Archive June 23, 2018

Exequity’s 2018 Equity Usage Calculator Now Available!

Exequity’s Equity Usage Calculator has now been updated for 2018 to reflect the most-recent burn rate information from ISS applicable to shareholder meetings on and after February 1, 2018. The calculator is available at at:

If you are interested in a quick refresher on Run Rate and Burn Rate, or would like to learn more about Exequity’s Equity Value Rate (which can be useful when analyzing equity compensation at larger market cap labor peers), please see Episode 10 of The EC Minute, Measuring Equity Usage.


Stock Buybacks: Trouble in Paradise?

This week, the new Democrat SEC Commissioner, Robert J. Jackson, Jr., gave a speech in which he presented the findings of his staff’s research into how “buybacks  affect how much skin executives keep in the game.” Commissioner Jackson was a law professor who liked to conduct research before joining the SEC. Commissioner Jackson said that he often asked his students two questions when thinking about how to give corporate managers incentives to create sustainable long-term value:

  • Are we making sure that executive pay gives managers reason to invest in the long-term development of their workforce and their communities?
  • Or are we paying executives to pursue short-term stock-price spikes rather than long-term growth?

Commissioner Jackson noted that the theory behind paying executives in stock is to give them incentives to create long-term sustainable value. But, as he also pointed out, that only works when executives are required to hold the stock over the long term.

So when the Tax Cuts and Job Act was signed into law, Commissioner Jackson worried that we would see a repeat of what corporations did when the last corporate tax holiday was enacted in 2004–use the cash influx for stock buybacks and not necessarily  invest in long-term value creation. The first quarter of 2018 saw corporations buyback $178 billion in stock. So Commissioner Jackson and his staff studied 385 buybacks over the last 15 months and matched them to information on executive stock sales. They found:

  • A buyback announcement leads to a big jump in stock price–typically more than 2.5% during the 30-days after the announcement;
  • In half the buybacks studied, at least one executive sold shares in the month following the buyback announcement.
  • In the days before a buyback announcement, executives trade in relatively small amounts (less than $100,000 worth daily), but during the 8 days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day.

Commissioner Jackson did acknowledge that this stock trading by executives is not necessarily illegal. However, he finds it troubling as he see it as more evidence that executives are spending more time on short-term stock trading than long-term value creation.

Commissioner Jackson pointed out that, “Executives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is.”

Commissioner Jackson then called for the SEC to update its rules to limit executives from using stock buybacks to cash out from America’s companies. He also called for an open comment period to reexamine the SEC’s rules in this area to make sure they protect employees, investors, and communities given today’s unprecedented volume of buybacks.


At the very least, any company that has undertaken a stock buyback during the past 1 to 2 years, should know how their executives traded stock shortly after the announcement of their buyback. Companies should know which executives made these stock sales and the rationale for the sales. Companies should be prepared to answer questions about such transactions from their investors and the media. It also might be a good idea to review whether peers undertook stock buybacks during the past 1-2 years and how much stock was sold by their executives shortly after their buybacks were announced. Companies should review this data and know how they compare to their peers, and, if relevant, larger market players. Companies contemplating adopting a stock buyback should consider this emerging view as an additional point in their deliberations.

Executives should ensure that they are utilizing a Rule 10b5-1 stock trading plan, and have established such a plan when they do not have any material non-public information (such as the fact that the company is considering adopting a stock buyback plan). While a Rule 10b5-1 plan does not offer full protection to executives, it is the best currently available to protect them from allegations of illegal stock trading, assuming the plan is set up as required by the rule. If stock sales were made after a buyback announcement that did not utilize a Rule 10b5-1 plan, executives should ensure that all preclearance procedures were followed. To the extent that stock sales increased after a buyback announcement, executives should review the reason for such action and be prepared to discuss with their Boards or internal compliance officer.

Link to SEC Commissioner Jackson’s Speech

Summertime is Check-up Time for Equity Plans

Welcome to summer. Picnics, lazy days, and gearing up for the fall cycle in compensation. While it would be natural to sit back and relax a bit, I know some folks wonder what they could be doing to help lighten their load when the proxy and compensation seasons start to heat up towards the end of the year and beginning of the next year. Well, for those that want to try to use their summers a bit more productively, might I suggest that it makes and excellent time to review your equity compensation plans? No, seriously, it does.

Your company likely made its annual equity grants towards the beginning of the year. Any new share requests are likely done. You equity plans are now in a bit of a holding pattern until the next annual cycle starts again. So taking the time this summer to review them might help you get a leg up.

So, without further ado, I offer my:

