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  • Feb 21 / 2017
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New FASB Equity Comp Accounting Standard Updates Making Headlines

As you’ve likely heard, in March of 2016, the FASB board released an Accounting Standards Update (Update 2016-09) with several changes that impact accounting standards for stock option and equity compensation plans. The intent of these changes was to simplify the accounting processes related to equity compensation plans.

Though FASB updates are generally considered fairly droll occurrences, these updates have already made headlines as some issuers with high-value plans make the switch. On February 3rd, the Wall Street Journal reported that Facebook Inc.’s earnings in 2016 included a more than $900 million boost from accounting changes, primarily related to the change that calls for running excess tax benefits from stock option exercises directly through the income statement, which reduces the provision for taxes and therefore increases net income.

As a quick recap, the main updates included in ASU 2016-09 were as follows

• Forfeiture Accounting – When recording the amortization of stock compensation cost, the accrual values are currently based on the number of awards that are expected to vest, requiring the issuer to estimate a forfeiture rate. This update allows an entity to make an entity-wide accounting policy election to either use a forfeiture hedging estimate to estimate the number of awards that are expected to vest, or to account for forfeitures real-time in the financial reporting period in which they occur. This shift is made much easier to implement by the fact that equity compensation systems such as OptionTrax® can automatically track forfeitures and adjust stock comp expense accordingly in the period in which the forfeiture occurs.

• Statutory Withholding on Exercises & Vests – In the past, employers were allowed to withhold only up to the minimum statutory tax rate for awards without causing the award to be classified as a liability award (requiring variable accounting over the lifetime of the award). The revised standard now allows employer share-based withholding up to the maximum statutory tax rates applicable in the issuer’s jurisdiction. It is important to note, however, that despite the updated FASB rules regarding tax withholdings for financial accounting purposes, there haven’t been changes in Treasury regulations (i.e., the methods to determining the withholding rate for supplemental wages still include the choice of only (1) mandatory flat rate withholding; (2) optional flat rate withholding; and (3) aggregate method withholding). As a result, before making changes to the withholding method for plan participants, it is important to understand and consider the IRS guideline implications.

• Statement of Cash Flows Classification of Employee Taxes Paid When an Employer Withholds Shares for Tax-Withholding Purposes – Until now, there has been no clear guidance on how cash payments made by a company to tax authorities for taxes on exercise or vest when an employee withholds shares, should be classified on the Statement of Cash Flows. This is now clarified, and should be classified as a financing activity.

• Private Entity Intrinsic Value Accounting – As per this update, nonpublic entities will be permitted to make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value. Since the initial adoption of ASC 718 private entities have had this option, however, FASB acknowledged that many private entities were not aware of the option, and has therefore authorized this one-time switch over of methodologies.

Facebook is not alone. Google parent, Alphabet Inc., and Microsoft Corp. have also seen an increase in earnings due to early adoption of the change. And it is likely that there will be more announcements of significant earnings impact, as other major tech companies and industries adopt the changes in the coming year.

Along with simplifying the rules, such results may boost the popularity of equity compensation plans even further. It also shows that while change is never easy, dragging your feet on this particular set of updates carries a real opportunity cost!

Have questions regarding FASB Update 2016-09 or best practice in managing your equity compensation plan?
Contact us today at [email protected]!

  • Sep 29 / 2016
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Blog, SEC

Clawback in Action – the Wells Fargo Cautionary Tale

Wells Fargo has officially announced that it will be clawing back $41 million from CEO John Stumpf, and an additional $19 million from former community-banking head Carrie Tolstedt, in the form of unvested equity awards.

With the increase of “say-on-pay”, where investors demand the right to vote on executive compensation, and pressure from proxy advisory firms such as ISS, clawback provisions are increasingly found in equity compensation plans. Yet, clawbacks are much more common on paper than in practice.

The Wells Fargo clawback provisions can be triggered by misconduct that does reputational harm to the bank; improper or grossly negligent failure, including supervisory capacity, to monitor or manage material risks to the bank or business group; and a material failure of risk management, among others. Given the apparent expanse of the retail bank’s fraud and size of the scandal it has created, the decision to invoke the clawback may seem unsurprising. And yet, this move comes only after intense scrutiny by the US Senate Banking committee and after the House Financial Services Committee scheduled an additional hearing for today.

The bank’s initial reaction to the scandal was to tout the fact it had fired 5,300 employees over five years for opening about 2 million accounts using fake information, or in clients’ names without their knowledge. The Senate Committee, however, led aggressively by Senator Elizabeth Warren, found that the actions taken glaringly ignored any accountability for senior executives. As of that time, the CEO had not made any statement on compensation clawback. Though Senator Warren excoriated Stumpf for what she termed “gutless leadership”, there was bipartisan outrage, and Republican Rep. Jeb Hensarling, the chairman of the Financial Services Committee later said to reporters “If I was a shareholder, I’d be outraged if there weren’t clawbacks”.

This case highlights the fact that clawbacks may be easy to put on paper, but just like breaking up, clawbacks are hard to do. In fact, despite the financial system collapse and recent recession, no other large bank CEO has actually been subject to a clawback. Even after the J.P. Morgan Chase & Co. London Whale trading scandal, the 2012 compensation for chief James Dimon was cut in half (from$23.1 million to $11.5 million), but there was no clawback on his equity awards. Three traders and other executives were subject to maximum clawbacks.

