Author: Tim Nguyen

Summary:

Our experts do a deep dive into the nitty gritty details of preparing the Executive Compensation Disclosures within the Proxy Statement. They will share a timeline of which disclosures can be prepared first and when, provide instructions on how to calculate the various data points within each table and explain where to find the information for each table. During this session you will also learn a few tips on ensuring the data is accurate.

Webcast Materials

Speakers:

(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

Have a question about this webcast?

For  inquiries call our office at (408) 979-8700

Or feel free to email your questions to Info@sos-team.com

Receive News About Our Next Webcast

What’s Proxy Got To Do With It?

Stock Administration has an important, but varied, role in the proxy process. Depending on the department stock reports to in your organization, you may be responsible for duties ranging from simply running reports to taking on all Executive Compensation Disclosures. No matter what your responsibility level, these are the items you must have for a smooth and successful proxy.

From learning who the “big 5” are in your company, to which disclosures you’ll need to complete, we’ll share an effective project plan and go over how to calculate the various data points within the Executive Compensation Disclosures during next month’s SOS Educational Webcast. Register now for this important topic.

Perfecting Period Close-It Bears Repeating!

We see this time and time again: a client performs their period close reporting and starts to reconcile the output and then realizes something isn’t right or that the beginning data points do not match the prior period end points.  Of course, they are stumped and it is the day prior to the deadline for booking the expense.  After a rush to dig into the data and identify the issues it is determined that a prior termination was entered, the valuation records were missing on the grants, the department code was never updated, etc.  Now the real panic sets in, document the issue, correct the bad data, re-run the reports.  If these differences are not caught prior to the auditor’s review, there could be concern about the process and SOX compliance. A material weakness could be uncovered. No one wants that!

We recommend that clients get ahead of these scenarios by performing some quick audits just prior to the period close and correcting or documenting the issue before it becomes a problem.  One of the first ways to jump ahead of these potential situations is to re-run your prior period reports several days in advance of the new period ending.  Verify if the data points (shares balances, shares outstanding, granted, exercised, cancelled, expense, etc.) match your prior period reports.  If not, then you have time to dig in and understand what happened.  Did someone enter a late termination?  Did someone enter a late transaction? Did a fair value get changed by accident or even worse, dropped off the record entirely?  Why?  What process improvements would prevent this in the future?

Some systems do allow you to “close the period”, a common practice in accounting software, but it's something that has been more recently introduced in stock plan software, at least in a few platforms. Using these features can ensure that the post-dated transactions or terminations don’t impact your prior expense, but they don’t help you explain the variances you see from this period to last. Again, you have to dig in, do a “flux analysis” and figure out what happened to that grant after the period was closed to make the expense so different from one period to the next.

The other common mistake we see happening during period close is the retention of an incomplete set of reports.  Many equity systems allow for the reports to be produced in either an Excel or .PDF format and, in some cases, both.  For very good reason, we see the .PDF version retained since those tend to be the Auditor’s request.  A .PDF report is not easily “manipulated”.  However, using a .PDF report to perform any type of comparison or research into data issues is not feasible.  Excel, on the other hand, is easy to use for comparison and research.  So, if your system provides reports in Excel, USE them, SAVE them.  It’s a great backup to the .PDF.  In addition, some systems provide detailed excel backup to the overall expense and other financial reporting needs.  These too should always be retained.  We love those expense reconciliation questions where the CFO wants to know why X didn’t equal Y and then hands over the system’s expense summary report in .PDF or a report with one row summary per grant….or, even better, the LAST page of the expense report. SCANNED. No details. UGH. Further, some systems provide a view of the data with all the “gory details” (tranche level, current and prior forfeiture rates, expense with and without forfeiture rates applied. Save these too. You will be so happy you took the extra 15 minutes to save off the detail when your expense doesn’t tie.

Equity systems generally provide the user with a multitude of user specific fields for adding certain flags, tags or identifiers to a participant or grant record yet the client is afraid to use these or uses them inconsistently.  Work with your internal partners to understand which flags might be useful and then put a plan in place for using these user-defined fields. And keep an external record of the business reasons for the codes in these fields and the valid inputs.  These can be very helpful in running any period close report by allowing for filtering for groupings, inclusion or exclusion of certain data.

That being said, though, we sometimes find filtering of reports can also lead to double counting or even exclusion of grants if not properly used.  An example of this is with expense.  Clients will set up their expense reports to run several sets for different grant type parameters.  Then using those reports, they manually add up the totals for their end use.  They don’t run a full set of the same report (no parameters) and never realize that the total expense doesn’t match to the sum of their reports…ACK.  Why not use your flags, run custom output reports (if available), export to EXCEL and then using a summary tab in the workbook, create totals by the respective parameters using SUMIFS or pivot tables?  This way you can capture what you need, in the buckets you need it and still tie back to the total.  If the auditors require a .PDF, show them how you proved to the total(s) on the .PDF system generated report and they should be comfortable.

Lastly, to build a better period close process, build a checklist:

  • All data updates complete - √
  • All cost center/department codes updated - √
  • All Market values entered - √
  • All dispositions entered - √
  • All grants assigned a fair value - √
  • All grants assigned a forfeiture rate- √
  • Re-run prior period - √
  • Run current period (EXCEL) - √
  • Run current period (PDF) - √

Using these tips will help you perfect your period close and make your auditors happier too!

