The myStockOptions Blog

ESPP Power: Market Turbulence Of 2020 Showcases The Unique Benefits Of Employee Stock Purchase Plans

Despite the torrent of market turbulence and volatile stock prices, many participants in employee stock purchase plans (ESPPs) have seen good returns in 2020. In fact, the stock-price volatility of 2020 provides a great example of why ESPPs are such a good deal. According to data from Fidelity Investments, employees with purchases in tax-qualified Section 423 ESPPs at the stock-price lows in March and April saw gains of over 40% by mid-June, after the market rebound. Read on for this rare good-news story of the current economic cycle.

Unique Benefits Of ESPPs

While there are various kinds of ESPPs, the most common type is known as a Section 423 plan, named after the part of the tax code that provides rules for it and the favorable taxation of the purchase discount. ESPPs with a purchase discount function a lot like stock options: employees get to buy company stock at less than the stock's market price. The features of these ESPPs include:

• after-tax contribution from your pay
• a set offering period when payroll deductions occur
• set purchase dates that use the accumulated deductions
• typically a discount on the stock-purchase price

With stock options, the exercise (purchase) price is the market price at the time of grant regardless of whether the stock price has fallen or risen since grant. Options can therefore be "underwater" if the exercise price is higher than the current stock price. By contrast, ESPP participation can never be underwater, as any discount comes off whatever the stock price is.

In fact, ESPPs with a discount and a lookback provision can even be a good deal even in a down market because you get the discount off either the start-date price or the purchase-date price, whichever is lower. Even if you do not have a lookback, you still get a discount off the market price on the purchase date.

Example: Your company uses a 15% discount with a six-month lookback.

• The offering date price is $10.
• The stock market price on the purchase date is $8.
• Your purchase price is $6.80 (85% of $8, not 85% of 10).
• In the price-drop example, your initial gain is 17.64% ($1.20 spread at purchase divided by $6.80 purchase price), before any change in the stock price after purchase

Data Shows Big Gains For Employees With Purchases In Down Markets

If the stock price then bounces back up after the purchase, ESPP participation can become very profitable. According to data from Fidelity Investments, employees at companies with ESPP purchases during the stock-price lows of March and April experienced meaningful gains of over 40% in the market rebound as of mid-June.

Of the Section 423 ESPPs that Fidelity Stock Plan Services manages for companies of varying sizes and industries, 48% of them had purchase dates for employees in March or April 2020, during the big stock-market decline. Fidelity looked at Section 423 plans with a 15% purchase price discount, both with or without a lookback, and quarterly or semiannual purchases that occurred in those months (i.e. purchase date every 3 or 6 months during the ESPP offering).

Fidelity found that, of those with lookback features, 32% of the companies used the offering-date stock price for the purchase-price calculation (i.e. stock price was still higher on purchase date), while 68% used for the calculation the lower price on the purchase date. Return on investment (ROI) for these employees in Section 423 ESPPs:

• All but two companies had positive ROI for employees as of June 17. At three companies, the price declined from the purchase-date stock price but positive ROI was still generated for employees based on discounted purchase price.
• At almost 96% of the companies, the positive ROI for employees in the ESPPs spans from 10%+ to 100%+ as of June 17 for those that held their companies’ shares.

With most ESPPs, you can withdraw from an offering or decrease your salary contribution percentage. Once the impact of Covid-19 hit the economy, it may have been tempting for employees to pull out of their ESPPs and use the money for immediate needs. However, Fidelity's data shows the wisdom of sticking with your ESPP, which can be an effective and disciplined form of investing at regular intervals, similar to dollar-cost averaging.

"Democratizing" Wealth Accumulation

For Emily Cervino, Head of Thought Leadership at Fidelity Stock Plan Services, Fidelity's 2020 ESPP data tells a very encouraging story about the significant wealth-building potential ESPPs present for employees at all levels. ESPPs can provide employees with some insulation from stock-market volatility when they have certain design features, she explained to me. “Thanks to the ESPP discounts and the market recovery, most of our [plan] participants have had impressive gains in their March and April purchases,” she added. “For many companies, the ESPP has been a bright spot in an otherwise difficult time.”

Another special aspect of ESPPs is that eligibility is usually companywide for employees at all levels. By contrast, at many public companies stock options and restricted stock units are granted only to certain employees and executives. Under the IRS rules for Section 423 ESPP plans, companies can exclude workers only for very specific reasons, such as being employed for less than two years. With broad-based participation, ESPPs can thus perhaps even play a small rule in reducing income inequality, including the racial wealth gap.

In Emily's words, ESPPs can therefore play a role in "democratizing wealth accumulation." These plans are not about executive compensation, she emphasized, as ESPPs provide the same financial benefit “from the very top to the very bottom of the organization.” Plus, as the coronavirus pandemic reveals the wisdom of stockpiling emergency savings, it is crucial to note that ESPPs can help employees build savings faster—whether by selling the shares to bank the cash proceeds or holding shares that keep going up in price.

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Webinar: Financial Planning For Equity Comp During The Pandemic

The impacts of Covid-19 have been a wild ride. After a steep swings in the markets, financial planning continues to be tested by ongoing volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate planning approaches.

