Tax Cuts and Jobs Act was released late yesterday and guess what? Yep, it includes the same provision changing the taxation of NQDC and stock compensation that the House bill had. It’s beginning to feel a little like the movie Groundhog Day. But hey, at least we aren’t talking about the CEO pay ratio anymore.

(Because it’s Friday and my fourth, no fifth, blog this week, I have a picture of a groundhog for you.)

Senate Version

The summary from the Senate version bill looks a lot like the same text that was in the JCT report of the House bill, so I did a document compare just for fun, because that is the sort of thing that is fun for me.

Turns out there are a few minor differences. Most significantly, the Senate version still exempts ISOs and ESPPs, but it sounds like the exemption might only apply if the shares acquired under these awards are sold in a qualifying disposition. This probably doesn’t impact ESPPs, since I think the purchase date would be considered the vest date in most cases, but it could impact how income on a disqualifying disposition of an ISO is determined.

The Senate version also includes the provision that modifies Section 162(m) to update the definition of covered employee and eliminate the exception for performance based compensation.

What’s the Score?

So, if you are keeping score, here’s where the two bills stand with respect to the provisions relating specifically to stock compensation:

  • NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 1 (out of the House bill, in the Senate bill)
  • Changes to 162(m): House 1, Senate 1 (in both bills)
  • Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 0 (in the House bill, not in the Senate bill)

What’s Next?

Well, for sure, what’s next is the weekend, during which I don’t expect anything to happen on either of these bills. I’m guessing we all could use a little break. Go enjoy yourselves.

The Ways and Means Committee has approved the House bill; next stop for it is floor of the House for debate and a vote. This is expected to happen next week. The Senate bill starts committee markup next week and still has to be voted on by the Senate Finance committee before it can go to the full Senate for a vote.

Once passed by both the House and Senate, both bills will have to be reconciled so that they agree. There are major differences in the bills right now in areas that don’t directly impact stock compensation; the topics I have been writing about are just tiny parts of very broad legislation. But if the differences I’ve noted above aren’t reconciled during committee markup in the Senate or in the floor debates, they will have to be addressed during the reconciliation process.

I will keep you posted.

– Barbara

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November 9, 2017

Another Tax Reform Update

Just this morning, the House Ways and Means Committee Chairman issued a press release announcing additional changes to the House’s tax reform bill.  The changes include removing the section of the bill that would change the tax treatment of NQDC, including stock options and RSUs.

So here’s where things stand with the areas of the bill that I have covered in my blogs this week:

Section 3801: Nonqualified Deferred Compensation

Based on the summary of the Chairman’s most recent mark-up of the bill, this section is removed in its entirety. Thus, the bill would not change the tax treatment of stock options, RSUs, or other nonqualified deferred compensation.

Section 3802: Modification of Limitation on Excessive Employee Remuneration

This section is still in the bill. It redefines who is a covered employee for purposes of Section 162(m) and makes stock options and performance awards subject to the $1 million deduction limitation. See my blog on Tuesday (“Tax Reform Targets 162(m)“) for more information.

Section 3804: Treatment of Qualified Equity Grants

The section is still in the bill. It creates a new type qualified equity award referred to as “Qualified Equity Grants” that would allow employees in private companies to defer taxation of stock options and RSUs for up to five years.  See my blog from this morning (“Tax Reform Update“) for more info.  The Chairman’s mark includes some technical amendments to the language of this section, but the intent of it does not appear to have been changed.

What’s Next?

At this time, we are still awaiting the Senate version of the bill. There’s some preliminary information available about it but we’re going to have to wait for the full bill to know if it makes any changes to stock compensation. I will keep you updated.

– Barbara

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November 7, 2017

Tax Reform Targets 162(m)

Remember when I said you should be aware of the new Section 162(m) rules that apply to certain health insurance providers because they indicate the direction Section 162(m) is heading (“CHIPs: More Than a Cheesy TV Show“)? Well, it’s happening. The tax reform package proposed by the House would make some of the same changes to Section 162(m) that already apply to CHIPs.

