RSU Grants At Amazon, Apple, Google Adapt To Help Retain Top Talent

Hiring competition, the Great Resignation, and stock-price volatility are prompting changes in longstanding stock compensation practices for key performers at big, established tech companies such as Amazon, Apple, and Google. Although grants at these tech giants are still more likely to be restricted stock units (RSUs) than the stock options that can be wealth-builders at tech startups, features of their new grants are evolving in an effort to retain top employee talent.

The changes that these industry leaders are making in their stock grant designs will be widely observed and may be emulated by other companies.

Amazon

One example is Amazon, discussed in an article from Bloomberg (Burnt Out Amazon Employees Are Embracing The Great Resignation) and other sources, including financial advisors who work with Amazon employees. The company is facing challenges with employee retention, for numerous reasons including a decline in its stock price since its high last July.

Amazon caps salaries for white-collar workers at a specified amount and then adds in stock grants that gradually vest in “steadily increasing chunks” over four years. In response to the tight labor market, the company just announced that it plans to more than double its cap on base salary, from $160,000 to $350,000 per year. According to an article from GeekWire, Amazon also stated that it will start making stock grants to employees when they are promoted, instead of waiting until the next annual grant cycle. Amazon’s announcement says the purpose is “to better align newly promoted employees with the compensation range of their new level.”

Further changes may also be coming in Amazon’s stock grant practices. Amazon’s RSUs currently vest 5% after the first year, 15% after the second, and then 20% every six months for the remaining two years. This is a backend-loaded vesting schedule. An article from Business Insider reveals that Amazon Web Services is considering a shift to a monthly vesting schedule for employees at Level 7 (principal) or higher and for approximately 15% of employees with a “top tier” annual performance review rating (see Amazon Considers Changing How It Distributes Employee Stock Options To Stem Exodus Of Top Talent).

Another article from Business Insider discloses an internal company memo stating that Amazon will allow employees to take longer leaves of absence before pausing their RSU vesting (Amazon Changes Employee Stock Distribution Policies After Exodus Of Top Talent And Complaints Of Slow Vesting Period). Previously, Amazon paused vesting for leaves of longer than two weeks for any reason, which is not a common practice. The Bloomberg article cited above adds that the company will now let vesting continue during parental leave and for up to 26 weeks of medical leave. Amazon will now also give employees the choice to trade fractional shares, and when an employee dies it will accelerate the vesting schedules for beneficiaries.

Apple

Apple has informed certain high-performing engineers (10%–20% in some divisions) that they will receive out-of-cycle RSU grants that vest over four years, according to a short news article from Fortune (Apple Is Doling Out Bonuses Up To $180,000 To Retain Top Employees). These grants are seen as a retention incentive to prevent defections to tech rivals. The grant values range from $50,000 to $180,000, with both the size and timing being atypical and surprising, the article claims.

The article also touches on the downside of these out-of-cycle types of grants, which are different than regular annual grants. They “irked” some engineers who didn’t get them and saw the selection process as arbitrary. Some grants equaled the annual stock grant normally given only to engineering managers.

Separately, Apple’s CEO received a new performance-based vesting RSU grant (performance stock units, or PSUs) on the 10th anniversary of his promotion to that position. See pages 44 and 50–52 of Apple’s definitive proxy statement filed with the SEC for his grant and others to executives, and also an article from MarketWatch (Apple CEO Tim Cook’s Compensation Rises To Nearly $100 Million Thanks To New Stock Award). These pay out stock based on the relative performance of Apple’s total shareholder return compared to companies in the S&P 500. For example, if Apple ranks in the 85th percentile of companies in the S&P 500 for the performance period, 200% of the target number of RSUs vest. For an explanation of the difference between time-based vesting RSUs, which were also granted at the same time to these Apple executives, and PSUs, see an FAQ at myStockOptions.com.

Alphabet/Google

Alphabet, the parent company of Google, is similarly finding the need to make larger grants to retain its top talent—see, for example, an article from CNBC, Alphabet Grants Tens Of Millions Of Dollars In Stock Awards To Top Execs. As detailed in Alphabet’s 8-K filing with the SEC on new compensation packages for four senior executives, including the CFO and the chief legal officer, each executive received stock awards valued between $23 million and $35 million, split between performance-based and time-based vesting RSUs.

The performance-based RSUs will vest from 2022 to 2024 according to total shareholder return (TSR) relative to companies in the S&P 100. The number of PSUs that vest will range from 0% to 200% of the target grant size. The time-based RSUs will vest quarterly in 12 installments, assuming continued employment at the company.

Business Insider reports that for all of its employees globally, Google has shifted to more front-loaded vesting for its RSU grants. Its RSUs used to vest evenly over four years (25% yearly). Now they vest 33% per year for the first two years, 22% in the third year, and 12% in the fourth. In comparison, most startup and pre-IPO companies tend to use a four-year vesting design in which 25% of the grant vests at the one-year mark, then monthly for the remaining term of continued employment (36 monthly vests after one-year cliff vest). I predict that more public companies will be tweaking their vesting schedules in various ways, including moving away from annual vesting to quarterly or monthly.

At Forbes.com, senior contributor Jack Kelly has a few insights on the RSU grants at Google for principal engineers. The author, a respected recruiter at one of the largest global search firms, emphasizes the importance of stock grants “that could potentially change your life” (Google Engineer Shares How They Made Over $1 Million In Total Annual Compensation: The Advice Applies To Everyone).

