Modifications are among the most challenging areas of equity compensation award (re)design, valuation, and accounting. Every modification is unique to the company doing it and the problem(s) they’re trying to solve. The technical aspects are also challenging. A slight misstep in the valuation methodology can cause major cost surprises, many of which will show up in the proxy.
Whether you have a small modification affecting a single employee or enormous modifications driven by corporate control transactions, Equity Methods can help you in the following areas:
- Model contemplated modifications before the business decision is finalized, helping to set stakeholder expectations about accounting cost while proactively identifying pitfalls that lead to unfavorable outcomes
- Determine fair value and incremental expense impact for awards modified as part of a termination, such as accelerations, extensions to exercise windows, and continuation of vesting
- Capture the impact of changes to performance targets, whether based on total shareholder return (TSR) or other metrics
- Model repricings and option exchanges ahead of such major transactions in order to minimize incremental compensation cost and align expectations between HR, finance, legal, and participants
- Amortize incremental cost over remaining service period while maintaining original amortization schedule for the grant date fair value, prevent double-counting of shares, and track multiple fair values for footnote disclosure purposes
- Value awards converted as part of major corporate transactions—including acquisitions, mergers, spinoffs, and special dividends—as well as bifurcate the value of assumed awards and provide ongoing reporting for awards in an acquisition or spinoff
- Perform custom modeling and valuation for any unique modifications contemplated or enacted, tailored to your specific situation
Anticipate the effects of modifications while getting the final valuation and accounting right the first time.