This article was originally written by Julie Kenia, CEP in 2015

Upcoming Equity Compensation Webcast

Our webcasts cover high-priority equity compensation topics

SOS Educational Webcast: No More Proxy Woes: Executive Compensation Disclosures within the Proxy Statement - Debunked!

Thursday, December 13, 2018 11:00 AM PST

Join our experts who will do a deep dive into the nitty gritty details of preparing the Executive Compensation Disclosures within the Proxy Statement. They will share a timeline of which disclosures can be prepared first and when, provide instructions on how to calculate the various data points within each table and explain where to find the information for each table. During this session you will also learn a few tips on ensuring the data is accurate. Don’t miss this must-attend proxy webcast.

(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

Speakers:

●  Moe Zohny, CEP, Stock & Option Solutions, Inc.

●  Sven Skillrud, TransUnion

Vacancy issues solved here.

Why hire when you can outsource the functions of a stock plan administrator? With hiring comes risk and high costs. You risk employee turnover, knowledge retention, and hiring a full-time resource if you really only need a part-time one. With our fixed prices and team's dedication to scalability, we will grow with you and adjust during your peaks and valleys, absorbing the costs during your busy seasons. You'll have access to our entire team of experts AND have your own dedicated account manager. Don't wait another minute...

SOS Consultant Corner: Fair Value and Hedging - How Do They Relate?

The terms “fair value” and “hedging” are often used in the world of finance.  Fair value is a term that is used daily in the equity compensation space.  Hedging is more of a Wall Street term and is not spoken about often in equity compensation circles.  That is a shame, as the two terms are very closely related.  As a matter of fact, thinking of valuing equity grants based upon how much it would cost the company to “perfectly hedge” away risks associated with the awards it grants, can build a more thorough understanding of valuation.

Almost every day across the country equity compensation awards are issued.  These may be form of restricted shares, options or even Relative TSR awards.  All these awards will need to be valued and reflected as an expense in the company's financial statements.  Various valuation techniques are used to value each award type.  As you will see however, the fair value is always the same; it's how much would it cost the company to “perfectly hedge” away all risk associated with issuing an equity compensation award.  The term “perfectly hedged” refers to a situation in which no matter how the stock price moves in the future, the company will not owe any money or receive any money as of the date the award vests.  This removing of all risk through hedging leads to “risk-neutral” valuation theory, which is the underpinning of the Black-Scholes model.  The theory is that if all risk is eliminated in a financial position, it is then “risk-less.”  All risk-less assets must earn the risk-free rate of return or arbitrage opportunities will arise that will be quickly eliminated by an efficient market.

A Restricted Share – The simplest of valuations.  An employee is issued a restricted share that vests at some point in the future if the holder is still employed at the issuing company as of the vesting date.  Say the share is currently trading at $100 and you wanted to hedge away all risk associated with the grant from the company’s perspective.  Would putting the $100 into a bank account and holding it over the vesting period hedge award all risk?  No, because the stock price can go up and down.  If the stock price were to double from the grant date to the vesting date, the company would need an additional $100 so they could buy the share and deliver it to the holder.  What about if the stock dropped to $50?  Although the company would gain in that transaction, since it has $100 saved (plus interest) and it would only cost $50 to purchase and deliver a share to the holder, it is not “perfectly hedged.”  Remember, the term “perfectly hedged” refers to a situation in which the company would not owe or receive any money upon vesting.  The best way to “perfectly hedge” a share owed in the future is to buy the share now and deliver it on the vesting date.  That aligns exactly with the “Fair Value” of a restricted share, which is the cost to buy the share as of the grant date.

An Option – One of the most challenging parts of determining the “Fair Value” of an option is determining the expected term of the option.  If you sit back and think about what the expected term represents, you will see it goes right back to hedging.  As with a restricted share, the best way to perfectly hedge an option granted to an employee is to buy an option with the exact same exercise price and term.  Since no one can predict with certainty when employees will exercise their options, determining an average expected term tells you what term option you would need to buy to hedge away, on average, the risk of issuing the option grant.

A surefire way to incorrectly value an option is to look at it through the prospective of how much the holder of the award values the option.  Say you are an option recipient and are given the choice of two options, which both vest immediately.  You can choose between an option that can be exercised at any time over the next five years or an option that can only be exercised at time 5.  Which has the larger cost to the company?  The option that can only be exercised at time 5.  Why?  Because the only way, from the company’s perspective, to “perfectly hedge” that grant would be to buy an option with a 5-year term.  For the first option, the company would probably expect the option will be exercised on average at time 2.50.  They would therefore need to buy an option with a term of 2.50 years to “perfectly hedge away the risk of issuing the option.  Remember in option pricing theory fair values increase as expected term increases, all else being equal.

Putting it all Together

The term hedging, although not used much in equity compensation circles, is very important as it relates to valuing equity awards under ASC 718.  An award’s fair value should always be thought of from the perspective of how much it would cost the company to “perfectly hedge” away all risk associated with an equity grant.  Doing a quick “back-of-the-envelope” estimate based upon the preferences of the holder of the award is a surefire way to make valuation errors.  This theory applies to all award types and any restrictions that may be place on the awards.  Recall that, although some restrictions may make an award less “valued” by the holder, the ASC 718 fair value should always represent the cost to “perfectly hedge” all risk associated with the award from the company’s perspective.

