The myStockOptions Blog

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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AdvisorFind Directory

Stock compensation raises many questions.

• How much should you contribute to your ESPP?
• When should you exercise stock options?
• Should you sell or hold restricted stock at vesting?
• How can you diversify your company stock holdings?
• How can you minimize your tax bill?
• How do you negotiate for stock compensation in your employment agreement?

While myStockOptions.com is a good place to learn about concepts, issues, and general strategies in equity compensation, at some point you may need an advisor to help with your unique situation. Yet finding a good advisor can be hard when you are busy and don't know where to start. The AdvisorFind Directory from myStockOptions.com is for you.

• Identify and contact an expert who can provide specialized professional guidance on equity compensation.
• Search for advisors by geographical area, type of advisor, years of experience, minimum portfolio size, and other key criteria.
• Look up resources for performing background checks on advisors.

Searching AdvisorFind is free and does not require registration at myStockOptions.com.

Financing Stock Option Exercises In A Private Company: A Financial Advisor's Guide

Many private companies are growing fast, with the intention to go public or be acquired. They tend to rely heavily on stock options or restricted stock units (RSUs) to attract, motivate, and retain the best employees. However, employees with stock compensation in a private company, whether in startup, growth, or pre-IPO phase, face a big obstacle that their counterparts in public companies do not.

The stock of private companies has no liquidity, as it's not listed on stock exchanges and resales are restricted by both SEC and company rules. In other words, you cannot sell your shares, even to pay taxes owed on them or to help fund the exercise of stock options. Stock options in private companies can create wealth; but unlocking its value when the stock has no immediate liquidity calls for special planning.

For insights on what you can do, and the growth in firms that provide financing to exercise private company stock options, we asked Valerie Gospodarek, CFA, an independent financial advisor with over 25 years of experience in the finance industry. She specializes in helping clients with their executive compensation, including stock options, restricted stock, and deferred compensation plans.

What is different about exercising stock options in a private company?

When you receive stock options from a company that is publicly traded, you have much greater flexibility in how to exercise them. Among the various exercise methods available, you can choose a “cashless” or “sell-to-cover” exercise, requiring no upfront payment. With these types of exercises, two transactions actually take place, although they happen practically simultaneously and are often viewed as just one. The first transaction consists of purchasing the shares at the exercise price. The second transaction consists of then selling all those shares (or a portion of, in the case of a “sell-to-cover” exercise) at the current market price and using the proceeds to pay for the share purchase in the first transaction and withhold any required taxes (for nonqualified stock options, not for incentive stock options).

With a private company, you can execute the first part of the exercise transaction—purchasing the shares at the exercise price. However, because the shares just acquired have no public market in which they can be sold and are not registered with the SEC, you cannot use the second part of the transaction (selling the shares) to finance the first part (purchasing the shares and paying any taxes).

How does this challenge for private company employees affect their ability to maximize the benefits of stock options?

It means you must come up with the cash required to both purchase the shares at the exercise price and pay for any tax withholding. The price to exercise (and the corresponding taxes) can be significant, and often employees don’t have this large sum of cash readily available to cover these costs. Even if purchasers for these private company shares exist, the company’s stock plan documents often restrict these types of resale transactions.

Do employers provide any financing for option exercises and the corresponding taxes?

Private companies may provide loans to their employees for the purpose of exercising their options, but I do not generally recommend this alternative to my clients. Should the company fail, creditors of the company can, and most likely will, aggressively seek repayment of these loans. At that point, the optionholders then find themselves without a job AND obligated to repay a loan on worthless shares of the company’s stock.

It is worth knowing that if you do use a promissory note from your employer to exercise your stock options and it is a nonrecourse note (i.e. no personal liability if you default), it is not considered an exercise for tax purposes until the note is substantially paid. When the promissory note is with a third party (e.g. a bank) and the stock is pledged as collateral, this is considered an exercise and the standard tax treatment at exercise applies, even if the stock price drops and you default on the loan.

How do you help a client think through whether to self-finance an exercise?

Clients not only need to have the ability to self-finance, but also the willingness. Therefore, the first topic I typically discuss with clients is their prospects for the company, including their expected upside/downside potential for the business and stock, and the anticipated timing for a liquidity event (i.e. IPO or acquisition).

I’ve found that most employees are typically quite bullish about their employer’s prospects, so I often play devil’s advocate to try to temper their overly bullish outlook and come to more reasonable expectations. As part of this discussion, I ask the client how much they would be willing to invest in their company knowing that there is a chance that it could go to zero.

