Summertime is Check-up Time for Equity Plans

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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


Launching 9/8/2009!

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Thanks for visiting!

Only a few more days until I officially launch this blog.  Until then, feel free to wander around, but keep in mind that things are still “under construction.” Also, please take a look at my presentation on implementing new equity compensation plans and plan amendments (link below):

View more presentations from EHauder.

If you have any suggestions on how this site could be useful to folks interested in equity compensation plans, please let me know.


Best regards,
Ed Hauder