SOS Front & Center: Stephen Paratore

Stephen Paratore has been part of the team at Stock & Option Solutions since 2014 and is currently a member of the Outsourcing Team. Stephen works out of the Campbell Headquarter office in California as an Account Manager for several public and private companies using Equity Edge Online, Shareworks, and Certent. Stephen earned his CEP designation in 2007 and has worked in the Financial Services industry for over 20 years.

Here’s what Stephen's clients are saying about him:

"Stephen’s depth of knowledge, patience, communication skills, thoroughness and commitment to those he supports is outstanding. His support helped me tremendously as I took on this new role using a new platform that I was unfamiliar with. Stephen is very professional and a good listener so he easily understands my questions and responds quickly. Stephen continues to provide back up support and I am extremely confident that all stock plan matters will be handled in my absence.  Peace of mind is priceless!" - Marcia Baertlein, Form Factor

"Stephen Paratore is a truly valued business partner for Enphase. He is patient with our questions, prompt and clear with his responses, quick to complete routine and recurring work, and he anticipates problems and suggests possible solutions for us to consider before they come up. We rely heavily on him, and his professionalism, experience and expertise all keep our equity program running smoothly." - Courtney Pastrick, Enphase Energy

"Stephen Paratore and the rest of the SOS Team have smoothly transitioned Aerohive’s Stock Administration from a 100% in-house to a 100% outsourced solution, saving Aerohive time and money and greatly improving service delivery.  Aerohive is a small company but, like many in the Valley, we are global with the complex equity administration that follows. Knowledgeable, detail-focused and attentive to our needs, with Stephen, we know that we are a priority.  I am sure that all of his clients would say the same." - Steve Debenham,Aerohive Networks, Inc.

SOS Xposé

...tender tidbits about people and players in our industry...

Starting something new… Rob Mills is working for Rambus in Stock Administration. Chris Dohrmann is the new Senior Vice President of Strategic Partnerships at Global Shares.  Andy Brown is a Senior Stock Administrator for Roku, Inc. Achaessa James is the new Legal Operations Wrangler at Automattic handling stock plan administration. Anamika Mandal is now the Executive Director, Corporate Sales at UBS and is based in San Francisco.

It’s loveClint Goodin of SOS married Carly Neal Cunningham on October 12th in Savannah, GA. The intimate ceremony was performed in Reynolds Square in front of their immediate families. They couldn’t have asked for a better day to say, “I do”. SOS’s LoAn Nguyen got married on September 6th on a Bahamas Cruise on the Royal Caribbean in front of their closest family and friends! Her and her new husband, Kurtis, spent two weeks in Japan for their honeymoon visiting Tokyo and Kyoto. Congrats to the happy couple!

Scholarship news… Scott McDonald of Equity Point was awarded the Marilyn J. Perkins Claassen Memorial Scholarship from The CEP Institute this year.  Time to crack the books, and good luck on your level 2 &3 exams!

Industry News… Save the dates for the 27th Annual NASPP Conference and Exhibition as equity compensation’s leading professional development and networking event comes to New Orleans from Sept. 16-19, 2019! Call for presentations and registration to open in January. SOS is hiring for Stock Plan Administrators in consulting positions, full time, part time and remote projects. We are also hiring for financial reporting and accounting professionals- first position is for an internal position working full time with SOS – SME with knowledge of equity accounting, finance and tax related matters for a variety of internal and external client needs.  2nd position – leading an FRA team with a large-scale data conversion and implementation, very visible position. For more details contact Carole Dubas.

Bragworthy… SOS’s very own Moe Zohny, CEP has been offered a seat on the CEP Certification Council and is now one of 12 members on the Council. The CEP Certification Council acts as the final authority over the content of CEP certification exams before they are administered. Congratulations Moe on this outstanding achievement!

SOS’s newest team members…
Sandra Briggs, People Solutions Team
Sam Coursey, Sales Team

From the SOS Webcast Archive...
SOS Educational Webcast: Stock Administration: Taxation, Year-End, & Some Things in Between

From the SOS Equity Compensation Library...
Stress Free Proxy Season: An Oxymoron?

Stock & Option Solutions Logo


SOS Xtra Editor: Shawna Casey
Did you miss an issue of Xtra? View our complete newsletter archive from our website here.
Miss a webcast? You can find links to recordings, as well as the materials, on our webcast page.


Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisers. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.

Summary:

We’re scratching the surface on stock administration (and what is all included in this multi-faceted role) in this “back to basics” session. We’ll dive into the difference between Incentive & Non-Qualified stock options, awards and how they work, form filings, and more. The documents employees need for their taxes, qualified versus non-qualified transactions, and what should be on your checklist will all be detailed in this educational webcast.

Webcast Materials

Speakers:

(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

Have a question about this webcast?

For  inquiries call our office at (408) 979-8700

Or feel free to email your questions to Info@sos-team.com

Receive News About Our Next Webcast

An Abundance of Education

With kids and adults returning to school, we’re excited to continue learning!  Keep up on the latest trends, tidbits, and educational opportunities with Xtra.

In this issue, we discuss how companies are implementing the simplification of nonemployee expense under ASU 2018-07, share industry updates and articles that have sparked our interest, dive into who has a new job and we provide details about our next SOS Educational Webcast. This month we are also focused on educating you on our 6039 reporting services and solutions. Are YOU ready for this requirement?