Join us on July 22 (2:00pm–3:00pm ET) for a special webinar: Financial Planning For Stock Compensation During The Pandemic. It will cover the current state of equity comp, the related financial planning amid the pandemic, and the impact of Covid-19 on markets, the economy, and employment. Bruce Brumberg, editor-in-chief of myStockOptions, will moderate a panel discussion by three leading financial advisors and a top compensation consultant. See the webinar page for details and registration.

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.

Survey: Gap Between Equity Comp Aspiration And Action Shows Need For Employee Education And Financial Advice

Knowledge is power. Most importantly, it reduces the fear of the unknown. In the context of stock plans, this is illustrated in the results of an interesting recent national survey of 1,000 stock plan participants by Schwab Stock Plan Services. The survey found that while half understand the long-term value of their equity compensation, many are hesitant about exercising stock options or selling shares because of anxiety that they will make a costly mistake. The survey suggests that improved education and guidance would reduce this fear factor.

The survey revealed that 76% of the participants consider equity compensation to be part of their long-term financial plan. Over a third of the participants (36%) report that stock comp was one of the reasons why they took their current job. Most also said equity compensation helps to keep them at their company, a great example of stock comp's employee-retention value.

Below we present selected results of the survey, including a few graphs from the published survey results.

Most Participants Do Not Act On Equity Comp

Astoundingly, only 24% of the plan participants that Schwab surveyed have actually exercised employee stock options or sold shares acquired from equity comp. Among the rest, 34% admit to being worried about selling in adverse market conditions, and another 34% say they fear the tax consequences of making an uninformed or bad decision. Almost half (48%) are afraid of making a mistake when exercising or selling.

Personal Importance Of Stock Compensation

Many participants view equity compensation as part of their overall financial strategies. These include:

• getting needed cash (35%)
• making a big purchase (28%)
• planning for retirement (11%)

Most say their equity compensation helps them feel

• less stressed about finances (76%)
• more prepared for retirement (63%)

Boomers (84%) and GenXers (81%) tend to see equity compensation as a long-term deal; by contrast, 31% of Millennials expect to use their stock comp in the short term.

Financial Confidence Is A Major Issue

Nevertheless, only half of the respondents say they are confident in their ability to make the right decisions about their stock comp on their own. Among the majority who have never exercised options or sold shares, the following reasons for their inaction were prevalent:

Confidence levels vary among the major demographic groups:

• Millennials, 58%
• GenXers, 44%
• Boomers, 39%

More Stock Plan Education And Financial Advice Would Improve Equity Comp Outcomes

By revealing this gap between aspiration and action, Schwab's survey suggests that many stock plan participants would benefit both from better stock plan education, to reduce their fear of the unknown, and from seeking the assistance of financial advisors to help them navigate investment and tax details. About 80% of the respondents say they would be much more confident about their stock comp with the help of a financial advisor.

Many participants said they would like advice on:

• tax consequences (50%)
• retirement planning (44%)
• the right timing for exercise/sale decisions (35%)

Stock Plan Education Resources

At myStockOptions.com, our extensive and engaging educational content on all aspects of equity compensation is licensed by stock plan providers and companies for their plan participants. The content includes not just easy-to-understand articles and FAQs but also videos, podcasts, modeling tools, and fun quizzes on many different topics (for example, try your hand at our quiz on RSUs). When they are ready, participants can seek an advisor with equity comp experience in our AdvisorFind directory.

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

Continuing education offerings, including CFP® CE credits, will be available. Register at the conference website or contact us for more information (617-734-1979, editors@mystockoptions.com).

News And Views On RSUs: Broad-Based Grants, Bankruptcy Court Case, And Survey

Grants of restricted stock units (RSUs) continue to become commonplace, whether alongside or instead of stock options, as a way to reward valuable employees and foster a company culture of employee ownership. In this blog commentary, we present three interesting stories involving RSUs that have recently come to our attention.

Unusual Broad-Based RSU Grant In Heavy Industry

An attention-grabbing example of a broad-based RSU plan is presented by an article in Bloomberg Businessweek. When Gardner Denver Holdings went public, backed by private equity firm KKR, it granted $100 million in shares to 6,000 employees who were not already part of its equity program. These grant recipients included hourly workers and staff in customer service and sales, with meaningful grants of equity equal to about 40% of their annual salaries, according to the article. Employees, including managers, now own about 10% of the company.

This move toward broad employee ownership is unusual in the company's manufacturing sector (industrial equipment and related services). As the Businessweek article points out, broad-based equity is far more associated with the white-collar high-tech industry than with blue-collar manufacturing, an observation also made by a blog commentary from the National Association of Stock Plan Professionals. Pete Stavros, head of KKR's industrial team and the chairman of Gardner Denver, believes employee ownership at manufacturers can be very effective at improving operations when the company needs to do a "a million things a little better." As employees everywhere know all too well, it's often the workers on the front lines who best know where inefficiencies need to be fixed. Through their equity stake in Gardner Denver, the company's employees now derive a direct financial benefit from striving for operational efficiency.

RSUs In Lehman Bankruptcy Case

While restricted stock or RSUs still have value even when a company's stock price is lower than the grant price (stock options would be underwater), any type of equity grant can be worthless if a company goes bankrupt. That is one of the many lessons of litigation stemming from the bankruptcy of Lehman Brothers back in 2008.

