SOS Xtra 5/15: ESPP: Tired or Trendy?, Product Spotlight: ESPP and SOS Outsourcing, Accounting for ESPP: Not as Easy as it Should Be, SOS Online Demo, Market Research Survey, MS Access Webcast, DTA Balance Proof Application, Xpose

May 20, 2015
Volume 8, No. 3

In this issue:

ESPP: Tired or Trendy?

Product Spotlight: ESPP and SOS Outsourcing

Accounting for ESPP - Not as Easy as it Should Be 

SOS Excel Demo - Goal Seek

May Market Research Survey

Free SOS Educational Webcast: Adding Access to your Stock Plan Professional Quiver

We've Got an App for That! 

SOS Xposé

Subscribe to Xtra!
Request a call from an SOS Team Member to get answers to your questions and further discuss your needs-click here
SOS Employment Opportunities

From the SOS Library:

Accounting for ESPPs - Share True Ups?

From the SOS Webcast Archive-

Executing Exceptional ESPP

Our Services: 


Equity Compensation Projects/Consulting

SOS-TEAM Outsourcing

Contact Us:

On our webpage


ESPP: Tired or Trendy?

Here at SOS we are big fans of ESPPs - because we really do believe in the ideas behind equity compensation (big surprise): attracting, retaining, and motivating employees. We do think that equity comp, when properly designed and communicated, can really help with all three. And ESPPs can be a big part of that. Whether you are a brand new public company or you've been public for years, these plans can be a great way to engage your employees and get them to start thinking like owners.

We've been getting a lot of requests for assistance with ESPPs of late, from helping to roll out a new plan, to providing an enrollment website, to filing the requisite forms 3922, to calculating (or forecasting) expense.  So we decided to take a look at the existing data on ESPPs to see if we could glean any trends.

We reviewed survey data compiled by the National Association of Stock Plan Professionals (NASPP) and Deloitte Consulting LLP in 2011 and 2014, and also some recent survey data from Fidelity Stock Plan Services working with Radford. Here's what we found.

Six-Month Offering Periods Are Slammin'
Six-month offering periods are all the rage! (And they have been for some time.) While it's true that other lengths of offering periods are increasing in popularity and 6-month periods are actually decreasing slightly, 6-month plans are still far and away the most popular. 

And the Fidelity survey confirms this, however in the Fidelity survey results, 6-month offerings held sway by only 6%; 39% of respondents offered a 6-month plan with 33% offering a 3-month plan.

Discount Dogma
In 2011, 71% of all 423-plans had a 15% discount. And apparently companies are finding that works for them since that number increased just a smidge to 72% in 2014. The Fidelity survey shows that 52% of responding companies have a 15% discount.

Lookbacks Are Liked
For the uninitiated, a lookback is the ability to purchase shares on the purchase date at the lesser of the discounted enrollment date market value or the discounted purchase date market value - so if the stock price goes up during the purchase period your employees could be purchasing stock at a much greater discount that the discount % implies. In 2011, the NASPP survey showed 62% of the 423-plans had this feature. In the 2014 survey, that number climbed just slightly to 63%. So apparently lookbacks are here to stay. At least for the time being... And we are big fans.

Raves about Resets
A number that appears to have jumped sharply is the number of plans that have a reset or rollover feature.

To quote the NASPP survey results' definition "Automatic reset provisions are common in ESPPs that have an extended offering period with multiple purchases throughout the offering. Under the automatic reset, if the market value on one of the interim purchase dates is lower than the market value at the start of the offering, all participants are automatically withdrawn from the offering and re-enrolled at the current price. This locks in the lower price for the duration of the current offering, or longer if the reset triggers the start of a new offering."

The 2011 survey shows only 15% of plans with a reset or rollover, whereas the 2014 survey shows a total of 40%. That seems like quite a leap in only four years. However, the numbers don't quite add up since the 2011 survey had 284 responses to this question, but only 67 companies with an offering period longer than 6 months (and generally this feature is only available for plans with longer offering periods and multiple purchase periods in each offering). The absolute number of plans with this feature actually decreased from 42 to 31. But the number of respondents to this question also dropped from 284 to 79.

The Fidelity survey does not include data on this topic.

