November 9, 2018 Tim Nguyen

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.)


●  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?

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SOS Xtra Editor: Shawna Casey
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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.