What Is 162(m) Again?

For those of you who don’t live and breath corporate tax deductions, Section 162(m) limits the tax deduction that companies can take for compensation paid to covered employees (currently the CEO and the top three highest paid executives, not including the CFO—but this is something the proposed legislation would change) to $1 million. A number of types of compensation are exempted from the limit, however, including performance-based pay—this would also be changed by the proposed legislation.

Update to Covered Employee Definition

The proposed tax reform legislation would update the definition of who is a covered employee under Section 162(m) to once again include the CFO. This change has been coming ever since the SEC revised the definition of who is a named executive officer for purposes of the proxy executive compensation disclosures back in 2006. The only thing that is surprising is that it’s taken over ten years for the tax code to catch up (and, actually, it still hasn’t caught up, but it seems pretty likely that this is going to finally happen).

Once a Covered Employee, Always a Covered Employee

The proposed legislation would also amend Section 162(m) to provide that anyone serving as CEO or CFO during the year will be a covered employee (not just whoever is serving in this capacity at the end of the year). Plus, starting in 2017, once employees are covered by the rule, they remain covered employees in any subsequent years that they receive compensation from the company, regardless of their role or amount of compensation they receive. This will prevent companies from being able to take a tax deduction for compensation paid to covered employees simply by delaying the payout until the individuals retire.

This change has been coming for even longer, ever since the SEC updated their definition of named executive officer to include former officers, which happened so long ago I can’t remember when it was (10 points to anyone who can tell me).

Performance-Based Compensation No Longer Exempt

Finally, the proposed legislation would repeal the current exemption for performance-based compensation. This exemption currently applies to both stock options, even if subject to only time-based vesting, and performance awards. Thus, both types of grants would no longer be exempt from the limitation on the company’s tax deduction.

At one time, this might have spelled the curtailment of performance-based awards. But these days, there is so much pressure on companies to tie pay to performance for executives that I don’t see this having much of an impact of pay practices. It does mean that a fairly sizable portion of executive pay will no longer be deductible for many public companies.

Not Final Yet

As I noted in yesterday’s blog, this legislation has a ways to go before it is final. You can rely on the NASPP to keep you in the know, even if it means I have to write blogs on Sunday night. Check out our alert for law firm memos providing more analysis.

– Barbara

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April 7, 2015

Final 162(m) Regs

It’s no April Fool’s joke—on March 31, the IRS and Treasury issued final regulations under Section 162(m). The final regs are largely the same as the proposed regs that were issued back in 2011 (don’t believe me—check out the redline I created); so much so that I considered just copying my blog entry on the proposed regs and changing the word “proposed” to “final” throughout.  But I’m not the sort of person that takes short-cuts like that, so I’ve written a whole new blog for you.

For more information on the final regs, check on the NASPP alert, which includes several law-firm memos.

The IRS Says “We Told You So”

The final regulations implement the clarification in the proposed regs that, for options and SARs to be exempt from the deduction limit under Section 162(m), the plan must specify a limit on the maximum number of shares that can be granted to an individual employee over a specified time period.  It is not sufficient for the plan to merely limit the aggregate number of shares that can be granted, even though this creates a de facto per-person limit; the plan must separately state a per person limit (although the separately stated per-person limit could be equal to the aggregate number of shares that can be issued under the plan). One small change in the final regs was to clarify that the limit doesn’t have to be specific to options/SARs; a limit on all types of awards to individual employees is sufficient.

When the proposed regs came out, I was surprised that the IRS felt the need to issue regs clarifying this.  This had always been my understanding of Section 162(m) and, as far as I know, the understanding of most, if not all, tax practitioners.  In his sessions over the years at the NASPP Conference, IRS representative Stephen Tackney has said that everyone always agrees on the rules until some company gets dinged on audit for not complying with them—then all of a sudden the rules aren’t so clear. I expect that a situation like this drove the need for the clarification.