Underwater Stock Options

With stock markets in decline at the start of 2022 and IPOs underperforming, concerns about underwater stock options have resurfaced. Martin Peers, New York bureau chief and columnist at The Information, bluntly expresses both good news and bad news about the volatility in a recent article (Tech Stock Slump Hits 2021 Stock Comp). The good news? Grants made early this year will have “lots of upside.” The bad news? Last year’s grants. Even with RSU grants that do not technically go underwater (unless the stock price falls to $0), the value of grants at some companies has been substantially sliced.

In the author’s view, the big decline in tech stocks will have a widespread impact on employee compensation, and companies will need to address that in the upcoming months. He also wonders whether companies will take steps to make up for what employees lost by “beefing up” new grants to increase employee retention.

More Resources

See the extensive articles and FAQs at myStockOptions for more about restricted stock/RSUs and performance shares/PSUs, including their tax treatment.

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Performance Share Grants: Equity Approaches At Apple And Uber Help Illustrate 5 Key Features

At most public companies in the United States, when you reach the executive ranks you are more likely to receive grants of performance shares than stock options. While stock options may still appear in the mix of grants you get, with the potential to create substantial wealth, major surveys show that other types of stock awards have overtaken options in popularity.

Popular With Both Established Public Companies And IPO Companies

At Apple, executives receive restricted stock unit (RSU) grants that increase or decrease in target size according to how the company’s total shareholder return (TSR) ranks relative to the TSR of other companies in the S&P 500. An illustration of this is in the terms of a grant to Apple’s COO that eventually paid out handsomely (detailed in the footnotes in the Form 4 SEC filing). If Apple ranked at the 85th percentile, 200% of the target number of RSUs would vest. For performance at the 55th percentile, 100% of the target number of RSUs would vest, while performance at the 25th percentile would cause 25% of the target number of RSUs to vest. No RSUs would vest if Apple's performance ranked below the 25th percentile.

These types of grants are not limited to long-established public companies. The Form S-1 registration statement that Uber filed with the SEC for its IPO states the following (page 236):

"As we transition to become a publicly traded company, we expect that the mix of service- and performance-based components of our equity compensation will shift. To help us achieve our objectives of rewarding our executive officers for their experience and performance and motivating them to achieve our long-term strategic goals following this offering, we anticipate that performance-based vesting conditions applicable to RSUs granted to our executive officers will become more prevalent."

Five Key Features Of Performance Share Grants

These types of performance-based equity awards can be highly customized to match a company’s compensation approach and goals. While the terminology and features vary by company, these grants most often pay out in shares rather than cash and tend to have at least five common features, detailed below.

1. Performance-based awards are often made as grants of restricted stock or restricted stock units (RSUs) that vest or pay out only if specified company performance goals have been reached by the end of the measurement period cycle. For regular stock options and RSUs, time-based vesting is the most common type of vesting (e.g. 25% of the grant vests yearly). In performance-based awards, vesting is both time-based (“service-based” in Uber’s SEC filing) and also dependent on the attainment of company or individual goals.

In stock awards to senior executive that deliver huge compensation, such as those listed in New York Times and Wall Street Journal reports about the highest-paid CEOs, the vesting of the grants is based almost entirely on performance criteria. That is the main way in which these stock grants for senior executives can be made acceptable to big institutional investors and the proxy advisory firms. By contrast, these types of vesting criteria are not common for stock options, which have their own built-in performance goal of requiring a stock price increase from grant to have any real value. The performance criteria in the huge and complex stock option grants to Elon Musk at Tesla are a rare exception.

2. A wide range of goals or metrics is possible, tied in some way to your company’s stock price and/or internal financial measures. The most popular are TSR (typically relative to the TSR of an index or competitors, as in the Apple example above); return on capital; earnings per share; and revenue. Companies often use multiple targets for the stock award. For example, 50% of the grant’s payout may be based on one goal, the remaining 50% on another.

3. The performance period for measuring whether the goal is reached is often three years. While a stock option grant may have a ten-year term and an RSU grant a four- or five-year vesting period, performance share grants with a three-year term are still considered a form of long-term incentive (LTI) compensation. Often you have multiple outstanding performance share grants with three-year cycles. This makes it complicated to track them all and follow how you’re doing against the performance criteria.

For tax purposes, you are likely to receive the shares only after the board certifies whether the performance goals were reached when the period ended (usually a cumulative calculation and not based on yearly measurements). The award is then paid out in the year after the cycle ends. It’s in that year when you’ll have taxable income from the grant. Some companies have started adding a post-payout, time-based holding period, at least for the shares net of taxes owed.

4. Grants tend to have sliding scales or multipliers that can give you a bigger payout. For meeting a goal, you may get the target award size (e.g. 10,000 shares). Falling below the goal could result in no payout or a minimum amount. Should your company exceed the goal by 100%, you may get a maximum payout of 200% of the target (e.g. 20,000 shares). The grants at Apple described above illustrate this potential upside.

5. Leaving your company for another job during the vesting period will end your rights to any payment, regardless of how well your company is doing during the performance cycle and your role in contributing to it. Retirement, death, or disability under your plan may allow for pro rata distribution at the end of the performance period, depending on how long you worked for your company during the cycle (or a full payout, if your grant’s terms permit that). Should your company get acquired, technically triggering a “change in control” as defined by your grant agreement, you may still get the full payout under the terms for an M&A transaction.

