How Changes to Your Equity Plan Can Affect Participants and Accounting

By Jennifer Baehr. Making changes to your equity plan is not an overnight process.  This laborious task involves many internal and external parties and several steps along the way.  It will take some time to determine a proposal of changes and evaluate what is best for your company and your employees.  It is critical to develop an equity plan that is attractive to top talent, but it is essential to keep in mind any cost prohibitions, communication challenges, and ongoing maintenance.

Below are some common changes companies make to their equity plans, as well as various impacts on accounting and information to help you determine how your employees will be affected.

Adding a market condition on time-based awards

It is important to consider if your participants will understand the market condition, and determine if this will change their motivation. Communication is key here to ensure the employee has a solid understanding of the added conditions of the award, so there is less confusion and fewer questions for the stock plan administrator to field. Be aware that adding a market condition can also decrease the fair value of the award.

Incorporating an ESPP

Keep in mind that ESPP plans that offer a high discount (15%) and a lookback are the most attractive to an employee, but they also cost the company more. Consider offering a discount on the purchase date with no lookback, as this type of plan decreases the amount of corporate expense and still provides the employee with the benefit of a discount.

Establishing a post-vest holding period

Since this is a new hot topic in the industry, there are a lot of learning opportunities out there for employees to gather specific details.  Implementing a post-vest holding period for your participants can decrease the fair value of the award, thus reducing overall expense that you would be taking on a company level.

Offer options with a higher exercise price than the fair market value on date of grant

If you are issuing options, this could decrease your fair value, resulting in less expense for the company. However by doing this, the employee will experience a decrease in gain. It is crucial to balance and carefully consider the number of shares issued against the exercise price.

Before making any changes to your equity plan there are two key steps that will help make the accounting process easier:

Reconcile your data

Making sure the data in your administrative system is clean and up-to-date is extremely important.  This will make your life easier when it comes time to run reports. Remember, garbage in, garbage out.

Know what your equity system can handle to lessen manual workarounds

Talk to your equity management provider to gain a full understanding of your system’s capabilities.  If your system is unable to run all the reports that the accounting department will need to support the new plan design, you will want to know this ahead of time.

Making accounting treatment a part of the plan design and implementing well-structured controls will prepare your team for any plan changes. Read Four Fundamentals of Financial Reporting for Equity Compensation to learn more about best practices for creating the right infrastructure and processes to minimize the headaches of share-based compensation while preserving its advantages.

 

Jennifer Baehr Banner