Stock Compensation Accounting Best Practices Survey 2017: The Call for Topics is Now Open
What do best-in-class corporate accounting and finance groups do differently in their stock-based compensation accounting? That’s the question we set out to answer every two years via our stock-based compensation accounting best practices survey.
A lot has changed since 2015, the last time we ran this survey. As we gear up to launch the 2017 survey, a number of questions and new dynamics are in play. How, for instance, is FASB’s release of ASU 2016-09 changing the way companies approach stock compensation accounting—especially the tax accounting? And is the ongoing rise in multi-metric performance awards driving more collaboration between corporate accounting and HR?
Below are what we’re hearing as important questions for the 2017 survey to address. Email us your ideas as we begin making final preparations on the new survey design, and please take a moment to sign up to take the survey upon its release
Big Questions for 2017
The overall takeaway from our 2015 survey was this: Best-in-class accounting and finance teams extend their influence and deliver valuable business insights throughout the organization. But how, exactly, do they do it?
Building on the framework established in 2015, some of this year’s focus will be on:
1. Forecasting precision. This was also a major topic in the 2015 survey. Anecdotally, we’re witnessing growing senior management scrutiny of forecast-to-actual variances. Are companies setting up hypothetical grants in more detailed ways? Do they model scenarios to tease out the sensitivities of different variables? How are they identifying and communicating variance drivers?
2. Tax. As a result of ASU 2016-09, we’re anticipating major changes in tax accounting, as excess tax benefits now flow through the income statement. That makes them a source of both expense and effective tax rate volatility. For example, many companies are implementing tax settlement forecasting in order to gauge how evolutions in the stock price could positively or negatively influence earnings. How prevalent has tax settlement forecasting become so far? And how are companies socializing the newfound volatility with senior management?
Historically, collaboration between corporate accounting and tax has been inconsistent. At some companies, the two functions work in lockstep. Elsewhere? Not so much. There does seem to be much more audit scrutiny of tax reporting processes now that tax settlements directly hit the P&L. For its part, the SEC has identified tax reporting as an emerging risk area. Meanwhile, how are handoffs changing between corporate accounting and tax? Are companies carrying out new flavors of controls? How much urgency exists to automate and connect tax processes with expense reporting processes?
3. End-to-end process integration. More than ever, we’re seeing top-down mandates within organizations to automate further and connect splintered processes. In our experience, the most disjointed processes tend to be tax reporting (as described above), IFRS statutory reporting, and equity recharging. Is that common? What else ends up in this category?
A natural benefit of process integration is standardizing how common events are handled across reporting areas. Take employee mobility, which cuts across US GAAP, IFRS, and recharge reporting. Are companies modeling the effects of employee mobility consistently across all reporting areas? Even more fundamentally, how is mobility being treated? Even if mobility is immaterial to the consolidated financial statements, could it be material to standalone country-level financials?
In particular, we’d like to take a closer look at international reporting. Many organizations have little insight into how their foreign subsidiaries approach IFRS statutory reporting. International auditors seem to be asking more questions, and inconsistencies between recharging procedures and IFRS reporting are leaving unanswered questions.
4. ICFR, especially as it relates to stock compensation. Auditors are paying more attention to internal control over financial reporting (ICFR), which also remains a prevailing theme in SEC speeches and comment letters. Stock-based compensation accounting is an important battleground for ICFR given the numerous moving parts, messy data, and cross-departmental handoffs.
The 2017 survey will have a new section on the types of controls in use and risk hotbeds requiring extra attention. What do best-in-class internal controls look like? Are procedures that detect errors more or less useful than procedures that attempt to avoid them altogether? We’re interested in how you prioritize and invest in your internal control environment.
5. Collaboration between corporate accounting and executive compensation. In 2015, collaboration around award design was a nascent trend that hadn’t yet taken hold. Award design happened under tight timelines and a partial veil of secrecy. However, the tide seems to be changing. Companies are designing more exotic awards, and compensation committees are more motivated to avoid surprises in the proxy.
How do these competing forces play out in practice? More importantly, what are the best ways for finance and executive compensation to work together during the award design process? What sorts of proxy surprises are most concerning, and what do best-in-class teams do to get in front of them?
Tackling these questions will happen in conjunction with an entirely separate survey on executive compensation decision support. In that survey, we’ll examine how these teams prioritize governance and executive tradeoffs, collaborate with the compensation committee, and allocate their time across different types of special projects.
6. Employee stock purchase plans (ESPPs). These are back in vogue as a cost-effective way to compensate employees. They also present an interesting case study in how finance and compensation teams join forces on an initiative. With over a dozen plan design features that all yield differing incentives and cost implications, there is not a one-size-fits-all choice to make. The reporting can become complex, and often hinges on data that doesn’t exist in the normal stock plan system.