Clients must be comfortable not only with the possibility of losing their entire investment but also with the fact that they will not get back any of the taxes they paid to exercise those options that are now worthless shares of stock. While this is particularly relevant if the employer is in its early stages and any potential liquidity event is several years away, it is a scenario that all optionholders should consider before investing their own capital. If this risk of loss will keep the client up at night, then it likely makes more sense to consider outside financing.

When a client decides to self-finance the exercise, how do you help them decide how to do it (e.g. from savings, borrowing from relatives, a home equity loan)?

When we have determined that a client’s employer’s prospects are attractive and that the client is willing to accept the risk of investing their own funds, then we will review the client’s ability to self-finance by looking at their current savings and cashflows. When it’s determined that there is cash remaining after a client’s expenses are met for the next 2–3 years, we will discuss the pros and cons of using their reserves to exercise their options.

If the anticipated timing for a liquidity event for the stock is within a year and the potential upside is significant, then I will likely recommend that they self-finance the exercise and retain all the potential upside, rather than committing a significant portion of it to an outside financing company. If the liquidity event is 1–2 years away, we will discuss a combination of self-financing and outside financing.

If clients do not have cash available to fund such an investment, but it still makes sense to self-finance, we will then look at their other assets that might be able to fund the option exercise. In this case, they may have other taxable investments trading at losses or minimal gains where the upside potential is less than that of their private company stock. I generally do not recommend that clients take loans against, or cash out, retirement plans to generate cash, as these tend to be more expensive and risky ways to raise funds.

If clients do not have cash or other investments available to finance their option exercises, we will then discuss the advantages and disadvantages of using traditional loans, especially home equity loans if they have significant equity in their primary residence. However, while it is difficult to beat the low interest rates on home equity loans currently, many traditional lenders will not allow for loan proceeds to be used for investments, limiting their use as a source of funds to exercise stock options. In addition, clients must be comfortable with the fact that should their company stock go to zero, they still need to repay the amount they were loaned to purchase those now worthless shares.

Relatives may be willing to provide loans to clients for the purpose of exercising their stock options, and these loans may have more attractive terms than those from outside financing companies. If this is the case, we will discuss not only the terms of the loan, but how borrowing from a relative may affect their future relationship with that relative. If the terms are better than what would be owed to an outside company, and the client is confident that accepting and possibly not repaying the loan will not damage their relationship if the company fails, then I will likely support this alternative.

If none of these alternatives for self-financing or family financing make sense for the client, then we will discuss funding the exercise wholly with outside financing.

Have there always been outside companies that specialize in provide financing for exercising stock options?

A whole cottage industry has sprouted up over the past decade that provides financing capital to private company optionholders. This industry has become quite large over time, with one of the largest financing companies having provided funding to employees at 80% of all US-based “unicorn” startups just since January 2020.

What are some of these providers of outside financing for private company option exercises?

Some of the larger, more prominent providers include (in alphabetical order) Equity Bee, ESO Fund, Liquid Stock, Quid, and SecFi. An internet search of “stock option financing” and/or “stock option lenders” will result in these and several other financing firms.

How does this type of financing work? Are these financing companies actually investing in the stock options or just lending to employees to exercise them?

These financing companies may provide the financing themselves if they manage a private equity or hedge fund for this purpose, or they may just act as an intermediary, connecting investors to optionholders. Either way, the financing company delivers the funds employees need to exercise their options themselves and pay the corresponding taxes.

It is important to note that these financings are not traditional loans that have annual percentage rates and fixed repayment dates. They are contractual agreements where the optionholder agrees to repay the funds (plus fees and some of the stock’s upside—more on this later) after the stock becomes liquid, such as after an IPO.

Many of these financings are “nonrecourse,” meaning that should the company fail, the optionholder is not responsible for paying back the financing amount. Because the financing company is bearing the risk of not being repaid, it will want to review the optionholder’s company for its potential upside, similar to how investors research which publicly traded stocks to invest. This may or may not require that the optionholder’s company share nonpublic information, including financial data.

The contract between the financing company and the optionholder is initially based upon the optionholder’s willingness to repay the financing amount plus the agreed upon upside and fees, since most shares acquired upon exercise are not typically able to be used as collateral due to restrictions in the company’s stock plan documents. The financing amount plus the agreed upon upside and fees are generally repaid after any lockup period has expired and the optionholder is able to dispose of their shares in the public market.

Do the terms of these agreements differ by the company providing the financing?

There are nuances in how each company structures their financing. For example, some may charge an additional fee for “brokering” a deal, in other words finding investors interested in providing the financing. In these cases, that fee would be in addition to the upside paid at the end of the lockup period. Other financing firms may only agree to provide financing if the optionholder’s employer agrees to allow it access to other optionholders within their company. Still other firms may require the shares become collateral for the financing once any lockup period has ended.