Further Resources On Performance Shares

To learn more about these types of equity awards, see the section Restricted Stock: Performance Shares at myStockOptions.com, including an FAQ on the top 10 questions to ask about your performance share grant.

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On Your Mark, Set, Go: The Top 10 Questions To Ask About Your Performance Share Grant

Performance share grants, whose vesting is based not on time but on the achievement of specified performance goals, align the motivations of employees with the competitive interests of the company and its shareholders. Amid the rising popularity of performance shares, well beyond just executive compensation, we have crafted an informative set of content on all aspects of performance shares.

We've also been getting a lot of questions about performance share grants. While performance share plans are extremely variable in their features and terminology, they all have basic common elements that you should understand, whether your grant's performance goals are a sprint, a mile, or a marathon.

To help our website users get the most of a performance-based equity award, and avoid costly mistakes, we have compiled the top 10 questions to ask about these types of grants. The links in the questions below go to the related content at myStockOptions.com.

1. How do performance share grants differ from normal time-based restricted stock and RSUs?

2. What are the performance goals and metrics as stated in your company's plan? Are the measures relative to other companies in the same industry or to a market index?

3. What is the performance period during which the goal must be reached? How soon after the end of the period will I receive the shares?

4. Is there a sliding scale for share payout? Are there minimum, maximum, and target-level payouts? If so, what are they?

5. Is there an additional holding period on the shares I receive after they are paid out?

6. What would happen to your performance share grant if you were to lose your job, retire, become disabled, or die?

7. How does tax withholding work upon share payout?

8. Is there an election to defer the delivery of the shares (and the taxes) beyond the normal time of share payout?

9. Do I get dividends with performance share awards?

10. What happens to my performance share grant if my company is acquired?

In addition, you should understand the tax treatment, the reporting on your Form W-2, and the related tax return reporting. The Tax Center at myStockOptions.com covers all tax topics involving stock compensation.

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Visit myStockOptions At NASPP 2018: Exhibit Hall And Financial-Planning Session

We are excited about the NASPP's annual conference, being held this year in San Diego (Sept 25-28). As always, myStockOptions.com will have its cheerful booth in the exhibit hall, where our editor-in-chief Bruce Brumberg will be available as an NASPP-designated expert to answer questions on stock plan education/communications and equity comp taxation. If you attend the conference, please stop by our exhibit booth for a chat and pick up a myStockOptions.com souvenir!

In addition, Bruce is presenting at an NASPP Power Session on September 28 (that Friday morning) called Financial Planning Strategies for Employees. Joining Bruce in this interactive session will be James Fucigna, a leading Wealth Management Director at Morgan Stanley.

Pay For Performance: Do Performance Share Grants Really Rock It Out?

Performance share grants have become popular awards for senior executives that companies make to improve alignment of executive pay, company performance, and shareholder value. While the theory behind them is sound, there has never been total agreement about how effectively these grants actually achieve their objectives.

The question of whether performance shares really result in pay for performance is at the heart of evaluating the effectiveness of these awards and their design. While it is hard to guarantee that these grants, or any other grant types, will truly drive better executive actions and decisionmaking, companies at least want some correlation between higher payouts and higher corporate performance. We have considered this question in other commentaries at the myStockOptions.com Blog: Do Performance Shares Actually Perform? and As Performance Share Awards Gain Widespread Popularity, Some Question Whether They Truly Improve Corporate Performance.

Three Truths And A Lie: New Research On Performance Share Grants

In a white paper on performance awards (Performance Awards: 3 Truths And A Lie?), Fidelity Stock Plan Services and ClearBridge Compensation Group apply survey results in an attempt to assess the alignment between performance award payouts and company performance. The title of the paper plays off of the popular party icebreaker game called "2 truths and a lie." The "three truths" show some interesting correlations:

1. Payouts and company performance awards are directionally aligned, but not perfect. About two thirds of the awards line up with performance (i.e. the higher the company performance, the higher the pay, and vice versa), measured by either total shareholder return (TSR) or earnings per share (EPS). The pay-for-performance alignment was 68% for TSR and 62% for EPS. In addition, payouts at high-performing companies were more aligned with performance than those at low-performing ones were. The study notes that, given those results, these awards are not a "silver bullet" way to achieve pay for performance.

2. Metrics matter. Companies often use multiple metrics, which occur at 42% of the surveyed companies. TSR at 68% had the strongest relationship between payouts and performance, while revenue performance had the weakest (51%).

3. The LTI grant mix can be related to company performance results. 73% of the surveyed companies grant restricted stock or options along with performance shares. High-performing companies tend to include performance awards and/or stock options in the mix more often than low-performing companies do (92% versus 81%).

Stock Options Still Rock

The "lie" was a surprise to the researchers: the idea that stock options do not function as a "performance" grant is inaccurate. In fact, the study found the opposite. Options continue to be an "enduring choice," providing direct alignment with shareholder value creation, making them "worth another look," as the authors recommend.

Performance Share Grants: Survey Data, Big Payout At Apple, And A Lawsuit

Despite the likelihood of a change in the corporate tax deduction for performance-based grants (see our FAQ on tax reform in Congress), the growing popularity of performance shares and PSUs is expected to continue, especially in grants to executives. For those of you who design, grant, or receive performance-based equity awards, we have observed some interesting recent developments.