To that end, what are leading companies doing to reassess their ESPPs or design an altogether new one? How do they approach the reporting? We of course automate and handle ESPP reporting for our own clients, but others tell us it can be tedious and difficult due to pulling data from multiple sources.
7. What it means to be a change agent. Since our 2015 survey revealed that best-in-class functions make decision-making and transparency a priority, we’d like to look more closely at the political and cultural characteristics that make this possible within a firm. Specifically, how does someone go about making changes when everyone else is consumed with day-to-day business? Are evolutionary “continuous improvements” more fruitful than large-scale change initiatives?
Although every situation is different, we’d like to begin a dialogue around ways to manage change in an environment that might resist it or simply be too busy to prioritize it.
Findings from 2015
As we look forward to the 2017 survey, now is a good time to review our findings from last time. We don’t expect the overarching conclusion to change: Best-in-class finance functions look for broad and deep ways to extend their impact. They prioritize analytics, forecasting, and other facets of internal reporting. They collaborate closely with tax, FP&A, and executive compensation. And they continuously improve their decision-making or information transparency.
But, as always, the devil is in the details. Below are some areas that we’re especially excited to explore further this year:
Analytics and internal reporting. In our prior study, we found that leading finance functions invest heavily in forecasting. During budgeting season, they stand up projections not only for the following year, but also three to five years out. They also tend to forecast on more detailed assumptions, such as hypothetical future grants that are based on person-level data. Reforecasting throughout the current year is also common. In 2015, 23% of respondents said they did so monthly and 69% did so at least two to four times a year.
Respondents also reported an uptick in the number of questions from senior management about forecasting variances. For example, 35% told us that variance analysis was important no matter how large the variance. We’re especially curious to see how this trend has evolved over the last two years. To what extent are companies relying more heavily on analytics to explain forecast-to-actual variances?
Also in 2015, most survey respondents indicated there was shrinking tolerance for budget misses. Many even said that favorable variances were frowned upon. Now that ASU 2016-09 is with us, plan for even wider variances. This year, we’ll look into how companies use scenario modeling to set expectations regarding potential future (and uncontrollable) variances.
In 2015, over 70% of respondents said they traced compensation cost directly to the legal entity, business unit, or cost center level. Why? Mostly to understand intra-firm profitability. But many respondents said that direct tracing seemed too hard and not worth the extra effort. This year, we’d like to know whether direct tracing has become more common. We’d also like to know how companies launch such a far-reaching accounting initiative and deal with pushback from divisions.
Intra-firm collaboration. Survey respondents in 2015 told us that best-in-class finance teams go out of their way to collaborate within the organization. But, they added, it’s easier said than done.
In 2015, we noted the rapid ascent of total shareholder return (TSR) awards, and how these designs are especially prone to triggering cost surprises at grant. We saw how tight collaboration between corporate accounting and executive compensation was an emerging best practice, but devoted most of our inquiry to the types of problems that accounting and HR need to be jointly monitoring. With the transition to multi-metric hybrid awards, the risks now seem higher than ever. This year, we expect to devote more attention to how best-in-class accounting and HR functions can collaborate more effectively.
Standard expense reporting and tax reporting is another collaboration touchpoint from the 2015 survey. At most organizations, corporate accounting records expense accruals and may also set up deferred tax assets (DTAs). Meanwhile, tax unwinds the DTAs at settlement and handles the tax returns. The problem? A lot can go wrong in between. DTAs need to be trued-up for tax rate changes and employee mobility and, ultimately, settlement records must be matched back to their corresponding grant records. Rate reconciliations, including the return to provision (RTP) analysis, also require piecing together different data elements.
As with executive compensation, much of our examination of tax and corporate accounting in 2015 was where handoffs could go awry. For 2017, we’ll continue down this same path. But we’ll also drill into how teams stand up shared controls, connect and automate their processes, and stay in close contact during periods of intense change.
Automation and controls. Interestingly, we found that quite a few (but hardly all) of the companies that prioritize analytics have more automated procedures. Many companies with sophisticated analytics rely on spreadsheets. But these companies report large staff allocations, significant turnover, and capacity crunches as ad hoc reporting needs surge.
The cause? In 2015, many best-in-class accounting functions had needs that were too robust for off-the-shelf software. To study this group more closely, we excluded the subset of Equity Methods clients for whom we provide financial reporting services. We discovered that companies, when confronted with tradeoffs between controls, automation, flexibility, and agility, often pick flexibility and manual controls over rigid reporting and automation. We empathize with this balancing act and have discussed our tips for evaluating competing solutions and service providers.
This year’s findings promise to be even more interesting given everything that’s happened lately. As we get ready to launch, we invite your feedback and ideas. You can sign up in advance for the accounting and finance survey here and the executive compensation survey here.
We also encourage you to email our survey team with your thoughts and requests.
We hope to see your participation!