Parental Advice That Sticks: Keep It Simple!

By Emily Cervino, Fidelity Stock Plan Services

September 21, 2016

I’ve been thinking about those little pearls of wisdom or nuggets of information that hang on, things we learned ages ago that travel with us. One I’ve never forgotten came from good old Dad.

Like many of us, I received an abundance of parental advice in my formative years—and much of it went in one ear and out the other. Some of it was silly, some serious, some sage. I still hear the sound track in my head: “Don’t take wooden nickels” … “Worrying won’t change anything” … “Don’t ever pay full price.” But one piece of parental advice that stuck with me was some variation of the perennial favorite, “Don’t overcomplicate it!”—or “KISS.”  The term came from the Navy, as an acronym for “Keep it simple, stupid.” My dad embraces this philosophy so fully, you’d think he coined the term, though when I first heard it, it was likely edited to “Keep it simple, silly,” back when I thought “stupid” was the “s-word.”

The concept is basic: Things work best when they are simple rather than complicated. So remove as much complication as possible. As a busy working mother, I subscribe whole-heartedly. I only considered summer camps where both boys met the age requirements. Being within walking distance of school was a stipulation for the new house. A base paint color connects everything in my home. And virtually every item in my closet matches everything else.

But it isn’t just on the home front where I’m a believer in simplicity. With equity compensation plans that are inherently complex, I’m often surprised to see complexity added. You have to wonder about unique plan designs and provisions where it isn’t entirely clear that the added complexity offers benefits that outweigh the added challenges. For example:

  • Taxes: When it comes to tax elections on equity awards, I’ve always believed there is such a thing as too much choice. There are three possibilities to cover tax: sell shares, withhold shares, or pay cash. They are all roughly equivalent economically to the employee. Cash isn’t feasible for most employees, but a company could mandate selling shares or withholding shares and remove the added complexity of a tax election. I know—there will always be that one employee who wants to pay cash and receive the full amount of shares. If the employee repurposes the cash tax payment to buy shares on the open market, she could potentially end up with essentially the same number of shares. So, really, what is the added benefit of the complexity of a tax election?
  • ESPP: Thankfully the limitations of Section 423 remove many of the temptations to add complexity, but it is still fairly common in the NQ world of ESPP. NQ ESPPs allow more flexibility than 423 plans, and I’ve seen companies fully embrace that flexibility with tiered match levels, or, even matching based on holding length, surprisingly confusing eligibility, and unusual interest payments. For a broad-based voluntary program, I think it is important to be as simple as possible so employees can easily make informed decisions about participation.
  • Performance awards: When performance-award popularity was initially on the rise, I spent a lot of time talking to plan sponsors about them. I often summed it up with, “One of the greatest things about performance awards is the flexibility they offer. One of the most challenging things about performance awards is the flexibility they offer.” That flexibility can really be a double-edged sword.  These awards offer plan sponsors the ability to tailor the award to each recipient and to craft performance metrics on an individual basis. Here I think it is critical to look at the population of recipients to determine how much customization is necessary (and to assess how to manage the administration, education, and communication of those custom awards). When it comes to designing the awards and selecting the metrics, think about how much time executives should spend trying to figure out how the award works. Is it a better strategy to adopt a simpler award structure and allow the executive to focus on strategic issues rather than sorting out their equity plans?

Is it time to inventory stock programs and identify those bits of added complexity where the benefits can’t be easily justified? Should the KISS philosophy apply to equity compensation?  I know my dad would approve.

So, remember to Keep It Simple, StockPlanProfessionals!

 

cervino_outdoor_landcape2-crop_webEmily Cervino is the Vice President, Fidelity Stock Plan Services and focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence. Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, and a member of NASPP, GEO, and NCEO. Emily is a Certified Equity Professional (CEP), and she holds Series 7 and 63 securities registrations.

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