In the preamble to the final regs, the IRS is very clear that this is merely a “clarification” and that companies should have been doing this all along, even going so far as to quote from the preamble to the 1993 regs.  Given that the IRS feels like this was clear all the way back in 1993, the effective date for this portion of the final regs is retroactive to June 24, 2011, when the proposed regs were issued (and I guess maybe we are lucky they didn’t make it effective as of 1993). Hopefully, you took the proposed regs to heart and made sure all your option/SAR plans include a per-person limit.  If you didn’t, it looks like any options/SARs you’ve granted since then may not be fully deductible under Section 162(m).

Why Doesn’t the IRS Like RSUs?

Newly public companies enjoy the benefit of a transitional period before they have to fully comply with Section 162(m). The definition of this period is one of the most ridiculously complex things I’ve ever read and it’s not the point of the new regs, so I’m not going to try to explain it here. Suffice it to say that it works out to be more or less three years for most companies.

During the transitional period, awards granted under plans that were implemented prior to the IPO are not subject to the deduction limit. Even better, the deduction limit doesn’t apply to options, SARs, and restricted stock granted under those plans during this period, even if the awards are settled after the period has elapsed. It’s essentially a free pass for options, SARs, and restricted stock granted during the transition period. The proposed regs and the final regs clarify that this free pass doesn’t apply to RSUs. For RSUs to be exempt from the deduction limit, they must be settled during the transition period.  This provides a fairly strong incentive for newly public companies to grant restricted stock, rather than RSUs, to executives that are likely to be covered by Section 162(m).

I am surprised by this.  I thought that some very reasonable arguments had been made for treating RSUs the same as options, SARs, and restricted stock and that the IRS might be willing to reverse the position taken in the proposed regs. (In fact, private letter rulings had sometimes taken the reverse position). I think the IRS felt that because RSUs are essentially a form of non-qualified deferred comp, providing a broad exemption for them might lead to abuse and practices that are beyond the intent of the exemption.

This portion of the regs is effective for RSUs granted after April 1, 2015.

– Barbara

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January 22, 2015

Proposed Bill Would Expand 162(m)

The new session of Congress comes with agendas and proposals. Notably, one of the changes proposed by House Democrats (essentially a resurrection of last year’s proposal) sought to add a new section to 162(m), in addition to expanding its reach.

I was going to try and summarize this myself, when I came across an article by Steve Seelig and Puneet Arora of Towers Watson on the topic that summarized the issue better than I could, so I am just going to quote the article. Broc Romanek quoted them, too, in his blog, so I guess we’re all on the same page.

As part of their alternative to the Republican agenda, House Democrats have dusted off last year’s proposal to limit the deductibility of executive pay to $1 million for companies that fail to increase their rank-and-file pay to keep pace with U.S. economic growth…This bill is part of larger democratic “action plan” focusing on the middle class that also would provide tax breaks to workers earning under $100,000 per year.

The House previously voted down Van Hollen’s procedural motion to consider the bill, but he’s expected to reintroduce the bill later this year. The Democrats appear determined to keep the CEO-versus-worker-pay issue in the news pending the Securities and Exchange Commission (SEC) release of final CEO pay ratio regulations, as evidenced in the “dear colleague” letter released by House Minority Leader Nancy Pelosi (D-Calif.) on the opening day of the new session.

The Van Hollen bill would take a different approach than the California bill we blogged about last year, which would have limited state tax deductions for executive compensation on a sliding scale depending on the ratio of executive pay to rank-and-file pay. (For more on the California proposal that was defeated in the state legislature, see “California Legislation Would Limit Tax Deductions for Companies Where the CEO Pay Ratio Is Too High,” Executive Pay Matters, May 1, 2014.)  Instead, it would add a new section to existing Section 162(m) of the tax code to limit to $1 million the deductibility of compensation (including performance-based compensation) paid to any current or former employee, officer or director if the average pay of all of the company’s U.S.-based non-highly-compensated employees (as defined under the qualified plan rules, i.e., those below $115,000 for 2015) does not keep pace with the growth of the U.S. economy. U.S. economic growth would be based on the average of productivity growth (based on Bureau of Labor Statistic measures) plus adjustments in the cost of living under the tax code.