Survey Reveals Trends In Performance Goals

The theme of optimal performance measures, featured in various sessions at the recent annual conference of the National Association of Stock Plan Professionals, has become a prominent issue for companies and shareholders.

According to Equilar's survey Equity Compensation Trends 2017, the most common metrics of performance awards at the "Equilar 500" companies in 2016 were relative TSR (52.4%), ROC/ROIC (34.9%), EPS (30%), revenue (17.8%), and cash flow (14%). Metrics vary by industry, as Equilar, the leading provider of executive compensation data, explained when reporting the survey results in its blog. For example, 88.5% of the surveyed utility companies based performance award payouts on relative TSR, while just 33.3% of the surveyed companies in the services sector did so.

As Equilar mentions, Institutional Shareholder Services (ISS) recently changed its methodology to include metrics other than TSR in its pay-for-performance analysis, and that may prompt meaningful changes in plan design (see the related ISS press release). An FAQ at myStockOptions has more survey data on performance share grants.

Apple Payout Of Performance Share Units

In September, RSUs granted by Apple in 2014 paid out at the end of their cycle after the associated performance conditions were met. Eight Apple executives each received a payout of 125,494 shares. This was reported by several sources. The footnotes in the related Form 4 filings (e.g. the filing by Apple's general counsel) provide details on the grant, including its payout scale, and an example of Section 16 reporting:

• The amount of stock each received was based on Apple's total shareholder return (TSR) relative to other companies in the S&P 500 from September 28, 2014, through September 30, 2017.
• Apple's TSR during that period was 65.53%, which gave it a ranking of 92nd out of the 451 companies in the S&P 500.
• Apple placed in the 80th percentile, resulting in the 125,494 vested RSUs for each executive. Had its ranking reached the 85th percentile, the executives would have seen a slightly larger reward: 200% of the target 68,576 RSUs would have vested.
• Apple withheld 62,929 shares for taxes.

For info on how to report performance share grants on Form 4, see the related FAQ at myStockOptions.

Lawsuit Over Performance Shares In Job Termination

A job termination in which stock compensation is forfeited creates a situation ripe for litigation. What happens when someone with a performance share grant is fired before the end of the performance period? In Suzuki v. Abiomed Inc., a federal district court in Massachusetts ruled that a covenant of good faith and fair dealing applies to potentially protect someone with unvested performance-based grants. The fired executive contended that his termination occurred after he had performed much of what was required to achieve the business objectives tied to his grant's customized vesting schedule. He claimed that the company simply did not want to pay him the compensation, particularly since its stock price had substantially increased after the grant date. The company contended that the employment agreement gave it the right to terminate employment at any time and that the performance conditions did not occur until 15 months after termination.

The court found that even for at-will employees the covenant applies to prevent unjust enrichment by the company for not paying compensation that is "fairly earned and legitimately expected." At a minimum, the ruling means that a termination made in bad faith cannot cancel the payout when the compensation "is connected to work already performed." The case is discussed by a commentary from the law firm Sherin & Lodgen. For more on issues to watch for involving stock plans and job termination, see the related section at myStockOptions.

Do Performance Shares Actually Perform?

In a performance share grant, you receive the shares only if specified performance goals are met within the measurement period set forth in the grant. Technically, these grants can be in the form of performance stock awards (PSAs), which are similar to restricted stock, or performance stock units (PSUs), which are similar to restricted stock units. Either way, the shares are not paid out unless the company scores the touchdown outlined in the playbook of the stock plan. Whether the field is big or small, that gives employees and executives an extra incentive to get the ball into the end zone.

The 2016 Domestic Stock Plan Design Survey, conducted by the NASPP and Deloitte Consulting, shows a big increase in the use of performance share awards, especially those with total shareholder return (TSR) as a metric. However, even though these grants generally foster the pay-for-performance conditions that shareholders and proxy advisory firms want, we have recently sensed some rumblings of discontent about performance share awards among commentators on compensation issues. One consultant has concluded, for example, that companies can reduce complexity and streamline their compensation by returning to stock options, which he regards as a "much simpler way to reward executives than performance shares based on TSR" (see Is It Time To Simplify Your Design? by Eric Hosken, workspan, July 2017, pages 41–44). The author also reasons that executives find it much easier to "relate to an absolute stock price objective than an always-evolving relative performance standard."

Skepticism about performance shares is coming from many different angles. Writing in the July–August issue of Harvard Business Review, MIT professors S.P. Kothari and Robert Pozen (a former executive chairman of MFS Investment Management) criticize performance share plans, including their design and disclosure (see Decoding CEO Pay). In the sample plan that they evaluate, 50% of each grant is based on "adjusted operating cash flow," which the authors could not find a definition of in the proxy statement. While it was in an exhibit in the 10-K, there was no quantification of what it means or its implications for the company or executive compensation. The other 50% of the grant, they noted, is tied to TSR relative to 11 peers over a three-year period. Although the company's annualized TSR ranked 10th, the CEO still received 80% of the target payout. The authors opine that this is not truly "pay for performance." Instead, they reason, if the TSR ranks in the lower half of the peer group, the payout should be less than half. These respected authors lament that this "generous treatment" of weak performance on relative TSR is far from rare. While CEOs get large payouts for outperforming a peer group, they are only modestly penalized for underperforming.

