Highlights from the 22nd Annual NASPP Conference

The National Association of Stock Plan Professionals (NASPP) hosted its annual conference in Las Vegas from September 29 to October 1, and Equity Methods was on the scene! The conference sessions covered a variety of equity compensation topics, with plenty of insights, surprises, and new twists on old issues. As you might expect, we have our own take on what it all means. Below are summaries of the sessions we attended, along with some of our observations.

Plan Design and Redesign

In “Performance Awards: What All Companies Need to Know Before Making Their Next Grant,” panelists Vivek Arora (Quanta Services), Thomas Paleka (Arthur J. Gallagher & Co.), and Scott Witz (W.W. Grainger) shared their companies’ experiences in granting performance awards. Tara Tays (Deloitte Consulting) moderated.

Panelists revealed how they evaluated competing performance metrics, communicated the program to recipients, selected a performance period, and tackled nuanced topics such as termination provisions. One theme was the tradeoff between precision and complexity. Another was the need to select metrics carefully based on business drivers. This led to a natural debate between market metrics (e.g., relative TSR) and operational metrics. Finally, the discussion turned to how the design of payout structures (e.g., steep curve where a small increase in performance results in greater payment increase) can be leveraged to motivate performance.

Our take: Consider accounting complexity surrounding performance awards, implement an effective communication program to help recipients understand the award, and do not over-complicate award design.

In “Relative TSR: Point, Counterpoint,” Wes Wada (Kimberly-Clark), Kevin Walling (Hershey), and Mike Halloran (Mercer) debated the hot topic of relative TSR awards from the vantage point of two successful companies in the same industry, with one using relative total shareholder return (TSR) awards (Hershey) and the other not (Kimberly-Clark). Panelists emphasized the importance of understanding your own company’s objectives.

Hershey places a combined emphasis on financial performance and shareholder returns, using a broad portfolio of short-term and long-term incentive vehicles. LTI awards are weighted 50% toward relative TSR and 50% toward internal financial metrics such as EPS and net sales growth. Kimberly-Clark, on the other hand, believes that performance objectives should be directly linked to operational targets that are more immediately in business executives’ control (line of sight). Therefore, Kimberly-Clark issues PRSUs that are tied directly to net sales/ROIC, as well as options to reward long-term shareholder value creation.

Our take: More of our clients are taking a portfolio approach to LTI that combines multiple incentive vehicles. The jury’s still out about whether high line of sight to award recipients is better than directly tethering an award’s payout to shareholder value creation. In general, we expect to see more varied plans that do include TSR as a metric, but perhaps as just one of many vehicles.

In “TSR Awards: Getting Implementation Right the First Time,” Robert Slaughter (Equity Methods), Sandra Sussman (Continental FRS Plan Administration), and Thomas Welk (Cooley LLP) delved into the nitty-gritty of designing and accounting for TSR awards. The panelists’ key message was that the devil is in the details, and to watch out for vaguely written grant agreements or disconnects between compensation committee minutes and the text that is implemented in a grant agreement.

Among the panel’s observations:

  • Make sure that the specific formulas used to calculate TSR are clearly defined and not left to interpretation.
  • When selecting a peer group, be aware that the larger the peer group, the larger the administrative burden.
  • Clearly define measurement dates. Make sure participants and the internal accounting team know the performance period and requisite service period.
  • Define whether a closed or semi-closed peer list is being used. When using an index, clearly outline if dropped peers will continue to be measured and if new entrants will replace dropped peers.

Our take: Details matter, there’s just no other way to say it. Award agreements often use inconsistent or vague language. Ensuring that all parties are on the same page as to the meaning of each and every award feature is essential. And, this means that communication is also key: to deliver the intended value, participants must understand both the purpose and mechanics of an award.

During an exciting episode of “Extreme Makeover: ESPP Edition,” Emily Cervino (Fidelity Stock Plan Services), Dan Edwards (Baker Hughes), Laura Gallerane (Hologic), and Christine Zwerling (Stock & Option Solutions) shared how they transformed their “rundown” ESPP plans into “newly remodeled” plans with higher participation rates and satisfaction. Among their suggestions:

  • Implement simple-to-digest communication across multiple channels (e.g. webinars, posters, emails, and live presentations).
  • Use ESPP levers such as increasing the discount or inserting a look-back period.
  • Educate participants via a medium such as an animated video or intranet site solely dedicated to ESPPs.