The bill would also expand the reach of Section 162(m) to cover certain nonlisted, publicly traded companies, make sure the CFO is re-included as a “covered employee” and make it clear that income paid to beneficiaries is included in an executive’s remuneration for 162(m) purposes.

There is a silver lining—according to Towers Watson:

Given the GOP’s wider majority in the House and control of the Senate in the new Congress, any democratic proposals are even more of a long shot than before.

If anything else surfaces on this front, we’ll be sure to keep you informed. At the present the proposed changes to 162(m) (at least stemming from this proposal) appear to be a remote possibility.



January 15, 2015

Share Limit Lessons the Hard Way – Part II

In December 2013, I blogged about a mistake that garnered public attention when daily deal website Groupon exceeded their plan’s limit for shares granted in a calendar year with an RSU award to their Chief Operating Officer (“Share Limit Lessons the Hard Way“, December 19, 2013). Just when I started to think it couldn’t happen twice, nearly a year to the day of my first blog another oops! occurred. This time it involved technology company Advanced Micro Devices (“AMD”).

In an 8-K filed with the SEC on December 29, 2014, AMD disclosed that they’d exceeded their equity plan’s limit on shares granted to an individual in a calendar year when issuing a series of awards to their new Chief Executive Officer. As a result of the technical error, the chipmaker decided to void and rescind most of the CEO’s newly issued awards. In their evaluation of the situation, AMD’s board of directors affirmed that the value of the CEO’s compensation package that included the awards was appropriate and in line with shareholder interests. Given that some of the awards were negotiated as part of an employment contract with the CEO, I wonder how the company now will deal with the fact that they can’t issue the grants that were contractually promised to the CEO. I’m no lawyer, so I’ll throw the question out there with no intention of trying to answer it myself. AMD did mention in their filing that they intend to “return Dr. Su’s equity compensation to the level it should have been prior to the action to void and rescind the equity awards described above at or near the earliest practicable opportunity available to the Company, subject to law and the terms of the 2004 Plan.”

How Does This Happen?

There’s been no information on “how” the oversight occurred, and I wouldn’t expect that we’d be privy to the specifics. The fact is that it happened. What stands out to me in this case is that, just like the Groupon case, the violation of the plan limit appeared unnoticed until AMD’s own shareholders filed a lawsuit over it. I’m thinking about all the checks and balances in a grant approval process, and wondering how it was left to shareholders in both cases to catch the mistakes.

While plan share limits seem on the surface to be a simple concept to embrace, there seems to be a trend, or at least a pattern in oversights of these limits. I’m guessing there are more situations like this that are caught before shareholder lawsuits occur. A common trigger for awards that exceed the limits outlined in the plan appears to large grants (or a series of grants) to executives or key employees.


We hear more and more about shareholders looking for prime litigation opportunities. As a group, they definitely have become more assertive in monitoring disclosures and finding opportunities to litigate perceived wrongs. With that in mind, I turn the focus to what we can learn from these high profile, public mistakes. I put myself in the position of asking “If I worked for this company, what would I do to avoid this in the future?” A few ideas come to mind:

  • Use these examples (AMD and Groupon) as the basis to have a training session or discussion with your internal Human Resources (HR) executives. Since the HR executives are typically the ones involved in discussing CEO and other executive compensation with the board, go right to those executives and educate them on any share limits (and other parameters) within the plan that may be triggers for violations of plan terms. If external compensation consultants are also in a position to have discussions with the Board on executive compensation decisions, it’s a good idea to make them aware of the plan limits as well.
  • Audit, audit, audit. Even if an oversight occurs at the HR/board level, the next stop should be the plan administrator. Anytime new grants come through, it’s best to have a check and balance in place that compares those grants to plan limits. Keep a running total of grants to date (whether it’s year to date or some other measurement outlined in the plan). Remember there are varied types of plan limits. Common limits include the number of shares that can be granted to an individual in a calendar year, the number of shares that can be cumulatively granted from the plan in a calendar year, and limits on the number of shares related to certain types of awards that can be made within a period of time (for example, a cap on the number of shares that can be issued as full value awards in a calendar year).
  • Advocate for contact with the board of directors. While it’s a good step to educate those who are in contact with the board (HR executives and compensation consultants), why not see if you can gain your own opportunity to educate the board? Whether it’s in person or via a  communication that is presented to the board, this may be an opportunity to go straight to the decision makers. Even if it’s not the full board, the Compensation Committee of the board is an ideal target for these communications.