Does an employee lose some of the upside in using this outside financing?

Yes. Optionholders can generally expect to give up one quarter to one half of the stock’s upside on average, including fees, with these types of financings. For an example of how this works, see Exhibit 3 in Stock-Option Financing in Pre-IPO Companies (Rock Center for Corporate Governance at Stanford University Working Paper Forthcoming).

This upside (and fees) is what the financing company receives for taking on the risk of the company potentially failing, as discussed earlier. Every financing deal will be priced differently depending upon the specific circumstances, including, but not limited to, the perceived upside of the stock, the length of time expected until a liquidity event for the stock occurs, and the amount of financing provided.

Does using outside financing change the tax treatment at exercise?

Generally speaking, no, but some of the arrangements may allow for the amount paid by the optionholder to the financing company above the initial financing amount to qualify as a capital loss, potentially offsetting gains from selling shares. These financing structures are complicated, though, so I always recommend that clients consult with a tax professional who specializes in stock compensation before entering into any stock option financing contracts.

What are the pros and cons of using an outside financing company to exercise?

One of the largest advantages is optionholders’ ability to exercise their options without having to self-finance with what could be a very significant outlay of cash. This is of particular benefit if employees are facing potential forfeiture of their vested options without the funds to exercise them, for instance if leaving their company for another job. Another benefit is not losing one’s own money or having to repay a nonrecourse financing should the employee’s company fail and the stock goes to zero. Lastly, obtaining outside financing may allow the optionholder to exercise their options earlier than without that funding. Taxes can be significantly lower by exercising early, particularly when the stock price is low after grant. Early exercises also start the capital gains holding period for future sales of the stock to qualify for the lower long-term capital gains tax treatment (versus ordinary income).

Giving up a portion of the stock’s upside (plus fees) if the stock ends up being very successful is obviously the biggest detractor to receiving outside financing. In addition, the added tax complexity that can arise from complicated structures used by outside companies in providing financing can result in significant tax consulting and preparation fees.

Additional Resources

See the section Pre-IPO at myStockOptions.com for more information and insights on financial planning for employees in private and pre-IPO companies. myStockOptions has also held a special webinar on these topics: Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition (available on demand at the link).

myStockOptions Webinar Channel

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each on-demand webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP:

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition: Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp: Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp: It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors: Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Strategies For Concentrated Positions In Company Stock: Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

Equity Comp Pandemic Planning: Leading Financial Advisors Headline myStockOptions Webinar

Like all storms, both literal and figurative, the pandemic of 2020 will pass, but at the moment it's a wild ride. Like everything else, company approaches to equity compensation and the financial-planning strategies advisors must consider for clients are being heavily impacted by Covid-19 and its ripple effects.

After wild waves in the stock markets, financial planning for stock compensation continues to be tested by volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate approaches in this planning niche. Client strategies that may have been ideal for the economic boom years may need adjustment or revision in the unprecedented circumstances of the novel coronavirus.

Webinar: Financial Planning For Stock Compensation During The Pandemic

This is the subject of a special one-hour webinar from myStockOptions on July 22. Bruce Brumberg, the editor-in-chief of myStockOptions, will moderate a panel discussion among three leading financial advisors and a top compensation consultant:

In this online event, leading financial advisors and equity comp experts will discuss how to reconsider planning for stock compensation and company shares amid Covid-19 and its fallout. Registration is open at the webinar homepage.

The webinar discussion panelists are:

• Meg Bartelt, CFP® (Flow Financial Planning)
• Tim Kochis, CFP® (Kochis Global, former CEO and Chairman of Aspiriant)
• C.J. Van Ostenbridge, CEP (Infinite Equity)
• Jane Yoo, CFP® (Jane Financial)
• Bruce Brumberg, discussion moderator (myStockOptions)

After explaining how companies are changing their stock grants, including trends in approaches to underwater stock options, the discussion will turn to what the pandemic and its impacts mean for financial planning. Key topics:

• what to do with vested stock options
• strategies for nonqualified stock options and incentive stock options
• whether to immediately sell restricted stock or restricted stock units when the grant vests
• whether to participate in an employee stock purchase plan, and ESPP benefits even in down markets
• special strategies for grants in private companies
• helping stock comp clients through layoffs, furloughs, and new job opportunities

The webinar offers 1.0 CE credit hour for:

• Certified Financial Planners (CFPs)
• Certified Equity Professionals (CEPs)
• CIMA and CPWA

Webinar Joins Related New Financial-Planning Articles

Many employees with stock compensation are facing tough choices with their equity grants and holdings of company shares.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably steeply declined and rebounded, going through volatility that makes you wonder about your equity comp and financial planning.
• You may have lost your job or been furloughed, or you may have changed jobs.