Holding Periods are Hot
Holding periods can be very handy for helping you harvest disposition data with ease. (Yes, I tried to get even more H words into that sentence, but I failed.) Companies often put restrictions not on the sale of shares, but on the transfer of shares out of an account with a designated broker. Keeping the shares at the designated broker lets the broker report the sales to the company and eliminates the painful process of paper surveys to track and report (and include in W-2 income) dispositions. In our experience, though, most companies limit the holding period to be 1 year from purchase and 2 years from enrollment period. This is a help.  However, if participants transfer shares after that, it's a qualified disposition, which you're still supposed to track and include the income on a W-2. We at SOS are big fans of holding the shares with the designated broker even longer (forever, in fact). Of course, if you change designated brokers, you may have an even bigger headache. We should also mention that not all holding periods are designed to ease the disposition reporting issue. Some are designed instead to reduce the "flipping" of the acquired shares.

But on to the data... in 2011, 20% of companies with 423 plans had some kind of holding period. In 2014, this crept upwards to 22%. Not a huge leap, but a gradual evolution in the right direction (in our opinion). The Fidelity survey showed 23% of plans with a sale restriction and 45% (!) with a transfer restriction.

Evolving ESPP
Are ESPPs evolving at the rate we'd like? No. We'd prefer to see everyone with a 6-month plan, a holding period that lasts until the end of time and a single designated broker. However, they do seem to be here to stay and they do seem to be moving in the right direction.

Interested in any more of our opinions about ESPPs? Email us at


Elizabeth Dodge, CEP, Vice President
Stock & Option Solutions

Elizabeth is the Vice President of Product Management for Stock & Option Solutions, Inc. (SOS). She also runs the Strategic Solutions and Accounting Solutions groups. Her responsibilities include monitoring new developments in the equity compensation arena, performing market research, speaking at industry events and helping SOS clients with all kinds of equity compensation challenges.

Product Spotlight: ESPP and SOS Outsourcing

Does managing your ESPP feel like a second job for you? Then let SOS Outsourcing take over, and allow you to get back to your first one.

The predictions of the demise of Employee Stock Purchase Plans (ESPPs) due to expensing have proven to be untrue. These plans are as popular as ever. While they are a huge benefit for your participants, administering these programs can be disruptive and time-consuming because so much needs to get done in such a short period of time. The added stress and workload on your already busy schedules is a serious issue, and may result in errors that effect your participants, impact morale, and may even cause loss of staff. 

SOS Outsourcing is completely customizable to the needs of each of our clients, and offloading the management of your ESPP is one significant way our clients choose to leverage that flexibility. Further, SOS outsourcing works with the platform you've chosen for administration. Using our services does not require changes to your platform or broker.

  • Participant education
  • Management of the open enrollment process
    • Participant communications
    • New enrollments, changes in contribution levels, withdrawals
    • Work with payroll on deductions
  • Database updates
    • Participant data
    • Plan settings
  • Purchase processing including coordination with Transfer agent and broker(s)
  • Audit, reconciliation and share balancing
  • Assistance with payroll reporting in multiple jurisdictions
  • ESPP accounting, including modification accounting
  • SEC Form 4 filings, if applicable
  • Disposition trackings
  • 6039 (Form 3922) filings

Whether you are looking to selectively outsource certain stock plan-related functions (like ESPP administration), or want SOS to take more off your plate, with SOS you will work with an expert who sits on your side of the table; a completely accountable part of your team focused on providing the high level of service to your participants and your collegues you demand, while giving you the ultimate in resource flexibility and cost efficiency. A win-win for your business.

To learn more, and get pricing for outsourcing your ESPP administration to SOS, please click here.

Your dream job is waiting

 Become a fan of SOS



Accounting for ESPP - Not as Easy as it Should Be

Accounting for stock options and restricted stock is now fairly straight-forward, right? So, why does it seem that we're all still struggling with accounting for Employee Stock Purchase plans - especially those fabulous Section-423 qualified plans that are all the rage? It's probably because there are a few different pieces with which we need to contend, all of which we've seen trip some companies up.