In the case In Re: Lehman Brothers Holdings Inc. (2017), the 2nd Circuit Court of Appeals confirmed that in a corporate bankruptcy RSU-holders do not have any preference over general creditors in the distribution of remaining corporate cash. Previously, the original decision in the lawsuit, made by the United States Bankruptcy Court, was upheld by the US District Court for Southern New York in 2016. It reasoned that RSUs fit the legal definition of "equity securities" and that employees with RSUs should therefore be treated like other holders of equity in Lehman Brothers. The contention that employees with noncompete agreements resulting from a merger should have priority over general creditors was similarly rejected. This outcome follows the reasoning set forth in a 2006 decision involving employee stock options in the bankruptcy of Enron. Some additional information on the Lehman case and the court's reasoning are provided by Courthouse News Service and Bloomberg BNA.

Long-Running Survey Charts Rise Of RSUs, Decline Of Restricted Stock

An article in Ayco Company's Compensation & Benefits Digest presents results of an informal survey that Ayco made of its 325 client companies in the United States which grant restricted stock or RSUs (Restricted Stock And Restricted Stock Utilization Today, pages 1–5). Ayco's long-running series of surveys in this area has found a significant rise in the use of RSUs between 2007 and 2017, along with a drop in the use of restricted stock during the same period. In 2007, 41% of the surveyed companies granted restricted stock, while only 13% did so in 2017. By contrast, in 2017 nearly three quarters (72%) of the surveyed companies are granting RSUs, while only 37% did so in 2007. An FAQ on myStockOptions.com discusses why companies may prefer RSUs over restricted stock. Another FAQ at myStockOptions.com has a range of survey data on trends in restricted stock, RSUs, and other equity awards.

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.

Surveys Reveal Trends In Stock Compensation, ESPPs, And Participant Behavior

At myStockOptions.com, we love stock plan surveys. They provide instructive views both on the way companies grant equity compensation and on the way plan participants use their awards and the shares acquired from them. We often come across surveys on a range of topics involving stock compensation, ESPPs, and company stock holdings that are of interest to companies, individuals, and advisors. Below we discuss a few we have seen over the past few months.

2016 NASPP Survey On Stock Plan Design

Conducted every two years, the Domestic Stock Plan Design Survey is the flagship survey of the National Association of Stock Plan Professionals (NASPP), which produces it with co-sponsor Deloitte Consulting LLP. The 2016 survey contains a wealth of data from more than 400 companies on stock plan design/granting practices, restricted stock/RSUs, performance share/units, and stock options/SARs. The NASPP's blog summarized key findings of the survey:

• Use of full-value awards continues to increase. The percentage of the surveyed companies making time-based restricted stock/RSU grants increased to 89% in 2016 (up from 81% in 2013). Grants are most commonly in the form of restricted stock units.
• Use of stock options continues to decline. At all employee levels, stock options are granted by 51% of the survey respondents (down from 54% in 2013). Only 18% of them granting incentive stock options.
• Performance awards are for executives. In 2016, 80% of the surveyed companies granted performance awards to CEOs and NEOs (up from 70% in 2013). The percentage of companies making performance grants to other senior management grew to 69% (up from 58% in 2013).
• TSR is the top metric for performance grants. In 2016, 52% of the surveyed companies that grant performance awards used TSR as a performance metric (up from 43% in 2013). Nearly all (92%) use relative performance. Most (81%) pay out even if TSR is negative as long as the company outperformed its peers, and some cap the payout (69%).
• Dividend payments increase. More than three quarters (78%) of the surveyed companies pay dividends with RSUs, up from 61% in 2007. Companies commonly pay dividends when the underlying award vests.
• Payouts to retirees. Some type of accelerated or continued vesting upon an employee's retirement is common: 60% of companies making stock grants/awards; 68% of companies granting performance awards; and 60% of survey respondents that grant stock options.

For a roundup of stock plan design surveys from various sources, see the related FAQ on myStockOptions.com.

Employee Stock Purchase Plans

We are big fans of employee stock purchase plans and the role that ESPPs can play in the financial well-being of employees. In fact, with all of our content on ESPPs, myStockOptions.com could just as well be called myESPP.com. A recent survey of more than 2,000 ESPP participants by Fidelity Investments shows how those employees actually used funds from ESPP stock sales to improve their financial wellness:

• payment of bills and debt (34% of the respondents)
• emergency funds (11%)
• home improvements (10%)
• reinvestments in stocks or mutual funds (10%)
• reinvestments in retirement-savings accounts (9%)
• purchase of a new or second home (7%)
• college expenses or student loans (5%)

Rule 10b5-1 Trading Plans

In the Nov. 11 issue of its newsletter Compensation & Benefits Digest, the Ayco Company discusses insider-trading law and Rule 10b5-1 trading plans that can be set up to prevent accidental insider trading. Ayco reports that among the 2,000 Section 16 insiders, including nearly 350 CEOs, for whom it provides financial-planning services, about 24% of the CEOs and 21% of other insiders (including directors) have had 10b5-1 plans during the past two years. For more on Rule 10b5-1 trading plans, including best practices, see the related FAQs and articles at myStockOptions.com.