New articles at myStockOptions address these and other timely topics:

7 Things To Know When You Sell Company Stock To Raise Cash
For reasons beyond your control, you may find yourself in a position where you suddenly need to sell stock for cash to meet urgent living expenses. When selling stock you must always proceed with caution. Review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

ESPPs Offer Special Benefits In Down And Volatile Markets
ESPPs cannot be "underwater" like stock options, but a declining stock price can have an impact on your plan participation and the tax consequences. This article explains what you need to know for participating in your company's ESPP with a falling or volatile stock price.

What To Do With Your Just-Vested Shares After Your Company's Stock Price Drops
Market volatility can rattle anyone's financial plan for stock compensation and company shares. What should you do with shares acquired from equity awards now? Sell them immediately? Hold them in the hope that the stock price will recover? Should you change the strategy you've been following? This article provides a financial planner's insights on how to consider these questions.

These articles join our longstanding expertise on equity comp and company stock during down markets in our sections on volatility and job loss.

Equity Comp Survival Guide For Pandemic Times

The COVID-19 pandemic has affected everyone, including employees with equity compensation.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably declined, leaving you wondering about your equity comp and financial planning.
• You may be considering the best use of your stimulus payment from the IRS.
• If you work for a small business that's seeking a forgivable loan from the Paycheck Protection Program, you need to understand the legal risks in the application and the use of the funds.

Here we present recent articles from the myStockOptions editorial team on these and other timely topics.

See also a full list of new and recently updated content at myStockOptions. Because Tax Season 2020 has been extended to July 15, it includes the fully updated tax-return content in our Tax Center.

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7 Things To Know When You Sell Company Stock To Raise Cash

You may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. One source of these funds can be proceeds from selling shares of your company's stock, whether acquired via the open market or equity compensation (e.g. stock options, RSUs, ESPPs). Before you sell your company shares, review this article's checklist of topics to understand on tax, company, brokerage firm, and SEC rules: 7 Things To Know When You Sell Company Stock To Raise Cash.

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Insider Trading: How To Stay Out Of Trouble

If you do sell company stock quickly to raise cash, be careful. Depending on your access to confidential company information, trading company stock can actually get you into serious legal trouble, including criminal liability for insider trading. A new article at myStockOptions explains what you need to know: Insider Trading: How To Stay Out Of Trouble.

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Market Volatility: A Survival Guide For Equity Comp

When stock markets become a rollercoaster and the economy is in a downturn, you need to hang in there and remember equity comp and company shares are best viewed as a long-term deal. Several articles at myStockOptions provide useful advice on coping with stock-price volatility, down markets, and job termination (whether layoffs or other types). These include:

• Stockbrokers' Secrets: Equity Compensation Strategies For Volatile Markets
• Stomach Volatility In Your Company's Stock Without Losing Your Mind
• Job Loss And Your Stock Grants (Parts 1 and 2)
• Preventing Irrational Decisions About Selling Company Stock Or Exercising Options
• Manage Your Expectations To Avoid The Option Blues
• Reframing Your Stock Option Exercise Strategy In Volatile Markets
• Equity Compensation Strategies For Down And Rising Markets

You can find these articles and extensive related content in the sections Basics: Volatility and Job Events: Termination.

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Donating Your Stimulus Check: 4 Key Tax Rules To Know

If you don't need the extra cash, one possible use of your stimulus payment from the IRS is to donate the money to a worthy cause. For this beneficence, you may get a tax deduction. Before you seek the deduction, learn the IRS rules that apply in an article at the Forbes.com blog of our editor-in-chief Bruce Brumberg.

For guidance on the tax deduction for donations of stock instead of cash, see the related FAQ at myStockOptions.

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How To Avoid Legal Problems With Your Paycheck Protection Program Loan

Potentially forgivable loans to small businesses are available via the Paycheck Protection Program (PPP).

• In an article at Forbes.com, we present advice from former federal prosecutors on avoiding legal problems with PPP loans.
• In a separate Forbes.com article, we share insights from small-business attorneys about how to meet the conditions that make the loan forgivable, and how to use PPP loan funds in a way that avoids abusing the loan program.