Fair Value with Three Components
Unlike a time-based stock option or restricted stock unit, and ESPP grant-date fair value can contain up to three different components:

  1. Discount - most 423 ESPPs allow participants to purchase stock at a discount, so the fair value needs to reflect the discount at the enrollment date. If your enrollment date market value is $10 and your discount is 15%, this piece of the fair value is calculated by multiplying the marketing value by the discount %.
  2. Lookback - if your plan allows participants to purchase at the lesser of the market value on the purchase date OR the enrollment date, your participants have the ability to benefit from an increase in the stock price. Just as with time-based stock options, this is included in the fair value by using the "call output" of an option-pricing model (generally a Black-Scholes model). Now multiply this call output by the inverse of the discount (e.g. 1-15% or 85%) to come up with the "discounted call" component of your fair value.
  3. No beginning price limit - if your employees can purchase more shares if the stock price drops during the purchase period, your participants have the ability to benefit from a decrease in the stock price.  This potential benefit is included in the fair value by using the "put output" of an option-pricing model (generally a Black-Scholes model). Now multiply the put output by the discount % (e.g. 15%) to come up with the "discounted put" component of your fair value.
Most equity compensation recordkeeping systems can, and do, include all three components when calculating their ESPP grant-date fair value However, if you are doing your ESPP expense in a spreadsheet, one error we've seen made multiple times is when clients use the discounted purchase price in the Black-Scholes model instead of the full purchase price. For example, if the FMV is $10 and they have a 15% discount, clients use $8.50 as the strike price instead of the full $10.Remember that the value of the discount is already included in the Discount component, so using a discounted purchase price in your Black-Scholes is really "double counting" the discount and giving you a higher fair value than is required.

$25K Limit Impact on Estimated Shares
ESPP expense is based on estimated contributions because how much will be contributed equates to how many shares can purchased. The estimated number of shares the participant can purchase multiplied by the fair value gives you their estimated expense. This seems like easy math at the outset: If a participant is contributing $100 and the purchase price is $8.50, then they can purchase 11 shares (rounded down).

However, because the $25K limit is complicated, estimating the number of shares that can be purchased when/if contributions might exceed that limit is also complicated. This is generally only a concern for more highly compensated employees, since both the limit and the estimated shares are based on the enrollment date market value. Although in some locations and if you allow higher contribution percentages, many of your employees might come close to or exceed the limit -  especially on the purchases that occur later in the year. Consider an employee making $125,000 annual salary and contributing 20% of her salary. If our enrollment-date market value is $10, and you have two purchases a year, she will exceed the $25K limit with her second purchase.

Salary $125,000
Contribution % 20%
6-month Contribution Amount $12,500
Enrollment Date Market Value $10
Discounted Purchase Price $8.50
Estimated Shares per Purchase 1,470*
$25K Limit Shares Per Year 2,500
* equals 2,940 shares for the entire year

Further, if your offering period is outstanding in more than one calendar year, any unused limit from the prior year can and should be carried forward to the follow year. 

In addition, any shares that are estimated to be purchased in the year should be subtracted from the $25K limit when calculating the limit for subsequent purchases. For example, in the scenario above, the first purchase of the year used 1,470 shares of the 2,500 shares available in the limit, so when calculating expense for the second purchase of the year, only 1,030 should be estimated for expense purposes.

Modification Accounting
Modification accounting is required for purchase plans that allow a participant to elect to increase their contributions during the offering period and for plans that contain a reset or rollover feature. A reset or rollover feature is triggered when the stock price drops during the purchase period, either resetting the offering to use the new lower price as the enrollment date market value or rolling all participants into a new offering, again with the new lower enrollment date market value. However, the accounting treatments for the two types of modifications are different.

An increase in contributions is treated as a new grant, with a new fair value calculated just for the additional shares that the participant can purchase with the new contribution amount.

A reset or rollover modification requires that you continue to recognize the original grant date fair value, but then add the incremental value for the modification. Determining any incremental fair value is performed by calculating the fair values immediately before and immediately after the modification. The difference in the fair value before and after will be due to the change in the purchase price.
Very few equity compensation recordkeeping systems can perform modification accounting for ESPPs.  As a result, companies are often forced to use complicated spreadsheets to calculate this impact on their expense.