Clearly education is the focus at the 26th Annual NASPP Conference & Exhibition in San Diego next week. Planning to attend? If so, please stop by the SOS booth #706 to learn more about us, play a game, win prizes, & more. Fill out our drawing entry form before the event (NOW!) to be entered into our pre-event drawing for a $250 Amazon gift card. With your advanced entry your name will automatically be added to into the pool for the post-event drawing after the conference. (You could win $500!). Catch SOS’s Jim Lecher in the SOS booth to answer questions on ASC 718 Valuations and Shareworks and in his session, Valuation 201. Hope to see you there!

ASU 2018-07: Improvements to Nonemployee Share-Based Payment Accounting

The Financial Accounting Standards Board (“FASB”) continues to issue releases as part of its Simplification Initiative.  These words are music to the ears of anyone dealing with accounting for equity compensation.   

ASU 2016-09 brought the welcome relief of eliminating the need to estimating forfeiture rates.  ASU 2017-09 clarified exactly when a company should account for the effects of a modification to an award.   And now FASB has released ASU 2018-07, which will again offer welcome relief – this time for companies dealing with nonemployee accounting.    

Nonemployee accounting (that is, mark-to-market) has been required whenever a company grants an award to an outside consultant or an employee converts to being a nonemployee.  Nonemployee accounting has been the bane to many an equity compensation professional’s existence.  To start with, it leads to uncertain expense over the service period of the award because the fair value (which, multiplied by total shares, results in total expense to be recognized) is recalculated each quarter based on new inputs like fair market value and remaining contractual term.  Initially, primarily due to the use of a contractual term (e.g., 10 years) instead of an expected term (e.g., 6 years) which also drives volatility calculations and interest rates, the Black-Scholes fair value for these grants is often higher than it would be if the fair value was calculated using “employee” inputs.  Finally, depending upon the functionality available in the equity compensation software used by the company, some if not all of the calculations required each quarter may need to be done manually outside of the software. 

ASU 2018-07 expands Topic 718 so that it now includes “share-based payment transactions for acquiring goods and services from nonemployees.”  What this basically means is that companies can now calculate a grant-date fair value for nonemployee awards the same way they do for employee awards and they will no longer need to recalculate this fair value each quarter until vesting. 

Upon adoption, the company will simply conduct one final fair value calculation for any nonemployee award that is still being expensed and then recognize that final total expense through the remaining service period. 

All equity compensation professionals dealing with accounting should read the entire release in order to understand fully all of the requirements of adopting the new standard.   However, some interesting highlights are: 

  • Unlike employee awards where the company uses an expected term to estimate fair value, companies can elect to use either an expected term or the contractual term when estimating the fair value for nonemployee awards. 
  • Awards with performance conditions can now be measured based on the probability of satisfying the performance conditions just like employee performance awards. 
  • Change-in-status accounting goes away completely under ASU 2018-07.  So, if an employee becomes a nonemployee and the award is not modified as a result of this change in status, the company will simply continue to expense the award based on the original grant-date fair value. 
  • ASU 2018-07 becomes effective for public entities for fiscal years beginning after December 15, 2018, and for fiscal years beginning after December 15, 2019, for all other entities.  Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606 (Revenue from Contracts with Customers).

    Upcoming Equity Compensation Webcast

    Our webcasts cover high-priority equity compensation topics

    SOS Educational Webcast: Stock Administration: Taxation, Year-End, & Some Things In Between

    Tuesday, October 16, 2018 11:00 AM PDT

    We’re scratching the surface on stock administration (and what is all included in this multi-faceted role) in this “back to basics” session. We’ll dive into the difference between Incentive & Non-Qualified stock options, awards and how they work, form filings, and more. The documents employees need for their taxes, qualified versus non-qualified transactions, and what should be on your checklist will all be detailed in this educational webcast.

    So Quotable:

    “Equity has become a mainstay for both retaining employees and enticing new hires. As stock administrators, it helps to not only have that knowledge, but to be capable to deliver that information in a way all employees can understand. Whether that employee be an insider or standard, this webcast intends to educate you or brush up your knowledge, at a high-level, of how to approach award types, year-end, taxation, and form filings.” Colin Bass, Stock & Option Solutions, Inc.

    (One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

    Speakers:

    ●  Colin Bass, Stock & Option Solutions, Inc.

    ●  Chris Cox, Stock & Option Solutions, Inc.

    Get through the end of the year without pulling out your hair.

    SOS Consultant Corner: Preparing for Quarter-End

    One of the busiest and most stressful times as a Stock Plan Administrator is when you are preparing for and completing your quarter-end tasks.  Close coordination is required between the Compensation, Finance, Tax, HR and other teams.  While quarter close will always be stressful, are there things you can do to make this process run smoother and that offer the ability to catch potential mistakes early in the process?  Here are some things that you can implement that can help:

