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Post-Vest Holding Periods - Part 1

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February 19, 2015 | Jennifer Namazi

Post-Vest Holding Periods - Part 1

Today I'm going to dissect a concept that's existed in equity compensation for a long time. In fact, it's nothing "new" per se. Yet, some recent trends, governance practices and changes in other industry areas have brought about new life to the idea. So much that I'm officially calling it the "buzz word" (okay, words) of the month. What is it? Post-vest holding periods. In this week's blog I'll explore why the renewed attention to this previously under-used practice. In a later installment we'll get down to the more detailed mechanics.

What is a Post-Vest Holding Period?

Just to make sure we're all on the same page, the post-vest holding period that I'm talking about is an additional holding requirement imposed on vested shares. Once vested, you must hold them for a period of time (1 year? 2 years?). This is different from holding the shares until they vest (aka the service or vesting period). Typically a company would include this type of holding period in the governing plan and agreement language, in addition to vesting details.

Participants Are Already Subject to Vesting - Why an Additional Holding Period?

This is where the old concept turned hot topic comes into play. While the idea of holding shares has been around for a long time, we are seeing recent and renewed interest in implementing post vesting holding requirements. There are a number of reasons why this may be attractive to a company, including:

  • Clawbacks: Having a holding period after vesting maintains a "reserve" of retrievable stock in the event the company needs to clawback income from an executive. After all, once an executive liquidates stock and spends the money, it's next to impossible to recoup those shares or proceeds in their original form. Does the company really want to try and repossess the executive's vacation home or new yacht?
  • ISS Scorecard: When ISS released their new Equity Plan Scorecard (see previous blog on this topic), it became clear that the existence of post-vest holding periods count for something. This is one of the items eligible for points on the scorecard.
  • Prevalence of Stock Ownership Guidelines: We've seen the steady rise of stock ownership guidelines over the past several years, with recent data showing more than 90% of public companies having some form of stock ownership guidelines. Post-vest holding periods can help an executive achieve their ownership targets.

 

In addition to the reasons outlined above, there are other interesting considerations emerging. In talking with Terry Adamson of Aon Hewitt, he pointed out that in addition to the above, companies may be able to reduce their ASC 718 accounting expense on awards with post vest holding periods. Why? Because the "lack of marketability" of the award deserves a discount.

The above only touches upon the surface. Questions I haven't explored today include the types of equity that make the most sense to cover with a post-vest holding period and whether this makes sense to implement on a broad basis.

We've got some great resources in the works to provide you with those additional details. With Dodd-Frank requirements for clawbacks on the horizon, the new ISS Equity Plan Scorecard coming into play this proxy season, ongoing corporate governance changes and continued interest in minimizing accounting expense, we think the concept of post-vest holding periods may be more than just a passing trend.

For additional information now, check out our latest podcast episode "Hold After Vest" (featuring Terry Adamson of Aon Hewitt). For even deeper details, we've got a great team of presenters assembled to address all of the points raised in this blog (including the possibility of reducing accounting expense) in our next webcast: Post-Vest Holding Periods on March 11th.

In the coming weeks I'll touch on more of the nuances that make this topic so interesting.

-Jenn

 

 

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