Highlights from the 32nd Annual NASPP Conference

Seeing everyone at the 2024 NASPP Conference this October in San Francisco was wonderful. We enjoyed talking with so many experts as part of the many insightful panel presentations. Let’s dive into the hot topics we covered in equity compensation.

A Crash Course on Clawbacks

Takis Makridis and Raenelle James discussed the newly released SEC clawback rules.

The session provided background on clawbacks, downstream financial reporting, and proxy implications, including nuances such as the impracticability exemption and how it works in practice.

Clawbacks may seem simple in theory, but what happens when you have awards that are linked to Total Shareholder Return (TSR)? In our experience, recomputing what the stock price would have done in the case of a “little r” or “big R” restatement can be complicated. While restatements have been trending down, we expect to continue seeing a few each year.

The session also highlighted the importance of having a playbook ready in case a clawback was to happen. The panelists rounded out the session by reviewing two real-life examples of clawbacks from this year, linking them to the theory discussed.

Key Takeaways

• The final rules require clawbacks for erroneously awarded compensation for both “little r” and “big R” restatements.
• Applies to the current/former officers of all public companies, including EGC and SRCs (during the recovery period).
• It’s critical to have a playbook in place if a clawback happens.
• Determining the EAC can be challenging when dealing with TSR awards. Although event studies can be leveraged to determine EAC, they are complicated and require significant time and effort, as well as partnering with industry experts.

SEC Reporting Deep Dive: Disclosures & Proxy

Raenelle James, Tommy Swindle (UBS), Garry Devine (Amgen), and Michael Wallace (Raytheon Technologies) discussed disclosures and proxy reporting, including real life examples of the required disclosures for the 10K and the proxy, highlighting best practices and differences between the two.

While the relevant guidance on these may seem cut and dried, some complexities must be managed. And, because of the range of requirements in these disclosures, there is no one source for the needed information. As such, collaboration across teams is critical.

Various stakeholders can define values differently (e.g., grant date value may mean an accounting fair value or the stock price on the grant date). Ensuring that the “right” numbers go into the “right” places can mean slowing down and being absolutely clear with requests.

In many cases, the guidance on disclosures is silent on how to present information for corporate transactions that result in modifications. The panel explained the best practices for disclosing the roll-forward table when a merger or spin-out occurs. However, regardless of the presentation, the team must ensure transparency on the modification in the footnotes embedded with the tables.

The rules regarding the proxy are more black and white when it comes to how it should be presented, but some items may still need interpretation.

Key Takeaways

• Performance awards accounting is complex and can be difficult.
• Understanding the accounting treatment for both the performance and market awards is essential.
• This includes the accounting treatment for all related reporting areas, expense, tax, EPS, and disclosures.

 The Impact of FASB’s Income Statement Disaggregation on Stock Compensation

Boxian Kolb and Matt Gabrielson, Allyson Graham (EQT Corporation), and Myles Hill (Uber) discussed the significance of the pending income statement disaggregation standard updates and why it means that the equity compensation disclosure will significantly increase in granularity.

Companies must understand the implications of the new standard and be ready to adopt it in FY 2027.

In preparation, companies are ensuring that their processes follow best practices and improve their forecasting precision and flux analysis. This will help them deliver effective narratives and help track and explain changes to compensation expense numbers over time.

Key Takeaways

• This applies to all entities that file financial statements with the SEC.
• The goal is to improve disclosures about public entities’ expenses by breaking out common expense captions.
• Effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption permitted.
• Review existing processes now to make sure you’ll be ready for adoption – and going forward, forecasting and analytics will be in the spotlight.

Ins and Outs of Performance Award Financial Reporting

Boxian Kolb, Stacy Bishop (Cimpress plc), and Elizabeth Dodge (Equity Plan Solutions) shared their insights on the accounting for performance awards in financial reporting and understanding the nuances to ensure accuracy. They explored the technical accounting treatments for various performance award types and how each performance condition affects areas, including expense recognition, tax accounting, EPS, disclosures, and pay versus performance.

Performance awards, commonly used for executive compensation, come in many forms. Understanding their accounting treatment is crucial. The panel discussed different vesting conditions—service, performance, and market conditions—and their impact on fair value measurement and service periods. They also explained how performance and market conditions are accounted for in terms of expense, EPS, and disclosures, using real performance designs to illustrate the appropriate accounting methods.

Key Takeaways

• The purpose of 10K disclosures is to provide transparency and investor information, and ensure regulatory compliance.
• SEC proxy disclosures must be clear, concise, and understandable and include all plan and non-plan compensation paid to named executive officers (NEOs) and directors.
• The evolution of complex performance award structures can result in grey areas, in contrast to the best practices that have evolved when presenting PSUs in the 10-K.
• Preparing the 10-K and the proxy requires cross-functional collaboration. Clear communication is crucial because technical terminology may have different meanings to various teams.

Demystifying Equity Award Valuation: Insights from the 2024 NASPP Conference

Kiel Greenfield and James Lecher offered practical insights into stock-based compensation valuation under ASC 718, including actionable guidance on choosing the right models and inputs for equity award valuation.

They first provided an overview of key equity award types, including non-qualified stock options (NQSO), restricted stock units (RSU), and performance awards. They defined terms like grant date, vesting date, strike price, and forfeiture.

Then they covered popular valuation techniques:  the Black-Scholes-Merton Formula, which is best for standard option grants; Monte Carlo Simulations, which are Ideal for market awards like Total Shareholder Return (TSR); and Lattice Models, which are helpful for capturing exercise behaviors. It’s important to consistently apply models, using key inputs like expected term, volatility, and risk-free rates.

Private companies also need to understand the Option Pricing Method (OPM) and strategies for addressing Discounts for Lack of Marketability (DLOM).

Key Takeaways

• There are three general award types – Restricted stock, options, and performance and market awards. These can be further differentiated into equity and liability awards.
• Create a checklist – Understanding your award design is critical, as is having a handle on all the levers available to you.
• End-to-end award management is a cross-functional exercise that should involve Legal, Executive Compensation, HR, and Financial Reporting.

As award designs are being contemplated, modeling the potential impact on financial reporting, both expense and dilution, as well as the proxy, is a necessary task.