For details about performance share grants, see the articles and FAQs about them at myStockOptions.com, including an FAQ with survey data on the most common metrics used for these grants.

Survey Reveals An Intricate Mix Of Restricted Stock, Performance Shares, And Stock Options In LTI Vehicles

If you're as into stock plans and equity comp as we are, you're probably also really into survey data and statistics. That makes this blog entry a good one for both of us.

While the rise of restricted stock/RSUs and performance shares, along with the relative decline of stock options, has been well documented for many years, it is always interesting to get a nuanced picture of how all three grant types are used in tandem now. As we predicted a while ago, stock options have not disappeared but are often being granted to supplement full-value awards such as restricted stock and performance shares, especially in long-term incentives (LTIs) designed for executives.

That's where the following new survey comes in. For its study 2017 Trends And Developments In Executive Compensation, the research and consulting firm Meridian Compensation Partners surveyed 118 companies to uncover the current usage of equity comp in LTI vehicles for executives. Meridian found that for their senior executives, 90% of the surveyed companies use two or three types of long-term grants (though for grants to employees at lower levels, the use of just one type is more common).

Meridian discovered the following about the prevalence and weight of restricted stock, performance shares, and stock options in LTI vehicles for executives.

Type of award	% of companies	Performance awards (dollar weight in total LTI value)	Stock options (dollar weight in total LTI value)	Restricted stock (dollar weight in total LTI value)
Performance awards, stock options, and restricted stock	22%	44%	27%	29%
Performance awards and restricted stock	55%	58%	—	42%
Performance awards and stock options	11%	51%	49%	—
Stock options and restricted stock	2%	—	28%	72%
Performance awards only	8%	100%	—	—
Restricted stock only	0%	—	—	100%
Stock options only	2%	—	100%	—
Overall (averages) in 2017	100%	56%	13%	31%
Overall (averages) in 2016	100%	55%	16%	29%

An FAQ on myStockOptions.com presents numerous other surveys which show that many companies use a variety of grants in tandem, including restricted stock/RSUs and performance shares.

Tax Reporting For Stock Compensation: Understanding Form W-2, Form 3922, And Form 3921

The end of January is in sight. Along with snowflakes, personal tax-return documents are in the air—or rather, hopefully either in your safe possession or on their way to you. When you have stock compensation, tax-return documents and the information they contain can be confusing and hard to decipher.

Making Sense Of Form W-2 When Stock Compensation Is Reported

Employees who had income from stock compensation or an employee stock purchase plan in 2015 must understand where that income is reported on Form W-2 so that they can complete their tax returns properly. In the Tax Center at myStockOptions.com, we have a section of FAQs about Form W-2 reporting for stock compensation. Each one includes an annotated diagram of Form W-2 that clearly interprets this sometimes cryptic document.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types. Income is included in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case, the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Form 3922 For ESPPs And Form 3921 For ISOs

Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2015, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic).

Alert: In 2016, the amount of the IRS penalty doubled for companies that file information returns late or fail to distribute the employee statements.

For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.

Annotated Diagrams Of Forms 3922 And 3921

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. You will find this content in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers.

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

Sell Shares In 2015? The Fun Is Just Beginning

If you sold shares from stock compensation or an ESPP last year, you will need guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting. These FAQs clearly explain how the information on Forms W-2, 3922, and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return.

Resources For Stock Plan Participants And Companies

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns.

The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).

Vesting Dilemma For Restricted Stock, RSUs, And Performance Shares: Should You Sell The Shares Or Hold Them?

It's THE big question with restricted stock, restricted stock units, and performance shares: what should you do with the shares at vesting?

The decision of whether you sell or hold the shares depends on various factors. Some of them are under your control.

• Taxes. Shares can be a source of the proceeds needed to pay taxes at vesting, whether through tax withholding, mandatory share surrender, or net share settlement.
• Tax planning. Whether you hold the shares and for how long will affect your capital gains tax at sale. Any holding period after vesting does not affect the amount of income tax due for the value of the shares at vesting.
• Your cash needs, upcoming life events, and other financial-planning factors, including diversification, dividends paid on your stock, and alternative investments.
• Whether your company is publicly traded or privately held. At public companies, be aware of blackouts when you can't trade or stock ownership/retention guidelines that require you to keep a certain amount of company stock. In a privately held company, you will not be able to sell the shares immediately at vesting because of restrictions that are likely to exist in your grant and/or because of the SEC rules on resales.

Calculations in the Restricted Stock & RSUs Comparison Modeling Tool on myStockOptions.com can help you decide. If you are not comfortable with making these decisions on your own, discuss strategies with a financial advisor. This is particularly useful if you are thinking about holding the stock at vesting and company shares represent at least 10% of your net worth.

Alert: If your company requires formal acceptance of the grant agreement, the delivery of the shares at vesting may be suspended until you accept it.

Tax Realities

Whether you sell or hold, you will owe taxes on the value of the shares at vesting, when the shares are delivered into your brokerage account. At least for federal tax purposes, the withholding is required to be at the rate for supplemental wages (usually 25%, though it is 39.6% for aggregate amounts above the level of $1 million during a calendar year). In addition, there will be Social Security tax up to the yearly maximum, along with Medicare (plus any state and/or local taxes on this type of income).