Unlike many other forms of equity compensation, panelists agreed, ESPPs can promote an ownership mentality across a broad range of employees at a relatively low cost. Compared to restricted stock and options, ESPPs are more likely to be considered a benefit rather than compensation.

Our take: These thoughts strongly echo our observations with clients. We’ve been doing more modeling of plan features to hone in on ESPP plan designs that deliver maximum value at palatable accounting costs. We’ve also had conversations about participant education and explainer videos. We’re very intrigued to watch ESPPs gain more momentum over the upcoming years.

In “Short-Term Travel, Long-Term Consequences: Focusing on Payroll Taxes for Business Travelers with Equity,” Brett Guiley and Cathy Goonetilleke, CPA (both of Ernst and Young) shared their insights on the issues surrounding business travelers. According to the presenters, “mobility” to most of us means permanent relocation from one state or one country to another, or into different groups and/or divisions. But there is a growing movement to capture taxes on business travelers who have equity compensation.

Business travelers can travel between states or even between countries. Meanwhile, rules differ by state (with California’s and New York’s being the strictest) and by country. The US has treaties in place with several countries that, under certain situations, exempt short-term business travelers from FICA taxes on their equity compensation. The complexity stems not only from the various rules across the country and the world, but in tracking employees who are frequent business travelers. Do you allow employees to use the honor system and self-report? Or do you enforce and penalize for non-reporting employees?

Our take: This issue isn’t going away any time soon. Jurisdictions will continue to increase their scrutiny, leading to a greater burden on companies and employees to ensure they’re in full compliance. However, we are seeing companies take a pragmatic view, such as by focusing in on their five highest paid people and their five most heavy travelers (whose compensation exceeds a base threshold).

“Why Grant Today What You Can Put off until Tomorrow” was the discussion topic among Peter Kimball (ISS Corporate Services), Michael Reznick (Frederic W. Cook), and Mason Stubblefield (Intuit). As the panelists observed, for the vast majority of companies, a gap exists between the grant and proxy vote. The reason? Companies usually design and grant awards at the beginning of the year, using the prior year’s performance as their reference. But institutional investors and proxy advisors evaluate the pay-for-performance alignment much later in the year. When shareholders vote on their decisions, they reference the current year’s performance. Switching grants to the end of a fiscal year, panelists noted, has its own set of pros and cons.

Our take: This is why skeptics claim “say on pay” is really “say on performance.” The vote outcome has less to do with the quality of the decisions made at grant (using information available as of that time), but rather with how things shake out during the months post-grant. We do not see this idea achieving broad market adoption, but could prove very handy to a small subset of companies.

Latest Regulatory and Legal Developments

In “FATCA and Beyond: The New Challenges of Global Tax Reporting,” Jason Rothschild (White & Case), Nicholas Greenacre (White & Case), Peter Simeonidis (Deloitte Tax), and Michael Haberman (Deloitte Tax) discussed the Foreign Account Tax Compliance Act (FATCA) and FATCA-like rules around the world. FATCA, enacted in 2010, is intended to identify US persons trying to avoid US tax obligations by using foreign accounts. The calendar years 2014 and 2015 are considered a transition period.

Panelists examined FATCA’s impact on non-US benefit plans, ways employers can reduce the risks of noncompliance, and best practices. In addition, as noted by the panelists, the Organization of Economic Cooperation and Development is working on a Common Reporting Standard (CRS), whose key considerations are similar to FATCA. The CRS reporting is expected to start in 2017.

Our take: Plan sponsors should make plan participants aware of the reporting requirements under FATCA, and encourage them to consult with their personal tax advisors for compliance.