Nobody wants their mistakes made public. And, while there may not be a sole person responsible for the oversights at Groupon and AMD, these certainly were preventable mistakes. I hope this will be my last blog on this topic and companies will take to heart the importance of monitoring any and every aspect of the terms of their equity plans. Let’s not leave it to shareholders to discover the next mistake.


December 19, 2013

Share Limit Lessons the Hard Way

A little blurb in the Wall Street Journal blog caught my eye this week. As it turned out, daily deal website Groupon had to rescind a portion of a restricted stock unit award to its Chief Operating Officer because the award exceeded a plan limit on share issuances to an individual – by 200,000 shares. I’ll cover the topic and the associated lesson that we need to reconcile, reconcile, reconcile awards and grants against all of the limits established in a plan.

What Happened?

In January 2013, Groupon’s COO was granted 1.2 million shares under a restricted stock unit award. From their own account in an 8-K filed with the SEC, the award exceeded a then-in-place 1 million share calendar year per person limit on awards – meaning the COO’s award exceeded that limit by 200,000 shares. It appears the error was not detected until a deep dive into the plans was done in conjunction with shareholder litigation. As a result of the discovery, Groupon rescinded the portion of the grant that exceeded the limit – 200,000 shares. This occurred just days before a portion of the award was scheduled to vest.

The Good News

The good news is that the error was detected in advance of shares vesting/sold. Had the shares vested and subsequently been sold, this would have made the situation more complicated to rectify. Even if not sold, had taxes been collected and the error gone unnoticed, the correction of the tax withholding could have gotten very complicated. Aside from the fact that the error was caught in advance of the vesting date, I can’t really think of any more “good news” in this situation.

The Bad News

This leaves me wondering how the error – for such a sizable, high profile grant – was not detected earlier. It seems to have gone unnoticed during quarter close and other periods where reconciliation seems to be likely. In fact, it appears that nearly a year went by without a blip on the stock plan radar. In addition, the correction involved public disclosure – another negative in this situation.

What Did We Learn?

Anytime there’s a negative involving errors and public announcements, I think it’s a prime opportunity for us to seek the lesson to be learned. In this case, this is a solid reminder that reconciliations need to extend beyond overall plan balances. It’s not enough to stop your analysis at the overall outstanding plan balance at the end of the quarter (which usually reflects beginning balance, plus any shares returned to the plan and minus any issuances). If your plan has internal limits on share types, maximum shares per award, or overall grants within a period of time, these parameters must be audited regularly. Examples of common limits within stock plans may include:

  • Limit on shares granted per award type: for example, no more than 3 million shares may be granted as restricted stock awards/units.
  • Limit on shares granted per option/award: for example, a grant to any individual cannot exceed 1 million shares.
  • Limit on shares granted within a specific window of time: for example, no more than 2 million shares in a calendar year.

If you have any of these types of share limits within your plans, you’ll want to ensure you are comparing grant and award activity to these limits. Ideally, this should initially be done at grant, and then double checked during the monthly or quarterly reconciliation process that follows. Year-to-date reconciliations should always be performed with each reconciliation process – in addition to the current month or quarter’s activity.

Groupon is probably not thrilled to publicly correct an award. However, the silver lining is the message in this for all of us – that monitoring plan share limits regularly and consistently is important. If you haven’t performed these reconciliations for 2013, you may want to do so now. Correcting errors that cross calendar years can often be tricky – or sometimes impossible, especially if a disposition of the shares is involved.


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