Advanced EPS: How Equity Awards Effect EPS Calculation

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By Kateryna Kyryllova. Earnings per share (EPS) is one of the most important corporate performance metrics, yet, one of the most complex measurements for companies with multiple types of equity awards. Jim Vincent, the vice president of client support at Certent, along with Ken Stoler of PricewaterhouseCoopers LLP and Raul Fajardo CEP, QUALCOMM Incorporated will be talking about the challenges of computing EPS at the 23rd Annual NASPP Conference in San Diego later this month. We met with Jim Vincent to take a peek at some of the considerations that may affect your EPS calculations.

KK: Tell us a little bit about your breakout session for the NASPP conference, “Advanced EPS: Beyond Stock Options.”

JV: I’m excited to be presenting with Ken Stoler from PricewaterhouseCoopers and Raul Fajardo from QUALCOMM Incorporated. In our session, we will be walking through real-life examples to examine the challenges companies face in computing EPS for PSUs, RSUs, PSAs, RSAs, and ESPPs.

KK: Why is it so important for stock plan administrators to have a solid grasp on EPS?

JV: Earnings per share is generally considered to be the single most important variable in determining a share’s price. There are many varieties of EPS being used these days and stock plan administrators must understand what each one represents. For example, EPS is defined as net income divided by the number of shares outstanding. However, both the numerator and denominator can change depending on how you define “earnings” and “shares outstanding.”

KK: Let’s talk about the denominator – what are the most common ways of defining the “shares outstanding”?

JV: Shares outstanding can be defined as basic or diluted. Basic EPS is calculated using the number of shares that have been issued and held by investors. Diluted EPS entails a complex calculation that determines how many shares would be outstanding if all exercisable stock grants, warrants, and options were converted into shares at a certain point in time. If a company has more types of stock than common stock in its capital structure, it must present diluted EPS in addition to basic EPS.

KK: Which type of equity awards represent the biggest challenge when calculating EPS?

JV: I would say ESPP [employee stock purchase plans] because there is no specific guidance on how to incorporate the impact of an ESPP on the calculation of diluted EPS, and companies apply different methods of calculating it.

KK: What is the main thing companies should be mindful of when calculating EPS for an ESPP?

JV: If you are a public company and you perform this calculation – congratulations! We find companies skip this step for a variety of reasons. For those companies who factor ESPP into their EPS calculation – when calculating the dilutive impact of your ESPP plan, make sure to calculate the buyback component for unamortized expense. Because companies have to calculate the estimated number of shares purchased for Black-Scholes valuation purposes, they often simply use that estimated number in the diluted calculation rather than take the extra step to factor in unamortized expense.

KK: What are you most looking forward to at this year’s NASPP conference?

JV: NASPP is a great conference. I look forward to catching up with all the equity compensation experts that attend each year – I don’t recall anywhere or any time more experts in our space gather, so it’s a great way to share information and learn what is going on in our industry.

For more information about how Certent helps companies navigate equity compensation administration and reporting download this data sheet or request a demo.

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