According to panelists in “Executive Compensation Conference: The SEC All-Stars,” the SEC is evolving its approaches toward regulating and investigating business and financial disclosures. Former senior SEC staffers Brian Breheny (Skadden & Arps), David Lynn (Morrison & Foerster), Keir Gumbs (Covington & Burling), Marty Dunn (Morrison & Foerster), and Meredith Cross (WilmerHale) participated.

Discussion topics included disclosures regarding Regulation S-K, Section 16 & Schedule 13D, cybersecurity risks and cyber incidents, climate change risks, and more. Blindly copying a peer firm’s disclosures is a big no-no, panelists agreed. Best practices include tailoring your own firm’s disclosure and demonstrating progress and improvement from the prior year. Where needed, companies may consider what other companies are implementing when it comes to applying existing SEC disclosure rules to certain mandatory financial fillings with the SEC.

Our take: Companies should keep abreast of SEC regulatory changes regarding business and financial disclosures. Now is a good time to develop a process for capturing measurable progress and communicating it to stakeholders.


Equity Methods president and CEO Takis Makridis moderated “Accounting Principles for Stock Administrators” with Phil Drake, PhD (Arizona State University) and Ellie Kehmeier (Steele Consulting). The session ran through the key rules in ASC 718 and linked them back to foundational accounting principles, such as the matching principle and the tradeoff between relevance and reliability.

Our take: When asked what motivated this session, Takis commented, “Our financial reporting practice delivers hundreds of reports to clients every week to satisfy large and small rules within ASC 718. As much as we all enjoy accounting theory, day-to-day accounting practice in the United States is very rules oriented. So, we thought conference attendees would enjoy a quick reminder of the core principles that led to all the rules that get applied quarter after quarter, month after month, year after year.”

Get your copy of the presentation here.

In “What You Don’t Know about Tax Accounting CAN Hurt You!,” Ellie Kehmeier (Steele Consulting), Joy Loh (Align Technology) and Elizabeth Dodge (Stock & Option Solutions) discussed the challenges tax accounting departments face with stock-based compensation. Panelists shared ways to facilitate reconciling tax balance and tax deductions, assess tax implications on executive grants (including mobility), and understand tax impact on earnings per share dilutive calculations.

Our take: Sloppy tax accounting doesn’t happen overnight. Instead, it slowly takes shape over many years. Given the growing scrutiny of income tax accounting for share-based payment awards, we strongly believe in the importance of a fully automated and integrated financial reporting process.

Administration and Best Practices in Equity Compensation

Vincent Alessi (EASi), Ruth Doyle (ComIntelligence), Angela Hammond (Ingersoll-Rand), and John Hammond (consultant) gathered to discuss “Irreconcilable Difference: How Shares Are Counted from Balance Sheet to Plan Reserve and Everything in Between.” In this session, panelists examined stock award shares from different angles during the lifecycle of an award, including plan review, grants and transactions, financial reporting, and proxy disclosure.

According to the panel, interested parties have varying perspectives. Administrators care more about how to administer and reconcile the grants and transactions. Participants would like to understand how many shares they are receiving. Shareholders, meanwhile, are interested in knowing the cost of the shares, dilution impact, and pay-for-performance alignment.

Our take: Stock-based compensation requires collaboration among different departments within a company: legal, HR, finance, and tax. A common understanding of the term “shares” improves cross-functional communication, increases participation in equity compensation programs, and makes share reconciliation and related financial reporting easier.

The session “10 Mistakes Your Participants Are Making With Their Stock Plans You Need to Know About,” given by Mark Curtis (Morgan Stanley), Kaye Thomas ( and Bruce Brumberg ( &, discussed the biggest misunderstandings participants have about their stock awards. They include confusion with the following:

  • How to enroll in equity programs
  • Timely tax filings
  • Tax implications at sale or regulations such as “wash sale”
  • Plan agreement
  • Specific rules such as insider trading and 10b-5-1 plans

As well as behaviors such as:

  • Making unwise investment decisions
  • Underappreciating the benefits of ESPP or equity compensation programs
  • Lack of awareness of the impact of death/disability
  • Undervaluing stock awards
  • Failure to maximize the benefits of stock awards

Our take: We concur. Educating participants about stock awards and understanding participant behaviors create a win-win situation for both issuers and recipients.

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