The Equity Methods Mailbag—Q3 2025

In the course of working with hundreds of companies each year, we field thousands of questions from every corner of the market. They range from the basics of stock-based compensation to advanced topics specific to a particular company’s situation.

Frequently, we find ourselves answering questions that are both nuanced enough to be interesting and general enough to apply to many companies.

It’s from this sea of knowledge that we bring you the Equity Methods Mailbag. Below, we answer real questions from clients and friends, edited for clarity, brevity, and anonymity.

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I saw that the SEC held a roundtable on executive compensation disclosures this summer. Do we expect that they’ll be changing or removing any compensation tables or other disclosure elements in the proxy?

– Director, Executive Compensation, financial services industry

It’s too soon to tell, but we’re watching with interest. The SEC held a roundtable on June 26 and is currently accepting comments on the existing regime of executive compensation disclosure rules. The current framework has been in place since 2006, and the SEC likes to “engage in retrospective reviews of its rules” to make sure the rules are functioning as intended and their benefits exceed the costs. This SEC is especially conscious of its mission of capital formation. The commission has signaled its intent to reduce barriers to public companies while still executing on its other mission of protecting investors.

In the roundtable and comment letters to date, we’ve seen much of the push-and-pull you might expect between investors seeking more disclosure and issuers who would prefer slightly less. The most intriguing ideas are those that serve both groups. That is, maintaining or enhancing the usefulness and tractability of the information being disclosed, but doing so in a way that’s simpler for issuers to prepare and present.

For example, one challenge is that each table has a distinct set of rules, making it hard to follow what actually happens through a compensation lifecycle. A refreshed, holistic framework could present this data in a simpler, more user-friendly way while reducing the disclosure burden on companies.

That said, a holistic overhaul may be more difficult to pull off. When it comes to regulation, you can have fast action or bold action, but not necessarily both. Additionally, many of the disclosure rules require an act of Congress to repeal.

So we may instead see marginal improvements. These could include updates such as addressing particular pain points related to perquisites, CEO pay ratio, pay versus performance, clawbacks, and the summary compensation table. In any case, we don’t expect anything that will impact the 2026 proxy season.

We recently issued our first PSU with a TSR modifier. How do I account for an award with both market and performance conditions?

– Controller, semiconductor manufacturing industry

We see more and more companies issuing awards with both market and performance conditions. These hybrid awards are an effective way to tie executive compensation to company performance. But they have more complex accounting treatment than a standalone market or performance award. Below is a brief overview of the accounting framework for hybrid awards, but for a deeper discussion on the topic, please see our recent issue brief.

Hybrid awards often use a multiplicative TSR modifier to directly tie financial or operational goals with stock price performance. In most cases, payouts are determined by scaling the results of financial or operational metrics by TSR results.

The accounting ultimately has elements of pure market and pure performance awards. The TSR component is valued using a Monte Carlo simulation for the expected payout of the market condition specifically. That grant-date fair value is then scaled by the expected payout of the performance condition. In other words, while the grant date fair value determined by the Monte Carlo simulation stays fixed, you’ll reassess the performance condition each period and record cumulative adjustments to expense for any changes in expectation. When the performance period ends, the total expense will be the target units multiplied by the Monte Carlo fair value multiplied by the performance condition multiplier.

Calculating the diluted EPS impact for multiplicative hybrid awards is even trickier. Two of the treasury stock method’s key inputs, weighted shares outstanding and unrecognized compensation cost, are affected by the intertwining conditions. Weighted shares outstanding should be scaled by the current as-of-period-end tracking of both the performance and market conditions (with no extrapolation into the future). In contrast, unrecognized compensation cost only considers the current tracking of the performance condition because the market condition is already embedded in the fair value.

Many companies also issue hybrid awards with additive conditions, where the payout is simply a performance condition achievement plus a separate TSR condition achievement. For these additive awards, employees earn shares independently for the performance and market conditions. In such cases, the market and performance components should be accounted for separately, as if they were two different awards.

We have a global workforce and want to introduce an employee stock purchase plan (ESPP). Can we have a single plan or do we need to make changes country by country?

– VP, Total Rewards, telecommunications industry

Introducing an ESPP across a global workforce has many challenges, both in the design and in the ongoing administration and financial reporting. In the US, companies can offer a Section 423 qualified plan that provides employees with preferential tax treatment for qualified dispositions (i.e., sales) of shares purchased through an ESPP. For participants outside the US, companies will often provide a non-qualified or non-423 plan, as there is no preferential tax treatment available to participants outside the US.

These two plans are technically separate, but they often operate in lockstep on the timing of purchase offerings, reset/rollover provisions, and allowable employee elections. Additionally, because plans in the US are subject to the $25,000 limit per calendar year to obtain qualified status, we tend to see companies applying that same $25,000 limit to their international non-qualified plans as well. However, using the same rules for each plan outside the US isn’t required. We’ve worked with companies that choose to make their international plans more lucrative for employees by increasing the discount percentage or allowing higher contributions.