Director Stock Compensation

For its 2016 Director Compensation Report, the consulting firm Frederic W. Cook & Co. surveyed 300 public companies in the financial services, industrial, retail, technology, and energy sectors. The firm's key findings include the following:

• Among all of the surveyed companies, on average more than half (57%) of total director compensation is paid in the form of equity awards. In general, the larger the company, the greater the percentage of stock compensation for directors.
• Most of the surveyed companies (more than 80%) grant only restricted stock/RSUs to directors (no stock options).

For more on the issues raised by director stock compensation, and for other survey data, see the related FAQ at myStockOptions.com.

Stock Plan Education: Survey Shows Where Employees Need The Most Help

If corporate stock plan education were a student, it would be getting a B-plus—not bad, but can do better. This is our takeaway from the data in Securities' 2016 E*TRADE Corporate Services Annual Participant Survey, which obtained responses from more than 43,000 people with equity compensation who use the firm as a broker. (Please note that the survey results below are solely owned by E*TRADE Financial Corporation and may not be reproduced or distributed in whole or in part without the written consent of E*TRADE, which is not affiliated with myStockOptions.com. E*TRADE Corporate Services provides equity compensation management solutions, including participant services from E*TRADE Securities.)

Mixed Report Card

In brief, the findings of E*TRADE's survey indicate the following:

• Most stock plan participants like their equity compensation and say it enhances their commitment to their companies.
• About 40% of the respondents say that stock comp would be a factor in deciding whether to stay in their current job or take a job with a different company.
• The survey responses make it clear that participants need well-rounded general financial education, not just communications about the specifics of their grants. Respondents indicated a desire to learn more about basic financial planning, investing, and the role of their equity comp in their overall financial planning.
• Many employees are eager to know more about how to make the most of their stock comp, when to take action (e.g. exercise options or sell shares), and the related tax impact. The survey suggests that ESPP participants need the most hand-holding in those areas.
• The most popular uses of stock compensation are (1) acquiring company shares for long-term holding and (2) paying big expenses.
• It appears that few participants sell shares and then re-invest proceeds in other securities.
• A growing number of the employees apparently perceive stock compensation as simply "extra pay, like a bonus."

Survey Data Shows Areas For Improving Stock Plan Education

The majority of stock plan participants surveyed by E*TRADE (75%) participate in an employee stock purchase plan. More than half (57%) have restricted stock or RSUs. Despite general decreases in the use of stock options, 42% of E*TRADE's survey respondents continue to have option grants.

According to the survey, a whopping 80% of plan participants do not fully understand at least one concept or feature of their stock compensation. The survey data that we present in the table below indicates that maximizing financial benefits and understanding tax impacts are the areas where plan participants need the most educational guidance.

Plan concept or feature	Stock plan participants who understand this "quite well" or "extremely well"
How to access account	74%
How vesting schedules work	62%
How the stock plan works	58%
How to find information about the stock plan	49%
How to decide when to take action	43%
How to make the most of stock compensation	34%
Tax implications	33%

The survey found that email and video are the most popular media for receiving stock plan education and communications, followed closely by written materials that can be downloaded from the company's intranet.

Stock Plan Education Is A Core Company Activity

While stock plan professionals have made huge strides during recent years, stock plan education can always be better—both to help plan participants and to maximize the value of plans for companies, which are depending on them to attract, keep, and motivate valuable employees. The more participants know about their stock compensation, the more likely they are to appreciate it, avoid mistakes, benefit from it, and be loyal to the company. This puts stock plans in a crucial position for corporate vitality and value creation.

The independent, unbiased educational resources of myStockOptions.com can help with stock plan education, including tax impacts and financial planning. Our content is available for licensing by companies to help plan participants learn more about their equity comp. These resources include a growing number of videos and podcasts to complement our articles, FAQs, interactive quizzes, tax guides, glossary, and tools.

Employee Stock Purchase Plans: Survey Shows Link Between Participant Education And ESPP Success

We are big fans of employee stock purchase plans (ESPPs). They allow ordinary employees to become company shareholders and build wealth. At a socio-economic level, ESPPs can thus perhaps even reduce income inequality, as can other forms of equity compensation. On myStockOptions.com, we have so much content on ESPPs that we could be called myESPP.com as well.

Studies about trends in ESPP design can be hard to find. Fortunately, the National Association of Stock Plan Professionals (NASPP), the National Center for Employee Ownership (NCEO), and the Certified Equity Professional Institute recently published data from their joint 2016 ESPP survey. The survey results are summarized at the website of the NASPP. Responses were received from 239 companies, 91% of which have tax-qualified Section 423 ESPPs. Among the findings of interest:

• 70% of respondents offer a 15% discount.
• 50% have a six-month offering period.
• 56% base the purchase price on the price at the beginning or the end of the offering period, whichever is lower.
• 79% do not have a required holding period.
• 54% spend less than 0.5% of their total compensation budget on the ESPP, while 21% spend between 0.5% and 0.9%.
• 24% report that they do not use any particular way of communicating the plan to their employees. Among those that do use specific communication channels, the most common means are email (93%) and the company website/intranet (90%).
• 36% of the companies are very satisfied with their ESPPs, and another 36% of them are somewhat satisfied; 25% percent report feeling neutral about their ESPPs; and 3% are dissatisfied with their ESPPs. 

That last point is especially interesting. Not surprisingly, the companies that report spending more on participant education tend to also have a higher level of satisfaction with their ESPPs. As the NASPP observes in its summary of the results, companies therefore "might be wise to consider investing more in educating employees about their plans." With features such as those mentioned in the survey, an ESPP can be a really good financial deal for employees.