      1. Prepare a checklist of all deliverables.  Indicate due dates and mark when each task is complete.  As the quarter-end tasks pile up, it’s handy to have the checklist to remind yourself of what is still outstanding.  Also, the checklist is a good place to make reminders, such as report parameters, distribution list, etc.  If you save these reminders and notes to your checklist template, they’ll be there for each subsequent close.
      2. Schedule reports and save report parameters. Many equity software platforms offer the ability to save report parameters—and even allow you to schedule reports—ahead of time.  This can be a big timesaver if you have multiple reports to run.  For example, if you sort your expense report by department code and grant type, you may be able to save these sorting and grouping options so they’ll already be there when you’re ready to generate your reports.  In addition, you may be able to have many (if not all) of your quarterly activity reports (such as, granted, exercised, cancelled and released) scheduled to run the morning of the first business day of the new month.  This way, you won’t need to generate each one individually.
      3. Keep your roll-forward up to date throughout the quarter. It’s a simple step, but it can save a lot of time if you’re searching for a discrepancy with the transfer agent. Having this already up to date when you begin quarter-end reconciliation may keep you from having the double task of populating the roll-forward and reconciling it at the same time.
      4. Do what you can do ahead of time throughout the quarter. If you’ve granted options, you can gather the valuation inputs and either apply them or have them ready to go when it’s time to start running reports.  Having missing items can prevent other tasks from being performed (in this example, the expense reports).  Do it in advance and save time when the time crunch really comes.

    Quarter-end close will never be an easy time for those of us in the equity compensation field.  However, I hope these steps help you develop your own plan (or enhance the plan you already have) for making your life a little easier.

    -Michael Forbes, CEP, Stock & Option Solutions, Inc.

    SOS Front & Center: Tanya Barnes

    Tanya Barnes has been a member of the Stock & Option Solutions team since 2014 and is currently a member of the Outsourcing Team working from the SOS Nashville office as an Operations Specialist. Tanya has expanded her knowledge in equity compensation and is passionate about day-to-day tasks of stock administration and interacting with multiple clients. Tanya is currently working to earn her CEP designation.

    Here’s what Tanya’s clients are saying about her:

    “Tanya’s attention to detail and positive can-do attitude made the transition away from in-house stock administration a seamless process.  Thanks to Tanya and her team, I was able to focus on the bigger picture and leave the day-to-day administration to the professionals!  Thanks Tanya! -Hilary Romero, Sonos, Inc.

    “Tanya is a fantastic partner and consummate professional.  She is always looking for ways to streamline and build processes to ensure we are working efficiently.  She is clear and concise in her communication and adeptly answers questions from participants as well as the accounting and human resources teams.  We are very lucky to have her supporting our transition from a private to public company.”-Jackie Hill, Sonos, Inc.

    Across Our Desk

    Rutgers Webinar on Equity Compensation  

    Tax reforms and how they might impact employee financial planning.   

    Equilar Executive Compensation Summit Highlights 

    Raising the threshold requirement for delivery of additional disclosure under Rule 701(e) details from Cooley and Mayer Brown 

    ASU 2018-07 and related articles from Deloitte and PwC 

    Employee understanding of equity compensation  

    High level overview of options vs. restricted stock and a discussion on basic equity compensation definitions 

    The impact of Pay Ratio disclosure  

    Aiming High” on Stock Plan approval 

    Reminder:  EU Prospectus Exemption Changes on the horizon 

    Changes to 162(m) provisions under IRS Notice 2018-68 on 162(m) 

    Evaluating the effectiveness of performance grants and a recap of how “Say on Pay” has impacted 2018 proxy season to date 

    ISS annual policy survey and potential 2019 proxy voting policy changes 

    SOS Xposé

    ...tender tidbits about people and players in our industry...

    Hard working… Anna Sotnikova is a Senior Consultant, Equity Management with CFO Advisery Services for Armanino LLP. Stephanie Trunk is a Global Equity Consultant at Syneos Health. Kody Adams, CEP is the Stock Plan Administrator for Qualtrics. Khang Diep is now working with Cutera, Inc. in the Equity Department. Josh Lurie recently founded JL Advisory, a mid-market advisory firm focused on the human capital, technology enabled services, software and data markets. Daniel Kapinos is now a Partner for Aon. SOS’s Andrea Best has been promoted to Vice President of Client Experience. In her new role she is responsible for leading SOS’ future growth by ensuring SOS understands our clients’ priorities and delivers an optimum client experience. Read the full press release here. New team leads have been created at SOS to support SOS team members and clients with a more direct, personalized experience. Promoted from within to fill these new roles are: Laura Kreman, CPA, Sarah Roberts, CEP, Tim McCleskey, CEP and Srinivas Kalakoti, CEP. Help us congratulate them!

    Industry News SOS is hiring for a 12-18 month project in Nashville area (onsite or remote), we’ve got a great contract to direct with pre-IPO company in San Francisco and a full time/direct hire Stock Administrator in the Bay Area/Peninsula. For more details contact Carole Dubas. We’re just weeks away from the 26th Annual NASPP Conference and Exhibition! Join your stock plan professional community Sept. 25-28 in San Diego to network and learn the latest best practices, solutions, and other tricks of the trade – including just-issued 162(m) guidance direct from the IRS itself. View Sessions and Keynotes  |  Register Today

    SOS’s newest team members…
    Michele Wortham, SOS Outsourcing Team
    Ronald Foltz, Jr., SOS Outsourcing Team
    Tamara Brooks-Lawrence, SOS Outsourcing Team

    From the SOS Webcast Archive...
    SOS Solutions Webcast: Your 6039 Dream Team
    SOS Educational Webcast: The End is Near: Preparing and Checking Your Year-end List (twice!)