Alert: If this rate is insufficient to cover the tax imposed by your federal and state marginal tax rates, you may need to pay estimated taxes.

As mentioned above, you will need to decide how you will provide the taxes that must be withheld. The choices may include using cash, selling enough shares to cover the taxes (a sell-to-cover), or share withholding (i.e. some of the shares are held back for the taxes). Your company may have a mandatory withholding method, in which case you don't have to make a decision, or it may have a default that it will use if you do not elect your withholding method by the deadline.

Facts And Expertise To Help You Decide

The section Restricted Stock at myStockOptions.com has in-depth articles and FAQs on financial planning with these grants that can help you decide what to do at vesting. Eyes tired? Don't want to read? We don't blame you. myStockOptions.com also has podcasts and videos on restricted stock/RSU topics.

Research Shows Continued Growth In The Use Of Restricted Stock, RSU, And Performance Share Grants

After many years of catching up on stock options, restricted stock and restricted stock units (RSUs) are now the most commonly used types of equity award. In its 2013 Domestic Stock Plan Design Survey, the National Association of Stock Plan Professionals (NASPP) found that "time-based restricted stock grants/awards and performance awards have both surpassed stock options in prevalence," in the words of the survey's executive summary. "Restricted stock/units are now the most commonly used award among companies regardless of industry and at all employee levels (81% of companies). Restricted stock units are the most common form of full value share awards (77%)."

For its 2014 Equity Trends Report, the compensation research firm Equilar looked at trends in the stock-based compensation footnotes of proxy statements to examine stock grant practices at 1,345 companies in the S&P 1500 from 2009 through 2013. Like the NASPP, Equilar observed a striking acceleration in the ongoing shift from stock options toward restricted stock, RSUs, and performance shares:

• In 2013, 34.7% of the surveyed companies granted only restricted stock/RSUs, up from just 20% in 2009.
• The percentage of companies granting only stock options fell from 10.7% in 2009 to 4.3% in 2013.

Year	Restricted stock only	Options only	Both
2009	19.9%	10.7%	66.5%
2010	22.3%	8.1%	67.5%
2011	25.9%	6.8%	65.5%
2012	30.7%	5.1%	62.3%
2013	34.6%	4.3%	59.6%

Other findings by Equilar include the following:

• The use of performance share grants continues to grow: 68.9% of the surveyed companies granted performance awards in 2013.
• In 2013, 79.7% of all performance share grants were long-term performance awards. In both long-term and short-term plans, the most common performance-related vehicle was performance share units (61.8% of all performance-related grants).
• In 2013, 23.7% of all performance-based grants included time-based vesting restrictions after the performance periods. The most common post-performance period was two years of additional vesting.

For additional data on changing stock grant practices, see the related FAQ at myStockOptions.com. See also our article series on trends in corporate stock grant practices as reflected by the data in the NASPP's 2013 Domestic Stock Plan Design Survey.

As Performance Share Awards Gain Widespread Popularity, Some Question Whether They Truly Improve Corporate Performance

Written by Bruce Brumberg, Editor-in-Chief of myStockOptions.com and myNQDC.com

As the editor-in-chief of myStockOptions.com, I probably spend too much time thinking about stock compensation. For something a little different, I recently attended the annual conference of the Investment Management Consultants Association, which was held in Boston (our hometown). There I attended a provocative talk given by Michael Sandel, a Harvard professor and the author of the book What Money Can't Buy: The Moral Limits of Markets. Maintaining that everything nowadays can be bought, even morality, Professor Sandel asserts that we have moved from a having a market economy to being a "market society"—and he goes on to consider whether there are things money shouldn't buy.

Perhaps predictably, I soon began thinking about the implications for stock compensation. Professor Sandel's ideas brought to mind a recent study of performance share grants released by the consulting firm Arthur J. Gallagher & Company (The X Factor: What LTI Measures Drive Corporate Performance?). The authors of the paper, compensation consultants James Reda and David Schmidt, seem to indicate that companies are trying to "buy" superior executive and corporate performance with performance share grants—and that in many situations they are not getting their money's worth.

The authors tried to assess whether the use of performance-based awards, particularly those based on total shareholder return (TSR), actually help to improve company performance. They analyzed data from the 200 largest US companies, which have an overall average TSR of 1.15%. Their findings include a number of surprising revelations, such as the following (results varied by industry).

• 53% of the companies used a TSR performance measure at least once in the 2008–2012 period, with an average five-year TSR of –0.18%. Companies with long-term incentive plans not using TSR had an average return of 2.67%.
• Companies that did not grant performance-vested incentives for any of the five years had average returns of 2.54% (but –0.47% if you leave out Apple and Amazon).
• 37% of the companies used an EPS measure at least once in the 2008–2012 period, with an average five-year TSR of 1.37% (the only performance measure that beat the overall TSR average of 1.15%).
• 44% of the companies used a measure involving capital efficiency (e.g. return on equity, return on invested capital). They had an average 0.68% TSR during the study period.
• 56 of the companies that used the same metric over the five-year period (instead of changing measures) experienced a 5.09% TSR.

The authors conclude that their results raise questions about whether performance-based equity awards really lead to better corporate performance than time-based grants do.