On the administration side, there are a few notable challenges we’ve seen among our clients with international ESPPs. They include staged rollouts to various target countries, currency conversion considerations, employee mobility between countries or plans, and disparate payroll systems.

Outside the US, individual countries may also have specific regulations or practices that make the administration of an ESPP challenging. We recommend discussing the regulations of target countries with your legal team or outside advisors. As an example, here are some obstacles to consider when deploying an ESPP in India:

• Under India’s Foreign Exchange Management Act, all transactions coming in or out of the country must flow through an authorized dealer (often referred to as a merchant bank), and intra-company remittances to a foreign country aren’t allowed. The authorized dealer requirement tends to result in timing challenges and additional fees

• Indian tax regulation subjects any foreign remittance over one million Indian rupees for investment purposes to a 20% tax. This includes ESPP contributions as well as personal remittances, which complicates the tracking and tax compliance for the company. It’s worth noting that this threshold translates to a little over $11,000, which falls within the typical $25,000 contribution limits we see in practice for global ESPPs

Navigating these obstacles requires excellent planning and process management across both domestic and international HR, finance, and payroll teams. For more on ESPPs, please see our dedicated resource page.

We’re thinking about adding a retirement eligibility provision to our equity plans. Will that be a modification, and will there be any incremental compensation cost?

– Controller, medical device industry

Allowing employees to retain some or all unvested equity compensation upon a qualifying retirement can be a great incentive. Such retirement eligibility (RE) provisions comes in many different flavors, reflecting each company’s employee base and competitive landscape.

Companies often add RE provisions to awards prospectively, but some modify existing awards as well. Depending on the employee population, a company may be able to add RE provisions to an existing plan for little to no immediate expense impact.

For employees far away from the respective RE dates, you would continue expensing awards according to the original service period. This is because the RE date doesn’t fall in the vesting period and, for most awards, achieving vesting is probable before the modification and probable after.

Employees closer to their RE dates may need more attention. If the RE date falls within the original service period, there may need to be a prospective adjustment of the remaining expense (i.e., amortize it from the modification date to the RE date). Also, if the new RE provision directly affects employees, such as an executive who recently announced their retirement, that may trigger a Type III improbable-to-probable modification with a remeasurement of fair value.

For new awards, the requisite service period should always factor in the RE date, at which point there’s no material risk of forfeiture. This is also the point when we typically see companies include time-based restricted shares added directly to common shares outstanding for purposes of calculating EPS.

There are numerous other complexities related to RE provisions. One is early payment of FICA taxes. To learn more about FICA tax withholding, see this breakdown of key decision points.

Companies should be mindful of the work necessary and the additional considerations in enacting retirement eligibility rules. Designing and implementing an RE strategy requires the combined efforts of HR, compensation, legal, and accounting teams.

Are there any award designs that allow me to have a grant date today but some flexibility with performance targets over a 3-year measurement period?

– Senior Director, Executive Compensation, consumer discretionary industry

In an environment of seemingly persistent macroeconomic uncertainty, it’s hard to forecast and set company-specific performance goals three years into the future. One way to curb this uncertainty is to use three one-year performance periods, with the performance goals set at the beginning of each performance period. Such awards still have a full three-year service requirement—and often a three-year TSR modifier to enhance the long-term dynamic—but they allow financial goals to be reset each year.

This design raises two issues, however. First, investors and proxy advisors prefer longer-term performance goals. Second, it gives rise to multiple accounting grant dates (as the question alludes to).

On the first issue, three one-year performance periods won’t get you a proxy advisor “no” vote on its own. But it can cause friction depending on the rest of your compensation program. That’s why we recommend considering a three-year TSR modifier for these structures.

On the second issue, this design has multiple accounting grant dates (one for each year the goals are set), since a mutual understanding of award terms isn’t present for the second and third years at the outset. This creates a couple of downstream accounting impacts. It effectively back-loads expense and proxy disclosures become more volatile. The latter is due to the delayed grant dates and the fluctuation in grant-date fair values stemming from those delayed measurement and disclosure dates.

One alternative that removes the issue of multiple grant dates is to base each one-year performance goal on a percentage increase compared to the prior year’s actual result. Under this design, there’s a mutual understanding of award terms at the outset, and therefore, one grant date. This doesn’t entirely undo the investor concern over short-term goals, but it’s a step in the right direction while also solving the grant date issue.

Another alternative we’ve seen is eliminating the need to determine absolute performance targets altogether. If you change the award design to a relative award (e.g., revenue growth relative to peers), you shift from targeting a specific forecasted metric attainment to targeting a relative ranking among peers. In practice, these types of awards are rare because we eliminate one issue but open the door to other issues, like determining a peer group, tracking the award’s performance throughout its life, and dealing with noise or comparability in peer financial metrics.

These aren’t the only options available to you. You might be solving for something different, or you might have different constraints. We would be happy to further discuss your circumstances and help you arrive at a tailored design.

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Do you have a question you’d like to see us cover? Or do you have a situation like one of those above that you’d like to unpack? Please feel free to contact us.