The full survey results, plus analysis of them, can be purchased from the NCEO.

Survey Finds That Financial Planning Improves Participant Perceptions Of Equity Awards

A couple of years ago, UBS started a research project called UBS Participant Voice, a series of surveys seeking to canvas the attitudes of stock plan participants toward their equity awards (see our blog commentary on the first survey). The latest survey in the series, which obtained responses from more than 1,000 stock plan participants across a variety of industries, delivers some interesting insights into the value employees both perceive and actually get from equity awards. These insights may be useful both to equity-granting companies and to financial advisors who have clients with stock compensation.

The research starts with a formula, called the UBS Equity Award Value Index, that UBS has engineered to assess employee perceptions of equity awards. The factors going into the index score, which runs from 1 to 100, include the following:

• the plan participant's view of stock compensation (wealth-builder, paycheck-booster, lottery ticket?)
• the importance the participant places on taking his or her job
• the importance of keeping that job
• the importance of accumulating savings or wealth
• the extent to which equity comp is included in a long-term financial plan

UBS finds that only 9% of its survey respondents place a "high value" on their equity awards (defined as the group scoring between 81 and 100). Just under 50% view their grants as having "considerable" or "moderate" value (a score between 41 and 80). Surprisingly, a whopping 45% of the survey respondents said that they feel their grants have "minimal value" (14%) or "no value" whatsoever (31%).

Clearly, there is much work to be done to raise the perceived value of equity awards among stock plan participants (one of the reasons we started myStockOptions.com 16 years ago). Perceived value matters because, as UBS points out, "each year companies grant more than $110 billion in equity awards, clearly a sizeable expense."

How To Increase Perceived Value

According to the survey findings by UBS, one way to improve employees' perceptions of equity awards may be to encourage practical financial planning with grants. In short, UBS finds that stock plan participants are more likely to perceive high value in their equity awards when they take three steps:

• include the grants in their financial planning
• seek professional financial advice about the grants
• diversify their stock holdings

Returning to the UBS Equity Award Value Index, the survey reports that the average score of participants who take none of these steps is only 27 ("minimal value"). Meanwhile, respondents who have taken all three steps have an average score of 55 ("moderate value" in the perception scale), i.e. twice the average of the others. Moreover, almost 80% of those who have taken the three planning steps agreed with the statement "I feel highly confident in achieving my financial goals," but only 36% of the nonplanners did.

In other words, there seems to be a correlation between basic financial planning and perception of grant value. According to UBS, employees view their equity awards more favorably and become financially more confident when they include equity awards in financial planning. By extension, this also implies that stock plan education should include guidance on financial planning for equity awards and how to fit grants into preparations for important life events and goals (e.g. college funding or retirement), as myStockOptions.com does in its sections Financial Planning and Life Events.

Diversification: Proactive Participants View Grants More Favorably

Some of the other findings of interest in the UBS survey involve diversification. Throughout the surveyed employees, the portion of company stock among investable assets averages about 20%. Just over half of the employees have holdings of their companies' stock in excess of the amount they would consider to be the limit of a comfortable level. UBS reports that when employees proactively diversify to avoid overconcentration in the stock of their employer, they tend to value their equity awards more than do employees who diversify for more reactive reasons, such as concerns about the company's stock price. Once again, it seems that there is a correlation between proactive financial planning and favorable perceptions of grant value.

Trends (And Gaps) In Employee Stock Plan Communications Revealed By Survey Of Multinational Companies

If you're as much into stock plan education as we are, you're probably also really into survey data. That makes today a good day for both of us at this blog.

We have been perusing the 2015 Global Equity Incentives Survey by PricewaterhouseCoopers and the NASPP. The survey presents questionnaire data from 245 multinational companies with employees in 75 countries. The researchers found that the use of equity awards by the surveyed companies generally continued to grow in 2014 and 2015, after falling in 2009–2011 and rebounding in 2012. With this growth in the use of equity has come an expansion in stock plan education and communications. While most of the surveyed companies (73%) communicate with plan participants at the time of grant, a widespread traditional practice, 47% of the companies now also communicate with participants again at the time of vesting, exercise, or payout. This figure rose from 37% in 2012. Some companies report that they communicate with participants at other times as well (or instead).

According to the researchers, the increasing frequency of interaction with plan participants "demonstrates how more companies realize the need to communicate to employees on their equity awards on a more consistent basis throughout the life of the equity award." This is a message that we at myStockOptions.com have been preaching since we started our website 15 years ago.

The survey found the following about the timing or availability of stock plan communications among the surveyed multinationals.

Stock plan communication	Percentage of companies
At every grant date	73%
Information always available on a website	69%
At vesting/payout/exercise	47%
Annually with a total rewards package	41%
Upon board approval of the grant	28%
At the time of the first grant	25%
When tax rules or regulatory requirements change in the employees' country	16%
When equity awards are modified	11%
When required by the exchange listing the stock	9%
Periodically between grants	7%

The methods by which multinational companies explain stock compensation to employees outside the United States are similarly diversifying. Although some companies still cling to printed materials, most are now using online forms of communication. Alongside the prevalence of electronically delivered information, some companies arrange in-person one-on-one meetings or group presentations, and some make help available by telephone. The survey revealed the following about the ways in which companies educate non-US employees about their stock compensation.