    From the SOS Equity Compensation Library...
    Consenting Adults? Tackling the Challenges of Electronic Delivery of 3921/3922

    Stock & Option Solutions Logo


    SOS Xtra Editor: Shawna Casey
    Did you miss an issue of Xtra? View our complete newsletter archive from our website here.
    Miss a webcast? You can find links to recordings, as well as the materials, on our webcast page.


    Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisers. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.

    Summary:

    Crafting communications never seems to be the highest priority in equity administration.  But the importance of communication is underestimated.  We will cover the importance of knowing your audience, leveraging existing communications and utilizing non-standard avenues of communication.  View this webcast to learn about what makes communications clear and effective for your employee population.

    Webcast Materials

    Speakers:

    (One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

    Have a question about this webcast?

    For  inquiries call our office at (408) 979-8700

    Or feel free to email your questions to Info@sos-team.com

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    Staying Cool with Xtra

    Several heat waves have hit the country from east to west and everywhere in between. Stay cool with a tall iced beverage and the latest issue of Xtra.

    In this issue we have the last article in our equity education series on Restricted Stock Awards, the latest industry gossip, info on the is the SOS/TD Ameritrade webinar and more. And while you are waiting out the heat, make sure to choose your sessions for the 26th Annual NASPP Conference in September. We can’t wait to see you there (we'll be in booth 706)!

    SOS is the only true outsourcing firm within the equity compensation marketplace. We deliver a team-based approach to filling that empty chair in your department. SOS takes away the burden of hiring, retaining, managing, and replacing a direct hire.

    All About ESPPs

    In our final installment in the Beginner’s Equity Series, we discuss the 423 Qualified[i] Employee Stock Purchase Plan (the “ESPP”).  ESPPs are generally only offered to employees by publicly traded companies.  Private companies usually do not offer ESPPs due to illiquidity and securities law issues.  Another form of ESPP is the non-qualified 423 ESPP.  These types of ESPPs are complex and are not suited for a beginning equity series.

    Enrollment period:  The eligible employee enrolls in the ESPP during the open enrollment period.  During this period the employee commits to having a percentage of his/her salary deducted during the offering period to purchase company stock on the next purchase date.  The percentages allowed are defined in the company plan document but generally fall between 1-15%.  No deductions are made during this period for new enrollees. This period usually runs 2 to 4 weeks prior to the beginning of the offering/purchase period.

    Offering/Purchase[ii] period:  Payroll deducts money from the employee’s salary in accordance with the percentage chosen and the company deposits employee contributions in a separate bank account that does not co-mingle the funds with the company’s general funds.  Employees may be able to change their contribution percentage (either increase or decrease) in compliance with the plan rules during this time.  Depending upon the plan rules, employees may be able to withdraw during the period and obtain a refund of all contributions during the period.  The plan also may offer the employee the choice to suspend their contributions.  Suspension of contributions means that the employee will stop future contributions but will leave any period to date contributions to be used to purchase shares on the purchase date.

    Purchase date:   At purchase, the company calculates the number of shares each employee can purchase, based on the plan parameters.  Some plans will stipulate that the purchase price is 85% of the fair market value on the purchase date.  Other plans state that the purchase price is 85% of the lesser of the fair market value on the purchase date or the offering period begin date.  This type of price calculation is called a “look-back” feature.  Once the number of shares purchased by the employees is finalized, the company deposits shares into employee accounts.  If the purchase is for a Section 16 reporter, Legal will need to report the shares purchased in a public filing.

    No Federal or state taxes are due at purchase (except in Pennsylvania).

    Accounting/Treasury reconciles the bank account to ensure the correct amount of money was received from employees and deposits the purchase funds into the company’s general account.

    Finance reports in the 10-Q/K information about the purchase and the number of shares still available for purchase under the ESPP.

    Share tracking after purchase:  Since the taxable event for US employees occurs at sale, it is vital to track the sale of ESPP shares for US employees.  If shares are sold within the required holding period (two years of the beginning of the offering period and one year after the purchase date), the discount amount (difference between the Fair Market Value on the date of purchase and the purchase price) must be reported on the employee’s Form W-2 in the year of the sale.  This is called a disqualifying disposition.[iii]

    If the employee holds the shares and sells after the holding period requirements have been met, this is a qualifying disposition.  A qualifying disposition results in the company reporting income on the employee’s Form W-2 equal to the lesser of (1) the gain on the actual sale (sale price minus purchase price) or (2) the purchase price discount on the date of grant.

    Generally, the broker tracks these sales and reports the sale information to Stock Administration.  Stock Administration uploads this information into the stock administration system and generates a report for Payroll.  Payroll includes the information on the employee’s Form W-2, but does not withhold taxes from the employee’s paycheck.

    Sales must be tracked for Section 16 reporters, as they must be publicly reported two business days after the sale.

    Tax implications for the company:  If the company tracks disqualifying dispositions and reports them on the employee’s Form W-2, they are entitled to a corporate tax deduction in the amount of compensation they report on behalf of the employee.   The Tax Department will request reports from Stock Administration regarding the amount of disqualifying dispositions on a quarterly basis to estimate the tax deduction for the year.

