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Maximizing Equity Plan Share Reserves

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May 03, 2018 | Jennifer Namazi

Maximizing Equity Plan Share Reserves

It's proxy season, and with that comes the typical topics of discussion you'd expect - how Say on Pay votes are cast, dissecting the reactions to the new CEO pay ratio disclosures, and monitoring how are proposals put forth to shareholder vote are faring. One of the common asks of shareholders during proxy season is to vote affirmatively to increase equity plan share reserves. Doing so often requires planning and contemplation - with the goal being to up the odds that shareholders will agree to the request. A rejected proposal could mean a halt in a company's ability to make new equity grants. What if companies could extend the time (and associated angst) period between such requests for plan share increases - in the form of maximizing their share reserves? 

A recent article, "Equity Plan Share Reserves: How to Increase Its Life Expectancy," published by Matthew B. Grunert and Carolyn A. Exnicios of Andrews Kurth, had some great insights into how companies can extend the life expectancy of their share reserves. Among them are:
  • Amend the plan to permit maximum tax withholding. The authors report that "A recent change in accounting rules provides that maximum withholding will not result in liability accounting treatment. Depending on the terms of the plan, withholding of shares to cover taxes may not draw from the share reserve."
  • Implement an ESPP. ESPPs can add diversity to your equity plan offerings. In addition, ESPP shares are purchased by employees using their own funds, and shareholders tend to appreciate that aspect of the plan terms. Data from the NASPP's 2017 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte, reports that 1 in 5 companies who do not have an ESPP are currently considering implemeting one.  
  • Grant awards that are settled in cash. The authors remind us that, "depending on the terms of the plan, a cash-settled award may not draw from the share reserve. An alternative would be settling a portion of the award in shares (e.g., up to target), with any achievement above that settled in cash."
  • Use inducement awards for new executive-level hires and certain M&A events – "The award must be a material inducement to getting the executive/employee to accept the position. If properly structured, these awards can be made outside of the plan and do not require stockholder approval under NYSE or NASDAQ rules."
For more suggestions on how to maximize the life expectancy of shares under your stock plans, view the full article.  

-Jennifer

 

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