True Ups
After the purchase has occurred, clients often wonder whether or not expense should be trued up to the actual number of shares purchased.  The answer is Yes and No. There are only two cases in which expense should be trued up: 1) for terminations and 2) for salary changes (this includes bonuses if they are an included wage type). There are many scenarios in which the actual number of shares purchased will vary from the estimate. Here is a chart of some of the reasons, whether or not to true up and an explanation for why a true up should occur.

Reason for Change True Up? Explanation/Reference
Termination Yes

Just as with a stock option or restricted stock/unit that fails to vest due to a failure to meet the requisite services period, the grant is forfeited.  Therefore, the expense should be reversed.
ASC 718-50-35-2:
"However, no compensation cost should be recognized for awards that an employee forfeits because of failure to satisfy a service requirement for vesting."
Salary Increase Yes ASC 718-50-35-1: "Changes in total employee withholdings during a purchase period that occur solely as a result of salary increases, commissions, or bonus payments are not plan modifications if they do not represent changes to the terms of the award that was offered by the employer and initially agreed to by the employee at the grant (or measurement) date. Under those circumstances, the only incremental compensation cost is that which results from the additional shares that may be purchased with the additional amounts withheld (using the fair value calculated at the grant date)."
Bonus (if included wage type) Yes Ibid
Lower Salary Due to LOA/Part-time change, etc. Yes Ibid
Price Decline = More Shares
More shares purchased due to a decline in the stock price
No ASC 718-50-55-5:
"Other ESPPs (Type B plans) do not fix the number of shares that the employee is permitted to purchase if the exercise date stock price is lower than the grant date stock price. In effect, an ESPP that does not fix the number of shares that may be purchased has guaranteed that the employee can always receive the value associated with at least 15 percent of the stock price at the grant date... . That provision provides the employee with the equivalent of a put option on 15 percent of the shares with an exercise price equal to the stock price at the grant date. ... A participant in a Type B plan receives the equivalent of both a put option and a call option."
In other words, the put component in the fair value already considers the possibility that the stock price will decrease during the period and the participant will be able to purchase more shares. Therefore, you have already included this possibility in your expense calculation and no true up for the additional shares purchased is required.
Participant Voluntarily Withdraws from the plan without terminating their employment
No ASC 718-50-35-2:
"Any decreases in the withholding amounts (or percentages) should be disregarded for purposes of recognizing compensation cost unless the employee services that were valued at the grant date will no longer be provided to the employer due to a termination.  ... The accounting for decreases in withholdings is consistent with the requirement in paragraph 718-10-35-3 that the total amount of compensation cost that must be recognized for an award is based on the number of instruments for which the requisite service has been rendered (that is, for which the  requisite service period has been completed)."
Decrease Contribution % No Ibid
Increase Contribution % No This should be accounted for as a modification, with a new fair value for the additional shares purchased, so a "regular" true up should not be performed.

ASC 718-50-55-29:
"Likewise, although not a change to the terms of the ESPP, an election by an employee to increase withholding amounts (or percentages) for future services (Type F through Type H plans) is a modification of the terms of the award to that employee, which, in substance, is similar to an exchange of the original award for a new award with different terms. Accordingly, the fair value of an award under an ESPP with variable withholdings should be determined at the grant date (using the Type A, Type B, or Type C measurement approach, as applicable) based on the estimated amounts (or percentages) that a participating employee initially elects to withhold under the terms of the plan. Subsequent to the grant date (except as noted in paragraph 718-50-35-1), any increases in withholding amounts (or percentages) for future services should be accounted for as a plan modification in accordance with the guidance in paragraph 718-20-35-3."
Reset / Rollover No This should be accounted for as a modification, with any incremental expense being calculated, so a "regular" true up should not be performed.

ASC 718-50-55-29:
"The basic measurement approach described above for a Type C plan also should be used to value awards under ESPPs with multiple purchase periods that incorporate reset or rollover mechanisms (that is, Type D and Type E plans). The fair value of those awards initially can be determined at the grant date using the graded vesting measurement approach. However, at the date that the reset or rollover mechanism becomes effective, the terms of the award have been modified (the exercise price has been decreased and, for a grant under a Type E plan, the term of the award has been extended) which, in substance, is similar to an exchange of the original award for a new award with different terms. Statement 123(R) modification accounting should be applied at the date that the reset or rollover mechanism becomes effective to determine the amount of any incremental fair value associated with the modified grant."