Techniques used for global stock plan education	Percentage of companies
Letter from senior management	48%
Printed materials	44%
Individual meeting between employee and supervisor	33%
Presentation from a service provider	31%
Help line connecting to a person at the company	30%
HR meeting at the local office	28%
Corporate video	16%
Corporate webcast	16%

Nevertheless, despite all of this communication, 66% of the companies reported that among stock plan participants "there is not a strong understanding of plan benefits." The survey researchers theorize that the decreasing tendency to translate stock plan documents into local languages may be contributing to the knowledge gap. However, as they point out, English continues to grow as the common language of international employment, so language barriers cannot account for all of the shortcomings of stock plan communication. Indeed, it remains true that, no matter how often communication occurs, stock plan education can always be better.

We at myStockOptions.com spend much of our working lives in making complex stock plan concepts clearly understandable and relatable. Visit the "About Us" section of the website to find out more about what we do for companies seeking to improve their stock plan education and communications. If you will be at the upcoming NASPP conference in San Diego, you can also visit our booth to speak with us about our corporate services.

New Surveys On Stock Compensation: Trends Show Continued Growth In Restricted Stock And Performance-Based Grants

Everyone loves survey data—especially stock plan professionals. That is why the editorial team at myStockOptions.com keeps up with the numerous equity comp surveys that are routinely conducted by research and consulting firms. Knowing the latest shifts of stock plan trends can be a valuable asset for any company that is benchmarking its stock plans or preparing the next moves in its long-term compensation strategy.

Long-Term Incentives (LTIs) Stay Strong, Especially With Performance-Based Features

New details about LTI trends among CEOs and senior executives can be found in recent commentaries by Steven Hall & Partners and Towers Watson. Using data from current proxy statements, they found the following:

• According to Steven Hall & Partners, LTIs (both equity awards and long-term cash incentive payouts) represent 57% of compensation and have increased by 5%.
• According to Towers Watson, target LTIs (long-term performance plans are most prevalent) increased by 7.1% in 2014. Three quarters of the companies use a mix of long-term vehicles (two thirds of them combine performance plans with either options or restricted stock, while a third use all three types of grants).

Meanwhile, Meridian Compensation Partners recently surveyed 114 companies to uncover their LTI practices. For senior executives, 82% of the sampled companies used two or three types of long-term grants. For grants to employees at lower levels, it is more common to just use one type. Among its findings on stock compensation, Meridian discovered the following about the prevalence and weight of 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	25%	43%	31%	26%
Performance awards and restricted stock	45%	60%	—	40%
Performance awards and stock options	8%	47%	53%	—
Stock options and restricted stock	4%	—	56%	44%
Performance awards only	11%	100%	—	—
Restricted stock only	5%	—	—	100%
Stock options only	2%	—	100%	—
Overall (averages)	100%	53%	16%	31%

Much More Where This Came From

At myStockOptions.com, we routinely cite compensation and HR surveys to illustrate our discussions of trends in equity comp usage and stock plan design. Several of our FAQs are regularly updated hotbeds of survey data that will interest stock plan professionals. Below are just some of them.

What do surveys and examples reveal about the effects of expensing, stock market trends, and other developments on equity compensation?

Do surveys show how employee stock purchase plans are changing with mandatory expensing and other developments?

What types of company goals are most commonly set for performance shares and units? What do surveys show about the performance metrics and periods that companies use?

Why do companies grant stock options, restricted stock, and other equity awards? Do employees really value them?

How common are stock options, restricted stock, performance shares, and ESPPs outside the United States? Do surveys show trends?

Do companies grant stock options or restricted stock to directors? Any survey data on director grants?

Any survey data on stock grants in privately held companies?

Can my company set ownership guidelines for company stock? Any survey data about their use?

Premium Members of myStockOptions.com have access to all of this content. They can also use our myLibrary feature to get a helpful email alert whenever FAQs with survey data have been updated with new information.

Survey Shows Trends In Employee Stock Plan Education And Communications

A major reason why we started myStockOptions.com is to help companies and stock plan service providers with equity comp education and communications—an area where most companies admit they need to do more. We were therefore very interested to see a section on plan education and communications in the 2014 Domestic Stock Plan Administration Survey by the National Association of Stock Plan Professionals (NASPP). The survey results outline some of the latest trends among companies for communicating facts and educational guidance about stock plans to employees.

In the NASPP's survey results, most of the responding companies (91%) said they make required stock plan documents available via the internet (whether on their own website or that of a third-party provider). A smaller majority (69%) reported that they publish online FAQs, and 70% said that they make other descriptive or educational materials available on the internet. The survey found the following about the typical times at which the responding companies deliver helpful nonrequired information about grants (i.e. materials other than legally mandatory documents).

Distribution of information	Percentage of companies
Upon grant	80%
Materials are available as needed via website (internal or third-party site)	74%
Materials are provided upon request	53%
Upon vesting (for awards) or exercise (for stock options)	26%
Upon termination of employment	23%
Upon hire or with offer letter	22%
On an ongoing basis (e.g. annually)	21%
Upon eligibility	13%
Other	1%
No materials other than the plan prospectus are distributed	4%

An overwhelming majority (96%) of the companies that provide informational materials use email to distribute them. Most of them use only email—just 39% use printed materials as well or instead.