Even as the use of performance-vesting awards and TSR metrics continues to grow among companies (and gain popularity with institutional investors), Mr. Reda and Mr. Schmidt offer some pointed insights from their research on the observable value of performance awards. "Since we did not find overwhelming evidence that using performance-based grants will result in improved company results," they assert, "companies need to understand as clearly as possible which measures are most likely to motivate executives and positively affect company performance as measured by long-term TSR. Our analysis strongly suggests that companies need to figure that out and then stick with it over the long haul."

For details on performance awards, including survey data on their features and a summary of their tax treatment, see the articles and FAQs on performance shares at myStockOptions.com.

Restricted Stock Grants: Research Shows Continued Growth

Equilar is the leading firm in executive compensation data, and we look forward to its yearly broad report on equity-granting trends. For its 2013 Equity Trends Report, Equilar looked at various sources, including the financial statement footnotes of annual reports from companies in the S&P 1500, to examine patterns in stock-based compensation and gain insight into stock-granting practices from 2007 through 2012. Unlike the data in proxy statements and Section 16 (Form 4) disclosures, which focus on executives, the financial statement footnotes in an annual report detail all of the company's grants and therefore give a broader picture of its stock plans.

In the data from 2007–2012, Equilar observed a continuing shift away from stock options and toward restricted stock, RSUs, and performance shares. While the number of companies granting both types of equity compensation remained fairly stable, there were significant changes in the percentage of companies granting only stock options and only restricted stock over the six-year period.

Year	Options only	Restricted stock only	Both	Neither
2007	16.2%	17.8%	62.3%	3.7%
2008	13%	20.4%	64.3%	2.3%
2009	10.1%	22%	65%	2.9%
2010	7.8%	24.3%	65.4%	2.4%
2011	6.8%	28.3%	63%	2%
2012	5%	32.6%	60.2%	2.2%

Other findings by Equilar include the following:

• The percentage of the S&P 1500 that granted options during the period of study fell from 78.5% in 2007 to 65.2% in 2012.
• During the studied period, there was a sharp increase in the use of restricted stock (including RSUs). In 2007, 80.1% of the companies were granting restricted stock, and by 2012 this figure had risen to 92.8%. Over the six-year period, the median number of shares granted in these types of awards increased at an annual rate of 11.9%.
• Among 477 companies that had filed their proxy statements by March 18, 2012, over half (61.8%) revealed that they had used some type of performance-based incentive in equity awards to CEOs during 2012.

For additional data on changing stock grant practices, see a related FAQ on myStockOptions.com.

Equilar's Executive Compensation Summit Reveals Strong Interest In Performance-Based Stock Comp

Last week, we attended Equilar's informative Executive Compensation Summit in Boston. The speakers' presentations and examples provided ample evidence of the ongoing growth in performance-share-type grants to executives, a trend that led us to create a section on myStockOptions.com exclusively about performance-based awards a few years ago. What was clear at the conference was the strong interest many companies have in using relative total shareholder return (TSR) as a metric.

The big issues with these plans seem to be (1) determining the appropriate peer group of companies for the purposes of comparison, and (2) communicating the plans to executives, shareholders, the media, and proxy advisory firms. It is worth noting that the plans which pay out a multiple of the target number of shares when a goal is exceeded also offer some of the upside leverage of stock options without much of the downside. For example, relative TRS grants with a sliding scale for payout awards could result in 200% of the target award amount, regardless of how the stock price performs in absolute terms (some companies do cap payouts when they have a negative absolute TSR).

When Does The Risk Of Forfeiting Stock Compensation Delay Taxation?

Substantial risk of forfeiture (SRF) is a crucial concept in the tax code (Section 83), as it determines whether and when compensation is taxable. If there is a chance you can lose compensation, whether stock or cash, and thus you don't really own it in the traditional sense, it is not taxable to you. However, once that restriction lapses and the risk of loss disappears, the property is considered to be transferred to you. Its value at that time is then taxable.

In stock compensation, the most common example of a substantial risk of forfeiture occurs with restricted stock. For you to receive the underlying shares, the restricted stock grant must vest; otherwise, you lose the grant—i.e. a risk of forfeiture exists. If, for example, you were to leave your company before vesting, you would forfeit your right to receive the shares. Only when vesting occurs is the value of the shares taxable. The tax concept for restricted stock units is similar, although RSUs are taxed under a different code provision, and only the actual delivery of the shares triggers taxes. RSUs also can have a feature that lets you elect to defer share delivery, and thus the related income tax, until a future date.

In May, the IRS issued proposed regulations to clarify when a substantial risk of forfeiture exists for stock compensation. In general, the proposed regulations confirm and clarify previous IRS revenue rulings, private letter rulings, court decisions, and the generally accepted understanding of what constitutes a forfeiture risk. The proposed regulations do tweak the tax-code definition in areas that the IRS, we can perhaps assume, found concerning or potentially confusing. For example, the wording now makes it completely clear that the reason for the restriction creating the SRF must involve your job and the services you provide in your job. In other words, if your restricted stock vesting depends upon a World Series victory by the Chicago Cubs, that condition alone cannot defer taxation unless you actually work for the Cubs.