    Stock Based Compensation Expense:  Finance will start calculating and disclosing expense (in the 10-Qs and 10-K) until the purchase date.  The ESPP expense treatment depends on the amount of discount offered under the plan.  If the purchase price is 95% or more of the fair market value on the purchase date, the plan is considered to be “non-compensatory” and no expense calculations are required.  If the plan does not meet those guidelines, then ESPPs are valued much like stock options.  ESPP expense can become very complex depending on the plan features such as discount, employee ability to increase contributions and the existence of a “look-back” feature.  Any true up expense calculations are also performed by Finance and reported after the conclusion of the purchase period as a result of terminations or salary changes.

    Company’s US reporting obligations[iv]The company reports the income from a disqualifying disposition on the employee’s Form W-2 for the year of sale.  The company also is required to report any qualifying dispositions on the employee’s Form W-2 for the year of sale.

    The company is also statutorily obligated to make additional reporting.  Under Internal Revenue Code Section 6039, the company must provide a statement to the employee regarding certain details of the purchase(s).  The statement(s) must be mailed no later than January 31 of the calendar year following the year of the purchase(s).  Additionally, the company must also transmit electronically this information to the IRS by March 31 of the calendar year following the year of purchase(s).

    Non-US employees:  While an ESPP may be allowed in certain counties, others have very different plan features and taxation rules and therefore are out of the scope of this document.


    [i] A Qualified ESPP is one that qualifies under Internal Revenue Code Section 423.  The ESPP must meet the following requirements:

  • Only employees may participate in the ESPP;
  • The ESPP must be approved by the company’s shareholders;
  • No employee may participate if they own 5% or more of the company’s shares;
  • The employee’s right to purchase is non-transferable;
  • An employee may not purchase more than $25,000 worth of company stock in each calendar year, based on the price of the stock on the enrollment date;
  • The purchase price may not be less than 85% of the lesser of the fair market value on the first day of the offering period or the purchase date;
  • The offering period may not exceed 27 months; ; and
  • All eligible employees must be allowed to participate; although some categories of employees may be excluded based on length of employment and customary work hours
  • [ii] The Offering period and purchase period terms are used interchangeably in some plans, but this is not true for all plans.  Generally, this is the period preceding the purchase during which the company is withholding contributions from employee paychecks in anticipation of the purchase date.

    [iii] A qualifying disposition is a sale that occurs after satisfying the holding period (two years from the beginning of the offering period and one year after the date of purchase).  The employee recognizes compensation income equal to the lesser of:  (i) the discount at enrollment date, or (ii) the actual gain on the sale.  No taxes are withheld by Payroll - the employee reports sales and pays taxes on the Form 1040 for the year in which the sale occurred.

    [iv] International reporting obligations vary from country to country.  This document only addresses IRS reporting obligations for US taxpayers.

    Upcoming Equity Compensation Webcast

    Our webcasts cover high-priority equity compensation topics

    SOS Educational Webcast: Empower your Employees: Best Practices for Equity Plan Communications

    Thursday, September 13, 2018 11:00 AM PDT

    Crafting communications never seems to be the highest priority in equity administration. But the importance of communication is underestimated. We will cover the importance of knowing your audience, leveraging existing communications and utilizing non-standard avenues of communication. Join us to learn about what makes communications clear and effective for your employee population.

    (One hour of Certified Equity Professional continuing education credit is available for attending. See the 
    CEPI website for more information on CEP continuing education requirements.)

    Speakers:

    ●  Rachel Southorn, CEP, Stock & Option Solutions, Inc.

    ●  Scott Shuryn, TD Ameritrade

    There’s no time like the present. Don’t wait another minute to get the support you need.

    SOS Front & Center: LoAn Nguyen

    LoAn brings almost 15 years of finance and stock administration experience to the table. She started her journey in finance, tackling the banking and mortgage worlds and coming out with a can-do attitude, impeccable attention to detail, and a strong management foundation. As she has worked her way up from stock administrator to account manager, she has demonstrated expertise in both equity Edge Online and Fidelity PSW. LoAn wrangles the day-to-day tasks of stock administration while seamlessly balancing multiple special projects and multiple clients.  LoAn just recently earned her CEP Designation in November 2017 and was recently promoted to a Team Leader, Client Management role with SOS.

    Here’s what LoAn’s clients have to say about her:

    “LoAn is a great resource partner to our small compensation team.  In the past year, she has helped us improve our equity process, communications with external vendors, and other internal processes.  She is a great communicator and efficiently interacts with all functions.  LoAn is very well versed in the various equity administration tools and is able to provide simple solutions to head scratching issues.  Most importantly, LoAn is a relator and is truly invested in her client’s success.  I enjoyed very much working with LoAn this past year and look forward to our continued partnership.” Angelica Jusino, HGV

    “We have partnered with SOS for almost 5 years and over that time, we have expanded the services that SOS provides where they are now an integral and valued part of our equity administration model in the United States.  Their knowledge of our programs, their professionalism, and prompt response times are very much appreciated by our employees.  Equity plans can sometimes be complex and confusing, and the time that SOS takes to explain these topics and resolve issues is invaluable. A significant reason why our relationship with SOS is so successful are the efforts demonstrated by LoAn Nguyen.  Her attention to detail, in depth knowledge of equity plans, her professionalism, dedication, and work ethic are all key traits why our relationship with SOS is so strong.  She is committed to seeking resolutions quickly, is always empathetic to participants’ frustrations, is always solutions oriented, yet remains consistent with the plan rules.  I thoroughly enjoy and very much appreciate the value that LoAn brings to her work.  Stock plan administration is always a challenging topic, but LoAn makes working through even the most challenging of issues an enjoyable experience.” Andy Genecki, Sanofi

    Across Our Desk

    SCOTUS rules on stock options.