Interestingly, only about half of the surveyed companies go beyond written materials in their educational efforts. In the NASPP's surveyed group, 52% said they "provide employee presentations on stock compensation." The rest do not. Just over 30% of the presentation-providers reported that they hold these events just once per year; most of them (60%) hold presentations on an irregular ("ad hoc") basis. The companies that make presentations reported the following methods for doing so:

Presentation method	Percentage of companies
In person	72%
Conference call	44%
Slide presentation available via internet or company intranet	37%
Live online presentation	36%
Recorded online presentation	28%
DVD or other video medium	5%

As for the use of social websites, only 9% of the NASPP's respondents said that they online social media (e.g. Facebook, Twitter, LinkedIn) in their educational programs. Far more of the surveyed companies provide educational material in a stock plan newsletter (56%) and/or some sort of internal blog.

Stock Plan Education Is A Core Company Activity

While the results of the NASPP's 2014 survey show improvement in stock plan education and communications by companies, any company's plan education can always be better. In fact, we believe that stock plan education should be viewed as a core company activity. After all, its purpose is not just to help plan participants but also to maximize the value of stock plans for companies, which are depending on them to attract, keep, and motivate valuable employees. The more participants know about their stock compensation, the more likely they are to appreciate it, avoid mistakes, benefit from it, and be loyal to the company. This puts stock plans in a crucial position for corporate vitality and value creation.

The independent, unbiased educational resources of myStockOptions.com can help with stock plan education. Our content is available for licensing by companies to help plan participants learn more about their equity comp. Many of our materials can be used in presentations to employees by stock plan or HR staff. Our resources include a growing number of videos and podcasts to complement our articles, FAQs, interactive quizzes, tax guides, glossary, and tools.

Stock Plan Education Shows Improvement But Can Do Better

If corporate stock plan education were a student, it would be getting a B-minus. This is our takeaway from the data in E*TRADE Securities' 2014 Stock Plan Participant Survey, which obtained responses from nearly 5,000 people with equity compensation who use the firm as a broker. (Please note that the survey results below are solely owned by E*TRADE Financial Corporation and may not be reproduced or distributed in whole or in part without the written consent of E*TRADE, which is not affiliated with myStockOptions.com. E*TRADE Corporate Services provides equity compensation management solutions, including participant services from E*TRADE Securities.)

Mixed Report Card

On an optimistic note, E*TRADE's survey does affirm that the diligent efforts of stock plan professionals in recent years have been successful, as stock plan awareness in the surveyed population seems to have improved. However, there is (as always) more work to be done. While plan participants may understand more about their stock compensation than before, their overall level of knowledge remains somewhat low. Many participants are adequately familiar with their stock plans' features but are unsure about how and when to take action with their grants. Slightly more than half of the survey respondents say they have a good sense of the relationship between company stock price and the value of equity compensation, and that is good—but it also implies that nearly half of the respondents do not understand even this basic concept.

Survey Data Shows Areas For Improvement

Not surprisingly, given trends in equity comp over the past decade, the majority of stock plan participants surveyed by E*TRADE (70%) have restricted stock or RSUs, though a healthy 51% continue to have stock options. A significant majority (64%) participate in an employee stock purchase plan. Most of the surveyed plan participants, however, do not view equity compensation as a core part of their pay.

For example, among those who participate in an ESPP but do not have other grants, 40% consider the company's ESPP to be just a nice extra, like a bonus. Only 14% of them rank the ESPP as a core part of their compensation. Even more disturbingly, 19% view their ESPP participation as essentially a form of gambling, and 28% say they never think about it at all—making a total of 47% whose attitude is either fatalistic or apathetic. Among the surveyed participants who have received equity awards, the results are a little more encouraging: 53% of them see their participation as a bonus and 21% view their stock plan as a core part of compensation.

According to the survey, plan participants with equity awards and/or retail stock holdings at E*TRADE seem to have a better grasp of stock plan features than those who participate only in an ESPP and do not have retail holdings at E*TRADE. The respondent percentages in the table below tell the tale.

Understanding of plan aspect or feature	Stock plan participants (may or may not include ESPP)	ESPP participants only	Plan participants with retail holdings at E*TRADE
How to access account	80%	71%	89%
How to get information	59%	52%	67%
How the plan works	58%	47%	69%
Vesting period	71%	43%	73%
When to take action on awards	49%	29%	55%
Where to find education	41%	27%	47%
Capitalizing on the financial benefit	35%	26%	42%
Tax implications	36%	25%	42%

Perhaps not surprisingly, performance share awards require a more intensive degree of stock plan education and communication than other types of equity compensation do. In E*TRADE's survey, only about half of the surveyed participants with performance shares feel they have a good working knowledge of how the awards function and what to do with them.

Stock Plan Education Is A Core Company Activity

While stock plan professionals have made huge strides during recent years, stock plan education can always be better—both to help plan participants and to maximize the value of plans for companies, which are depending on them to attract, keep, and motivate valuable employees. The more participants know about their stock compensation, the more likely they are to appreciate it, avoid mistakes, benefit from it, and be loyal to the company. This puts stock plans in a crucial position for corporate vitality and value creation.