Elizabeth Dodge, CEP, Vice President
Stock & Option Solutions

Elizabeth is the Vice President of Product Management for Stock & Option Solutions, Inc. (SOS). She also runs the Strategic Solutions and Accounting Solutions groups. Her responsibilities include monitoring new developments in the equity compensation arena, performing market research, speaking at industry events and helping SOS clients with all kinds of equity compensation challenges.

SOS Excel Demo - Goal Seek

Elizabeth Dodge delves into Goal Seek in Excel. This is one function you will want to have in your back pocket.  

May Market Research Survey

Complete the survey and be entered into a drawing for a $100 Visa gift card!

Periodically, SOS will ask for issuing companies' participation in a market research survey to enhance our understanding of current practices and trends in the industry and to provide our clients insight into the practices of other issuing firms. Our surveys are brief, taking no more than 5 to 10 minutes to complete.

Complete the survey today!

Please note that only issuing companies, not vendors or consultants, should complete the survey and are eligible for the drawing. Thank you for your cooperation!

Free SOS Educational Webcast:

Adding Access to your Stock Plan Professional Quiver

Please join us for our next educational webcast on June 23, 2015 at 11am Pacific Time, 2pm Eastern Time.


Most Stock Plan Professionals are forced to utilize different tools to accomplish our goals, no matter how great a stock plan system we have. Many Stock Plan Professionals already have MS Excel in their bag of tricks, but what other tools should they add? MS Access should be on the top of your list. Adding a basic database application, MS Access, to your tool belt may seem daunting, but there are some basic things that you can do without significant effort. 

In this educational webcast you will learn from our SOS Access experts about some of the more common uses of Access. Join our panelists and learn some of the basics of MS Access from getting started with a blank database, linking to external data, creating queries, and exporting to Excel for further analysis or deliver to other departments. 


(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.)?


 Sharing is caring. Check out our library of Excel videos. Knowledge IS power, afterall. 

We've Got an App for That!

Work smarter, not harder with our new SOS DTA Balance Proof Application. Saving time has never been easier. 

Heaven's got a new angel. Our hearts go out to the friends and family of a young Solium employee, Jillian Lavalle, who was killed by a drunk driver this month. Jillian took a cab one evening and it was tragically hit by a drunk driver that killed both Jillian and the cab driver, Amritpal Singh Kharbanda. A legacy fund in memory of Jillian has been created and all funds raised will go the cab driver's family and MADD Canada.

SOS Xposé

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

A new face around the office...Matt Abram is the new Vice President at Fidelity Investments and is now working from the Phoenix, Arizona office. 
Walking with purpose... Leah Lane of SOS walked in the March of Dimes, March for Babies, last month with her two dogs, Wyatt and Duncan with a contribution of $50.00. In April, Leah also walked with Dog Scouts in the Morris Foundation K-9 Cancer Walk contributing another $50.00. (Money contributed was raised, in part, via SOS recycling efforts).

Can't wait... Joanne Sucgang of Genentech and her husband, Charlie, are expecting baby number 2 (a girl this time!) in August. Her big brother Nathan can't wait to meet her!

Making a fashion statement... Jocelyn Finn of Progress Software sent us this cute photo of her daughter, Ashleigh, wearing her SOS onesie (on her christening day, under the dress!). Too cute!

Making Moves... SOS's own Andrea Best, Managing Director of People Solutions, has relocated from sunny South Florida to West New York, NJ this month. Look at the view she has! This move means that she will now represent SOS in the Northeast market. Catch up with Andrea at the 7th Annual New England NASPP Regional Conference on July 16th.   
SOS is hiring and here is our latest addition:
April Kilgore (Outsourcing)

SOS Xtra needs your news! 

Know anyone in our equity comp industry who's taken a new job? Anyone expecting an addition to the family? Anyone moving, getting married, releasing a new product, rolling out a new program, etc.?

Please send over any ideas/thoughts you have to, we're happy to track down the person/company to confirm the news and get their acceptance to include it in Xtra. (All news is reviewed and approved by the person and/or company involved.)

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 advisors. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.

Stock & Option Solutions | (888)SOS-0199
SOS Xtra Editor: Shawna Casey