Annual Equity Plan Check-up Checklist

  • Overall Plan Limits
    • Is a shareholder-approved plan still effective? When is the expiration date of the plan?
    • What is the plan’s overall share limit? How many total shares remain available for grant under the plan? How many shares remain available for grant assuming maximum payout for previously granted performance awards?
    • Are there sufficient shares to cover the regular annual grant next year? Are there sufficient shares assuming a maximum payout?
    • Are there sufficient shares to cover Board of Director grants next year?
    • Are there sufficient shares to cover other/special grants that may be made before next year’s annual shareholders meeting?
    • Based on historical grant practices, are there sufficient shares to cover next year’s grants? Are there sufficient shares assuming a maximum payout? Are there sufficient shares if the stock price declines by 10% 20%?
      • Note 1: If there could be a shortfall under these scenarios, consideration should be given to submitting a request to shareholders to approve additional shares through either a new plan or an amendment of the existing plan at next year’s annual shareholders meeting. If the shortfall is caused by the regular annual grant before the next annual shareholders meeting, it may be necessary to make grants contingent on subsequent shareholder approval or delay the annual grant until after the annual shareholders meeting.
      • Note 2: If the plan has a split share pool (i.e., one pool for stock options/stock appreciation rights and another pool for full value awards), the above questions will need to be evaluated relative to each share pool.
  • Retirement/Termination/Severance
    • Are any named executive officers or key employees planning to retire?
    • Are any reductions in force planned for the coming year?
    • Is there a significant number of shares that will be forfeited during the year that will replenish the plan’s share pool?
    • Are any large promotional grants expected to be made in the coming year? Will it be necessary to make a large sign-on grant to a newly recruited executive during the year?
  • Share Forfeitures, Tax Withholding, and Option Exercises with Stock
    • Does the plan provide for replenishment of the share pool due to forfeitures of prior grants? Due to withholding shares to cover income tax withholding? Due to stock-for-stock, or net-settled exercise of stock options?
    • Has the appropriate number of shares been added back to the plan to cover these circumstances?
    • Note: Typically, prior-year grants will vest or be forfeited at about the same time as the annual equity grants are made (assuming your company generally makes the annual grants at about the same time each year).  Thus, there may be replenishment of the share pool from the above items at about the time the annual grant will be made.
  • Accounting
    • What is the grant date for awards made so far this year, i.e., when is the award finally approved by the Compensation Committee or full Board of Directors?
    • Does the full Board approve all awards? Only the CEO awards?
    • Has the accounting cost of each vehicle been determined?
    • Will performance shares initially be expensed at target or some other performance level?
      • Note: Share awards that are earned based on a stock price metric are generally expensed based on their Monte Carlo value, which will not be revisited during the performance/vesting period unless the awards are modified.
    • How will forfeitures be estimated at grant?
  • Vesting
    • Does the plan include minimum vesting requirements?
      • If so, do the annual equity and other grants comply with these requirements or qualify for an exception?
      • If an exception to minimum vesting requirements is used, is there sufficient room for all proposed awards that seek to use it, e.g., total plan limit for awards with a vesting period of one-year or less is limited to 5% of the plan’s share pool (say 10 million shares) or 500,000 shares-so how many of those shares are still available to be used for awards that do not meet the plan’s minimum vesting requirement?
  • Board of Director Awards
    • Does the plan establish a limit on awards to directors?
    • Are the contemplated awards to directors within such limit?
    • Will the limit be sufficient going forward (should review this in the context of a Director Pay Study)?
    • Do director awards from the Plan comply with any applicable minimum vesting requirements or an exception to such requirements?
  • SEC Filings
    • Are Form 4s required for any of the proposed grants?
    • Are Form 4s required for vesting of prior grants?
    • If so, when will the Form 4s be filed?
    • Will Form 5s required for grants made during the year?
  • Compliance Check
    • Does the plan incorporate all currently necessary features to be in compliance with all applicable rules and regulations?
    • Does the plan need to be amended to reflect any changes to the rules and regulations during the past year?
      • Section 162(m) was modified significantly by the Tax Cuts and Jobs Act of 2017, and plans no longer are required to have certain provisions that would otherwise enable them to be used to grant awards that would qualify for the Section 162(m) performance-based exemption such as limits on the number of awards that can be granted to a single participant and the performance metrics that can be used to qualify such an award.
        • Does the plan have outstanding awards that are designed to qualify for the Section 162(m) grandfather provision in the Tax Cuts and Jobs Act of 2017?

Remember, ultimately, you want to be able to know how your plan stacks up against the three criteria for a good equity plan:

  • Compliance
  • Best Practices
  • Flexibility

Another thing you might want to consider doing during the summer months is to check your equity usage and dilution to evaluate how your company is using equity compared to its peers.

  • Consider conducting a dilution analysis for your company and your company’s peer companies
  • Consider conducting a run rate and burn rate analysis for your company and your company’s peers


Three Keys to a Good Equity Compensation Plan

Having worked with a number of companies and equity compensation plans over the decades, I paused the other day to reflect on what makes for a “good” plan in my experience. In thinking this through I think there are three keys which help make an equity plan “good”:

  • Compliance
  • Best Practices
  • Flexibility


Seems simple, but a good equity plan ensures that it complies with all the applicable rules. These rules include the Securities and Exchange Commission rules, the listing exchange (NYSE/NASDAQ) rules, the tax rules, and accounting rules.

Best Practices

A good plan reflects the current thinking of what constitutes “best practice” with respect to an equity plan. For example, today’s good plans typically have a minimum vesting period for awards, have some form of double-trigger protection for change-in-control, and are likely to place a limit on the number of shares that can be granted as full value awards (stock-settled awards other than stock options or stock appreciation rights).


Good equity plans also manage to balance compliance and best practices with flexibility, so that the plan itself does not unintentionally box the company into a particular action but instead enables the company to determine what is to occur, i.e., maintaining the most flexibility while still being in compliance with applicable rules and following best practices. Flexibility itself often is not fully understood until an unforeseen event occurs and the equity plan is put to the test.


I listed the keys for a good plan in order of their applicability. In order to have a viable equity plan, it has to comply with the applicable rules, i.e., compliance. To have a better equity plan, it should reflect current best practices in its provisions (vesting, CIC, award limits, share limits, etc.). Finally, to be a good plan, an equity plan needs to have sufficient flexibility to allow the company to address issues that arise, even if not expected.

In my experience, the hardest thing for an equity plan to do is to incorporate adequate flexibility and reflect current best practices. Sometimes, compliance can be a stretch, but that is a baseline which needs to be met and most plans do an adequate job of following the applicable rules. Many plans also do a relatively good job of incorporating best practices at the time they are adopted. The toughest thing is drafting an equity plan to ensure there will be sufficient flexibility.