    What will we sip iced coffee from?  The iconic green straws are going away.

    Return of the IPO on the horizon for several companies?

    First GDPR in Europe, now AB 375 in California……

    Is eating your vegetables really that good for you?

    SOS Xposé

    ...tender tidbits about people and players in our industry...

    Work, work, work… Julie Ray is Director, Global Stock Plan Administration at Zynga.  Guy Schouten is the new Global Equity Administration Specialist for Hewlett Packard Enterprise.  Alex Florea is the new Director, CEP Institute at Santa Clara University. Dan Walter and Melanie Jameson are both now working for FutureSense, LLC. Dan as a Managing Consultant and Melanie as a Senior Consultant, Director of Marketing & Communications. David Hanes is a Strategic Service Manager with the Equity Plan Advisory Service group at UBS.

    Putting down roots… SOS’s Clint Goodin and his fiancé, Carly, have purchased their first home together in Nashville and they can’t wait to hear “wedding bells” with friends & family in October!

    Industry News… SOS is hiring! We are looking for contract Stock Plan Administrators to fulfill several projects. We are specifically looking for coverage for a 12-month project in the Nashville area (onsite or remote), a 6-month project in Seattle (onsite or remote) and also we have a great contract to direct with a pre-IPO company in San Francisco. For more details contact Carole Dubas. The 26th Annual NASPP Conference and Exhibition, scheduled for Sept. 25-28 in San Diego, is fast approaching. Register by August 10 to save, and be sure to check out the full line-up of sessions and featured speakers here.

    SOS’s newest team members…

    Vangie Alconis, People Solutions Team

    From the SOS Webcast Archive...SOS Educational Webcast: RSU Basecamp-Your Staging Area for the Climb Ahead 

    Stock & Option Solutions Logo


    SOS Xtra Editor: Shawna Casey
    Did you miss an issue of Xtra? View our complete newsletter archive from our website here.
    Miss a webcast? You can find links to recordings, as well as the materials, on our webcast page.


    Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisers. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.

    Summary:

    As experienced Stock Administration Managers, we have noticed that certain issues seem to pop up time and again, causing headaches wherever we go. Different companies manage their trading windows, release dates, documentation and other processes in a variety of ways, some of which can be quite creative. We will present a sampling of these issues, noting the problem and the reason that it is important. We’ll give some examples of our experiences, and we’ll discuss the best ways to handle these problem issues.

    Webcast Materials

    Speakers:

    (One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

    Have a question about this webcast?

    For  inquiries call our office at (408) 979-8700

    Or feel free to email your questions to Info@sos-team.com

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    Summary:

    How do you determine your Employee Stock Purchase Plan (ESPP) expense? SOS has been helping clients with this task whether they have a simple plan with no modifications, or a more complex plan where modification accounting is triggered from resets, rollovers or contribution increases. In this solutions webcast we will provide an overview of our newest solution to ESPP expensing that allows you to project your expense and finalize your true up, including modification impacts.

    Webcast Materials

    Speakers:

     

    Have a question about this webcast?

    For  inquiries call our office at (408) 979-8700

    Or feel free to email your questions to Info@sos-team.com

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    Summary:

    6039 compliance was nerve-wracking in 2010, but almost routine in 2011. Now, as the IRS begins to catch up with the multitude of early errors that were made, the end of 2016 is a good time to ask, “Is my 6039 compliance in good hands?” In this SOS Solutions webcast, members of our experienced and elite 6039 outsourcing team will discuss HOW SOS ensures the integrity and timeliness of client filings and participant mailings. 6039 certainty now will give you a peaceful mind in the New Year.

    Join us in this solutions webcast that will cover:

    • An overview of the regulation (for the 6039 newbies, but a good refresher course for everyone)
    • The SOS 6039 outsourcing process and safeguards
    • Common data issues, and the audits we use to catch them
    • Preemptive actions our clients can take to ensure data accuracy
    • SOS added value for 6039
    • Lessons learned

    SOS solutions for electronic delivery of 6039 statements

    6039 compliance can seem easy. In this webcast, SOS will show you how we make sure it is both easy and right.

    Webcast Materials

    Speakers:

    Have a question about this webcast?

    For  inquiries call our office at (408) 979-8700

    Or feel free to email your questions to Info@sos-team.com

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    Summary:

    Outsourcing is defined as the contracting out of a business process. The term "outsourcing", as we have learned, can mean something very different from one company to another; though the idea might be the same, the model varies significantly. The decision of determining if outsourcing is right for your company can be difficult since passing off any level of work to a third party comes with its own risks.

    In this SOS Educational Webcast we will delve into:

    • Different types of co-sourcing/outsourcing models in the industry
    • What helps to make a decision on outsourcing (pros/cons)
    • How to work with your vendor(s) in preparing:
      • Employee communications
      • Management planning
      • Problem resolution
      • Financial reporting
    • Best practices for administrative challenges and frequently asked questions

    Join our expert panel in this discussion that will leave you with more answers and a clearer picture on how outsourcing can work best for YOU.

    Webcast Materials

    Speakers:

    Have a question about this webcast?

    For  inquiries call our office at (408) 979-8700

    Or feel free to email your questions to Info@sos-team.com

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