Also, the IRS proposal modifies the regulations to clarify that a transfer restriction—such as a clawback requiring stock disgorgement, a lockup period at an IPO company, an insider-trading blackout, or a stock-buyback provision for at least fair market value—do not create a substantial risk of forfeiture. A delay in the taxation is allowed only if the immediate sale of the stock received would trigger a short-swing profit violation under Section 16(b) because the grant is a nonexempt under the Section 16 rules. Again, this is not a dramatic shift (perhaps apart from the addition of clawbacks to the non-SRF list), as the proposal is here consistent with prior revenue rulings and cases.

Situations involving time-based vesting are straightforward. What is most interesting about the proposed regulations is that they also address performance-based vesting, as with performance shares. The example in the background section of the proposed regulations indicates that the IRS wants the condition which triggers vesting (and thus taxation) to have some teeth, i.e. to be truly a meaningful measure of performance, or at least not a performance goal that appears to have been already satisfied at the time of grant. As the IRS explains, it cannot be "extremely unlikely that the forfeiture condition will occur." This point is also raised in two other sources worth looking at for additional details on the proposed IRS regs: see the compensation and benefits blog of Winston & Strawn partner Michael Melbinger and a memo from PricewaterhouseCoopers.

Restricted Stock & RSUs On Tax Returns: How To Avoid Costly Mistakes

Restricted stock, restricted stock units (RSUs), and performance shares bring their own very special issues to tax returns. In addition, this tax season has many more changes in the reporting of stock sales on tax returns than in past years. It is easy to make expensive mistakes that lead to paying more than necessary or (perhaps worse) unwanted IRS attention. This tax season in particular has been more confusing than most because of the new IRS Form 8949 and the corresponding revisions to Schedule D, which has significantly changed upon the introduction of Form 8949. These alterations, in turn, stem from the expansion of the information that brokers must report on IRS Form 1099-B.

In any year, however, there are many potential costly mistakes that can befall taxpayers with restricted stock issues on their tax returns.

One Mistake: Double-Counting Income

When restricted stock vests, even if you don't sell any shares, the value of those shares at vesting will be treated as ordinary income and included in Box 1 on IRS Form W-2 with your other compensation, and in the other boxes for state and local income (see our related FAQ with a diagram of Form W-2). Companies may voluntarily break out the income in Box 14 ("Other").

This Box 14 reporting is not required and is done only to help you understand what part of the income reported in other boxes resulted from the restricted stock. When you fill in the line for "Other income" on your Form 1040 (Line 21 of the 2011 form), don't make the mistake of listing the amount shown in Box 14 of your W-2 or any income already included in Box 1 for stock compensation. That would be double counting.

Instead, you include this value of the stock at vesting on your tax return as part of your salary/compensation income on Line 7 of Form 1040. It's the same for restricted stock units, as long as all the shares are delivered at vesting (see another FAQ on RSUs with deferred delivery of shares).

Another Mistake: Waiting Until The Entire Grant Has Vested

For restricted stock that vests incrementally over a number of years (e.g. 25% per year), you realize and report for each year the W-2 income from the portion that vested during that year. Do not wait till the whole grant has vested—unless, of course, the grant vests all at once (i.e. cliff vesting).

However, if you made a Section 83(b) election (not available for RSUs or performance shares) to pay tax on the full value of the restricted stock at grant, you report the value in that tax year, and thus you do not later report the income from the value of the shares at vesting. Should you have performance shares or units that pay out when certain corporate goals are met (either yearly or at end of cycle), but the payout and share delivery occur in a different calendar year than the achievement of the goals, you report the income for the year in which you actually received the shares (i.e. not in the year when the goals were met).

Complex Topic; Many Potential Mistakes

Believe it or not, the two errors discussed above are just the beginning. Our exclusive article on tax-return mistakes with restricted stock lists a total of 10 common blunders to avoid. Want a quicker read? See the companion FAQ that also explains errors to avoid on tax returns that involve restricted stock, restricted stock units, or performance shares.

In general, the Tax Center at myStockOptions.com is a one-stop shop of information about the tax-return reporting and filing issues presented by stock compensation and employee stock purchase plans, including a special section with annotated diagrams of Form 8949 and Schedule D.

Got Eight Minutes? Get The Facts On The New IRS Forms & Reporting For Stock Sales

If there's a way to make learning about tax forms fun, we'll try it. In the Tax Center at myStockOptions.com, we just published an animated presentation on the expanded IRS Form 1099-B, the new IRS Form 8949, and the revised Schedule D. It's a painless way to learn these important developments and prevent expensive mistakes on tax returns during the imminent tax season.

In a concise, engaging overview, our editor-in-chief Bruce Brumberg will inform you about:

• the expanded reporting on Form 1099-B, and why the reported cost basis may be wrong or omitted
• how to figure out the right cost basis for your stock sales
• the new Form 8949 and how to report stock sales on it
• how to interpret Form 1099-B when completing Form 8949
• what to do when the cost basis in Box 3 of Form 1099-B is too low or not given
• totaling the reported stock sales on the revised Schedule D

Need further information? There's plenty more where that came from. A new article and FAQ at myStockOptions.com give full coverage of these tax-return topics. Additionally, our special section Reporting Company Stock Sales presents FAQs with annotated diagrams of Form 8949 and Schedule D. Each FAQ explains and illustrates a different reporting situation involving stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, or stock appreciation rights. Clear instructions and diagrams show how to complete the forms, whether the cost-basis information on Form 1099-B is accurate, too low, or omitted.