Client Story

An NYSE-Traded Science and Technology Company Achieves Best-In-Class Stock Compensation Reporting with Equity Methods

A publicly-traded science and technology company was encountering significant challenges with stock compensation reporting software due to equity plan complexity and impact of corporate transactions. Before things got worse, the company had used an off-the-shelf software product to handle its financial reporting for stock-based compensation. With $50 million in reported expense annually; more than 100,000 unique awards spanning restricted stock, deferred restricted stock units, performance awards, and non-qualified awards; and an off-the-shelf software reporting platform, the company’s finance group invested in numerous spreadsheet workarounds to achieve compliance. A completely separate database system and process was maintained for deferred RSUs, since they did not “fit” in the off-the-shelf software’s reporting model. Although the group was able to fulfill requirements, the company faced key-person dependency risk and the overall process was antiquated. The corporate transaction (a spin-off) introduced trade-offs and complications which resulted in sub-optimal outcomes and only caused the situation to deteriorate further.

The Challenge

Once the spinout was consummated, the company’s fragile reporting equilibrium was disrupted. The restructuring also resulted in the loss of personnel who had run the in-house workaround processes. Bifurcating share data for the two companies and applying conversion ratios in to the stock plan database yielded results for the parent company that were adequate for employee-facing applications but incorrect when the new data structures were processed by the reporting software. Lacking adequate expertise, the reporting software team also failed to understand the unique circumstances behind the company’s requests for assistance. And the new finance team was perplexed by a devilish confluence of manual spreadsheet overload, weak controls, poor documentation, and incompatibility between the company’s plan data and its reporting software.

A Search for Alternatives

Stymied by inefficiency and frustrated by lack of software support, the company hired a public accounting firm in an effort to resolve the ongoing stock compensation reporting challenges. The accounting firm’s billings soon ballooned into a seven-figure financial commitment as the consultants’ lack of familiarity with stock plan data and the underlying technologies hindered efficiency. Ultimately, the accounting firm’s solution consisted of 30 override files that took several days to upload to the software tool for compensation expense calculation every single reporting period. The heavy manual requirements and computational intensity of the accounting firm’s Excel-based workaround eventually consumed five full time resources for SBC reporting. Ad-hoc reporting became a nightmare, and forecasting became a rule-of-thumb exercise. Further, EPS, dilution, deferred tax, and deferred RSU reporting remained completely spreadsheet based.

Equity Methods Delivers an End-to-End Reporting Solution

The company determined that its situation for stock-based compensation reporting was untenable. Equity Methods (EM) was brought in by the stock plan administrator to advise the company on the implementation of a new reporting solution.

EM’s engagement team immediately started working with the company’s finance, tax, and HR groups to understand the company’s data structures and reporting needs. After briefly piloting a new software product, the engagement team determined that the company could achieve far more cost-effective, time-efficient results with an end-to-end solution leveraging custom technology and processes. The solution would consolidate data from the company’s primary and deferred RSU databases, preserve the employee database view needed by HR, and apply the right technical accounting methodologies to the full suite of SBC reporting requirements. The company agreed with EM’s conclusion and approved commencing an ongoing relationship.

Equity Methods Achieves Impact

  • All of the company’s stock-based compensation reporting — including expense, EPS, tax, dilution, and related disclosures — is now fully automated and segmented by type for ease of use
  • Two full-time employees involved in SBC reporting were able to re-focus on other critical finance initiatives due to the elimination of manual processes, and further efficiencies are being implemented
  • Ad-hoc requests (custom forecasts, run-off reports, and other calculations) are handled immediately by a dedicated engagement team with knowledge of technical accounting and back-end technology
  • Data validation reports, variance analyses, control totals, and other supporting analyses yield strengthened controls and reduce misstatement and key-person risk
  • Estimated cost reduction afterward, including Equity Methods’ fees, is 40% to 50% of the estimated total cost of implementing and operating a standard software solution for this company