The independent, unbiased educational resources of myStockOptions.com can help with stock plan education. Our content is available for licensing by companies to help plan participants learn more about their equity comp. These resources include a growing number of videos and podcasts to complement our articles, FAQs, interactive quizzes, tax guides, glossary, and tools.

New Survey Shows Importance Of Stock Plans To Employees And Reveals Their Use Of Proceeds

For more recent survey data on this topic, see another commentary in this blog.

As corporate competition for valuable employees intensifies in the current resurgent job market, the presence of a company stock plan is proving to be a crucial advantage. A survey by Fidelity suggests that many employees don't just value stock plans highly but now expect them as an employment benefit, especially when considering a new job. Fidelity found that among the surveyed employees in 2014, about four out of five (82%) say an attractive stock plan is something they want a new employer to have. Moreover, 40% stated outright that they would not consider a new job opportunity unless the company offered a stock plan—a view held by a whopping 86% of the survey respondents under the age of 40. A significant minority of the surveyed employees (10%) stated that their company stock plan is worth more to them than any other employment benefit, including medical insurance and 401(k) plans.

In the battle for valuable workers, the edge given by stock plans does not stop with merely attracting employees. More than half (57%) of the respondents to Fidelity's survey asserted that the company stock plan has elevated their loyalty to the company, and a similar number (54%) said that it makes them work harder. The survey results also indicate the retention value of stock plans, which can give employees a very strong reason to stay at their companies. "Giving up my current stock plan benefits would make it difficult for me to change jobs/companies" is a statement agreed with by 37% of US respondents and 35% of non-US respondents in Fidelity's survey.

This predilection for stock comp among employees seems to be correlated with their use of stock plan educational materials and other communications, which we at myStockOptions.com are happy to see. In Fidelity's survey, nearly half of the responding participants (46%) said they regularly use available stock plan information to make choices about their grants, up from just 38% in 2011. About as many (49%) prefer learning about the plan through online materials, also up from just 38% three years ago. The surveyed plan participants tend to be astutely engaged with their plan and their grants:

• 87% say they know how much their grants are worth.
• 87% know their vesting schedules.
• 88% understand the plan well enough to explain it to a new colleague.

Stock plans seem to be increasingly a valuable adjunct to retirement-savings vehicles such as 401(k) plans. Saving for retirement is the overwhelming top use of stock plan assets among the US employees surveyed by Fidelity.

Intended use of stock plan assets	Percentage of surveyed US stock plan participants
Reinvestment in retirement-savings account	41%
Payment of bills or debt	14%
Investment in stocks or mutual funds	13%
Emergency fund	9%
College funding	6%
Home purchase	6%
Home improvements	5%
Special events	3%
Other uses	5%

Among non-US stock plan participants, only 28% said they intend to reinvest proceeds in retirement savings. However, the percentages of non-US respondents indicating use of proceeds for a home purchase (11%), home improvements (10%), or a special event (6%) were about twice as high as those of US respondents.

As we have said many times before, the more participants know about their stock compensation, the more likely they are to appreciate it—and stay with the company. The independent, unbiased educational resources of myStockOptions.com are available for licensing by companies to help plan participants learn more about their equity comp. Our resources include a growing number of videos and podcasts to complement our articles, FAQs, interactive quizzes, tax guides, glossary, and tools.

Survey Reveals Participant Attitudes About Stock Plans

UBS has started an interesting new research series it calls UBS Participant Voice, which will include semi-annual surveys. The first survey introduces the UBS Equity Award Value Index in a study of participant attitudes about equity compensation and wealth management. In the survey, the researchers categorized employees into different groups according to the number of vestings they have experienced to reveal how they perceive their stock grants. The results clearly show that the more experience employees have with equity awards, the more they value them.

Among the findings of interest:

1. Slightly less than half (47%) of the participants view equity compensation as a way to build wealth, while about 20% see it as a lottery ticket.

2. The more vestings employees have experienced, the more they value equity awards and the more they are likely to position them as part of a financial plan. While the survey found that at least some employees at every level of vesting experience perceive equity compensation as "a way to build wealth," 55% of the employees with six or more vesting experiences felt this way.

3. Those most likely to see equity compensation as "a paycheck supplement" had three to five vestings, while those most likely to see equity compensation as a "lottery ticket" had fewer than three vestings.

4. Those with the most experience of stock grants were more likely to see equity comp as an important motivation for taking a particular job (48% of those with the most vestings and 19% of those with the fewest) and staying at a job (51% of those with the most vestings and 29% of those with the fewest), and as an important factor in accumulating wealth (51% of those with the most vestings and 20% of those with the fewest).

5. While base salary, health insurance, and 401(k) plans were more important than stock grants in the decision about whether to accept a job offer, participants with over five vestings ranked equity awards as slightly more appealing than a cash bonus. For these participants, when it came to the question of their ability to accumulate savings/wealth over time, company stock grants ranked above cash bonuses, company 401(k) contributions, and pension plans.

6. Employees with three to five vesting experiences are the most engaged with their grants. They are the participants most likely to check the stock price, model the potential value of the award, think about what to do with the proceeds, or talk with a tax advisor.

Stock plan participant surveys have become popular (see, for example, our recent blog entry about a new survey by Morgan Stanley). These can help companies better design their stock plans and their efforts in employee communications and education, and they can help financial advisors better serve their clients.