As reported by the Wall Street Journal (note 1), the human-resources consulting group Overture Group LLC estimates that the $41 million forfeit by Mr. Stumpf will represent about a quarter of the compensation he’s earned over his tenure at the bank. Wells Fargo has also said that the board is leading an independent investigation that will determine if additional actions are necessary, such as forfeiture of the about $35 million in unvested options currently held by Ms. Tolstedt.

As this case continues to unfold, it may provide the first true example of top-executive level equity award clawbacks in action. It should serve as a reminder to institutions with clawbacks that they are not intended just as a “check the box” measure to pass say-on-pay, but must come with a commitment to use them as necessary. Beyond language in the award agreement, companies must have clearly defined internal metrics for when clawbacks will apply, and a process in place to invoke the provision. The Wells Fargo cautionary tale shows that both the US government and US shareholders are taking clawbacks seriously, – issuers beware – this may finally be the era where companies are held to the lip service paid to executive compensation that truly reflects corporate behavior and performance.

Elena Thomas is Head of Operations and Strategy for Plan Management Corp.

1. Glazar, Emily. “Wells Claws Back CEO Pay”. The Wall Street Journal 28 Sept 2016: A1-2. Print.

  • Jul 24 / 2015
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Cheap Stock Option and Cap Table Software for Startups

We know you are doing your software due diligence, and sure, there are cheaper versions of equity plan administration and securities recordkeeping software that you can buy. Isn’t there always something cheaper you can buy, no matter what it is? Do we really have to say “You get what you pay for?”

Before you pull the trigger and save a few hundred bucks and get a lot of glitz and pizzazz, why not ask yourself a few questions, like:

  1. Will the cheaper company be around next year or are they just loading up clients at any cost so they can sell themselves to some VC or private equity fund, leaving you in the lurch—having to find some new provider or being painfully converted to a system for which you never signed up? (Look up the history of CapMX and Corporate Focus).

    How long have we been in the securities record keeping and equity plan software business? Only 43 years.

  2. Is there anyone at ElCheapo, Inc. or Glitzyrama Co. cap table or equity plan administration that can actually answer a complex question about either service? Plan Management Corp. has CEP’s (Certified Equity Professionals) CPA’s and professionals with decades of experience at one of the largest SEC registered securities transfer agents.
  3. Can they properly handle the expensing of the performance or consulting awards you are dreaming of granting? If they can’t, or they do it wrong, your company’s plans for a buyout or an IPO just got stalled and/or a lot more expensive!
  4. Are they able to provide flexible CEP support when you can’t keep up with plan activity, or need help with a data project or audit? Is their software even easy to use once you get beyond your most elementary needs?
  5. Can their software transition you from a private to public company? Have their “experts” worked with clients through hundreds of corporate actions, including IPOs and acquisitions?

We could list the dozens and dozens of specialized features, functions and reports that PMC’s OptionTrax® and InvestmenTrax(sm) software provides, or the countless times our experts have straightened out clients’ problems, but, let’s just say that by the time you find that the cheaper, slicker-looking systems don’t have them, it’s too late for you! Having to re-state your financials is a real disaster and it sure doesn’t look good to any potential acquirer or underwriter!

So, yes, you can always save a few hundred or even a thousand bucks over a year by going cheap, but…do we really
have to say it?

  • Apr 20 / 2015
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Six Must-Haves for Stock Option Agreements

Plan Management Corp. was recently asked about what to include in employee stock option agreements. It is such a good question, that we thought we’d include our answer here as well.

The option agreement is the critical document used to clearly lay out the award terms in a way that the participant understands, and to avoid future litigation due to any misunderstanding. First, it is most important that participants realize an agreement is a legally binding document, and that they are signing off to the terms included, i.e., it is not just a memo that can be amended later. Once that is established, here are other items to have clearly included:

  • Non-compete, particularly for executives or early employees critical to success, you may want to make a non-compete part of the term of the agreement. If so, make sure it is explicitly laid out in the award agreement, in addition to any language in an over-arching employment agreement.
  • Be very clear on vesting – some issuers include fancy legal language about the vesting schedule, and we’ve actually seen some suits lately because the language was vague enough to leave room for interpretation. The most simple & effective is just to include a table with dates and vesting amounts, or for performance to make clear the amount of shares tied to each performance metric.
  • Make the expiration terms clear (include a definition of expiration), and note that the employee is responsible themselves for knowing when their awards expire and for taking any action accordingly.
  • Define any terms that may not be clear to participants – have a lay person outside of plan administration review to make sure it will be understood!
  • Clarify that there are tax events related to the exercise of options, and that the taxes are the responsibility of the employee, and that they will be withheld for employees from any exercise payout.
  • Depending on how strict you want to be with the agreement, you may want to include language about what happens if the agreement is not “accepted” (physically or electronically signed) by the participant. Some issuers do not allow exercise until it is accepted, and in some cases there is even a deadline by which the awards are cancelled if not accepted. Of course you will be best legally protected if you require acceptance.

As you can read above, the most important theme here is clarity! Trying to leave room for flexibility will more often than not become a liability down the road, so address any likely questions up front in the agreement. Some issuers are making the first page of the agreement into more of an executive summary format that is easy to read and clearly includes basic terms like grant date, shares granted, vesting schedule and expiration. This can be helpful, but make sure participants have the full agreement as well and that any signature still applies to the full set of terms.

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