Building a High-Impact Stock Administration Function

Effective stock administration plays a pivotal role in the success of any equity compensation program. When managed with purpose and foresight, it ensures compliance and accuracy while delivering a seamless experience for internal stakeholders, strengthening employee engagement, and unlocking the full potential of equity programs.

CHROs and CAOs alike often ask us what sets apart a best-in-class stock administration function. Given our role in working with thousands of companies over the years, including those that outsource some or all their stock administration to us, we’ve been able to inventory the qualities of superior functions. We discuss these attributes here.

Domain Expertise and Integrated Approach 

Equity administration is a specialized area requiring technical knowledge about award structures and securities rules, operational know-how on how shares and taxes must be processed, and hands-on systems experience, effectuating all the relevant procedures. In this regard, equity-related actions impact the Total Rewards team, Accounting, and Legal. Solutions that prioritize one stakeholder (e.g., the equity recipient) can have unintended legal or accounting consequences, making it essential to have all the relevant domains represented in decision-making.

Too often we encounter processes that are designed without consideration of the downstream implications. When we unpack the root causes, we often find that people were simply unaware of how their actions affect other stakeholders.

For example, consider the conundrum that arose when a company needed to withhold FICA taxes on retirement-eligible awards at the point they become non-forfeitable, rather than at the legal vesting date. While the stock administration system provider confirmed support for early withholding, the client did not realize and the system provider did not flag that the platform lacked functionality for sell-to-cover on these FICA obligations. Because the equity plan permitted only sell-to-cover as a tax settlement method, and not net share withholding, it resulted in misalignment that created significant disruption. The disruption included friction with the vendor, confusion among equity recipients, and operational strain on the administration team.

An administration team with strong domain expertise can help avoid these pitfalls. They can anticipate risks, recognize interdependencies, and create workflows that support all stakeholders. The key is knowing what policy decisions should be made, given award design and operational structures and then having the system wherewithal to ensure those decisions work in the platform of choice without triggering an unintended consequence later on in the process.

But what happens if the platform simply doesn’t support a particular structure or operational necessity? Sometimes the answer is to change the design, but this can also give rise to cases of the tail wagging the dog. In these instances, we design automated processes to supplement and bridge gaps in the administration platform. The risk to look out for is manual Excel-based processes, which become unwieldy over time and succumb to key-person risk.

Key-person risk should also be an important consideration in team design. We’ve seen firsthand the disruption that occurs when a single team member departs, taking critical knowledge with them. While executives often aim to build lean teams, stock administration is too important to operate without redundancy. Whether an organization outsources or invests in team overlap, it is imperative that it is resilient to turnover, change in the award design, or other corporate actions for the function to succeed over the long run.

Communication

Another important responsibility of the stock administration team is contributing to the effective communication of the value of equity compensation across the organization. Even the best designed equity plan can fall short if employees don’t understand their awards and therefore discount their value.

A common question we hear CEOs, CFOs, and CHROs asking is, “What’s the ROI on our equity compensation program?” For one, they genuinely want to know given the pivotal role equity plays in the human capital strategy. But they also are asking out of concern that the program is sub-optimizing. For example, perhaps the recipient base is too broad or narrow and would benefit from revision. Or perhaps the award design needs to be simplified. Questions of ROI are indeed important (and we have many ideas on how to quantitatively and qualitatively measure ROI), but a more productive starting point is ensuring the communication strategy is effectively driving the intended perception of the program.

A well-defined communication strategy not only builds awareness of the plan’s benefits but also ensures information is accessible for all participants. Best practices include:

• Providing clear, easy-to-digest materials that explain plan benefits, key deadlines, and where to find more information
• Issuing timely reminders so employees remain aware of upcoming actions and responsibilities
• Adapting communications for global audiences, accounting for local differences and cultural nuances

A related question is what mediums to use when distributing communications. We suggest starting with delivering information via platforms that are already being utilized for other internal communications, such as a corporate intranet, internal emails, or texting.

To illustrate the importance of an effective communication plan, consider a case where a stock split is leading up to an IPO. While it’s common to implement forward or reverse splits in tandem with an IPO, sending employees to the S-1 to understand the treatment of their shares is a recipe for confusion. (As finance theory would suggest, value shouldn’t be created or destroyed through splits, but this is not self-evident outside the profession.) Employees will need plain-spoken explanations on the nature of the split as well as clear information on their ownership holdings before and after the split. To do this effectively, it will require coordination among various teams.

Even with careful planning, pitfalls may follow. Using the IPO example mentioned above, here are examples that highlight the importance of keeping lines of communication open between the administration team and other teams.

• With a stock split scenario, timing is crucial. There needs to be complete alignment between when the stock split ratio is made visible and when communications explaining the split are shared with plan participants. To mitigate potential risk, we’ve seen companies distribute additional, highly detailed communications prior to the split.
• Timing is only half of the battle. Communication clarity and precision are just as important since participants will calculate share split outcomes as soon as the event is announced. If communications are not clear, or they lack key details, it will only create more confusion for participants and lead to more questions. Even details as basic as rounding conventions can create confusion and cynicism for participants.

Technology

Amid evolving regulations and the push for faster execution, integrating additional technology into stock administration has become more necessary. Connecting equity administration platforms with other HR systems, using custom programming where necessary, can deliver automation that lightens the load of day-to-day administrative tasks and support operational speed. Customized tools and workflows leveraging automation can also equip teams with analytical tools to uncover the story behind equity data—driving speed, accuracy, and scalability.

Historically, many organizations have relied on spreadsheet-heavy, manual workflows under the assumption that modern upgrades would be costly or difficult to implement. Our experience shows otherwise. Today’s solutions can be deployed quickly and cost effectively, often delivering transformative results.

For example, Equity Methods partnered with one client to integrate its equity administration system with the organization’s HR information system using tailored middleware. This system integration initiative was done in less than a month and unlocked immense functionality, requiring virtually no involvement from internal teams.

Managing Change

Another essential ingredient to a healthy function is having the people, processes, and technology needed to respond constructively to growth or other types of change. We often hear, “Our plan is simple, and we intend to keep it that way.” But our experience suggests it’s usually a question of when, not if that simplicity turns into complexity. Growth could come from adding plan participants, complexity in the design, expanding the plan internationally, M&A, and so on.

While growing companies add headcount and acquire other companies, struggling companies explore modifications and creative award design revisions.

When we’re engaged to review stock administration functions and propose improvements, we borrow from a chapter in the cybersecurity playbook. A common technique in cybersecurity is to run tabletop exercises where responses to various exogenous events are simulated. In the stock administration domain, we find it constructive to explore questions such as:

• How would our operations respond to the addition of 200 new participants? 2,000?
• Suppose a modifier metric gets added to our PSUs; how would we reflect that in the system and how would it flow through to our accounting process?
• If an employee violated their Restrictive Covenant Agreement and claimed they did not formally accept the grant with the restrictive covenant, what sort of a paper trail exists illustrating the communications that took place?

Obviously, this list of hypotheticals can become very long, but some version is helpful in gaining live feedback on the scalability and adaptability of the function.

Building a Stock Administration for Long-Term Impact

An effective stock administration function is built through deliberate choices about people, processes, and technology. As companies grow and equity programs become more complex, taking the time to establish the right foundation today can save significant time, risk, and rework down the road.

As always, if you’d like to discuss your own situation, please don’t hesitate to reach out.

Learn more about how we help design, communicate, and manage a comprehensive total rewards program.