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Learning Center Offers CE Credits

Keep up your continuing professional education! In our Learning Center, myStockOptions has six courses and exams offering CE credits for several professional designations:

• 30 continuing-education credits for Certified Equity Professionals (CEPs): 100% of the total requirement
• 15 continuing-education credits for Certified Financial Planners (CFPs): 50% of the total requirement
• 15 continuing-education credits for Certified Private Wealth Advisors (CPWAs) and Certified Investment Management Analysts (CIMAs): 37.5% of the total requirement
• Chartered Financial Analysts (CFAs) and Certified Public Accountants (CPAs) are encouraged to take our courses and exams and include them, if possible, when they self-document their continuing professional education

Each course of study features podcasts, articles, and FAQs from myStockOptions. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.

Why Employee Stock Purchase Plans Are A Great Deal: Understanding Key ESPP Features

An employee stock purchase plan (ESPP) is a great deal. It lets you use after-tax payroll deductions to buy shares of your company's its stock, often at a discount (and even if there is no discount, you still pay no commission). In this blog commentary, we explore the key features of ESPPs that you need to understand to make the most of your company's plan.

Type Of ESPPs

In an ESPP that follows the rules under Section 423 of the tax code, the purchase discount can be up to 15% off the market price of the company's stock. That type of ESPP is called a "qualified" ESPP. Other types of ESPPs are either nonqualified plans or direct purchase plans. An ESPP that is tax-qualified under Section 423 offers favorable tax treatment of the purchase discount when you hold the shares long enough (more than two years from your enrollment date and one year from purchase).

Biggest Potential Gains When Plan Has Lookback For Setting Purchase Price

An ESPP discount is a good benefit. It's even better when the plan also has a lookback provision. A lookback takes the purchase-price discount from either the stock price at the start of the offering or the stock price on the purchase date, whichever is lower. If the stock price rises between the offering date and the purchase date, your discount is based on the lower offering-date price. Even if the stock price falls between the offering date and purchase date, you still profit because your discount comes off the lower stock price on the purchase date. This means that, unlike stock options, an ESPP with a lookback cannot go underwater.

Example: Your company's ESPP has a 15% discount with a six-month lookback.

• The stock price on the offering date is $10 per share.
• The stock price on the purchase date is $12 per share.
• With the lookback, your purchase price for stock worth $12 is only $8.50 (15% of $10).
• This gives you a gain of 41% ($3.50 spread at purchase divided by $8.50 purchase price).
• If instead the stock price falls to $8 on the purchase date, your purchase price is $6.80.
• Even after that price drop, you still have an increase of 17.64% ($1.20 spread at purchase divided by $6.80 purchase price).

Another advantage of an ESPP is that you can often sell the shares easily to pay for immediate cash needs or to reinvest in other long-term savings. By contrast, company stock in your 401(k) can be sold only for other investments in the plan.

The taxation and special tax requirements of shares purchased under a Section 423 ESPP are detailed by our articles, FAQs, and videos in the section ESPPs: Taxes at myStockOptions.com.

Top Questions To Ask About Your ESPP

Before you participate in your company's employee stock purchase plan, you want to understand its key terms, rules, and dates. These affect whether you want to participate, how much salary you want to contribute for stock purchases, and how to fit the ESPP into your financial plan. Become familiar with the essential features of ESPPs by asking the questions on the following checklist:

1. What type of ESPP is it?
2. When am I eligible to participate?
3. Does the ESPP have a purchase discount? Does it have a company match, which would make it a nonqualified plan?
4. Does the plan have a lookback feature?
5. How long is the offering period for the salary deductions?
6. Are there shorter purchase periods within the offering period? Example: 12-month offering period with two separate six-month purchase periods.
7. How do I enroll in the ESPP? Once enrolled, am I automatically enrolled in subsequent offering periods?
8. Is there a maximum contribution amount/percentage and number of shares I can purchase with my eligible compensation? Related to this question, how and when can I increase or decrease my contribution percentage, or withdraw from an ESPP offering?
9. Is there a mandatory transfer restriction or holding period after share purchases? Many companies require you to keep the ESPP shares with a specific brokerage firm or transfer agent to track the tax reporting. Some prevent you from flipping shares at purchase by enforcing a holding period.
10. How will the ESPP fit into my financial planning for long-term goals (e.g. house purchase, college funding, retirement savings) and more immediate goals (e.g. medical expenses, car purchase, vacation).

How To Answer These ESPP Questions

Unlike most grants of stock options or restricted stock/RSUs, ESPPs are broad-based (i.e. open to all or most employees). Therefore, you will probably learn about your company's plan during your orientation or when a new ESPP is rolled out.

Before you participate in an ESPP, you should review the plan documents: these state the plan's terms, features, and procedures and include enrollment forms (usually online). If the materials are not on your company's intranet, ask your HR department for a copy of the plan materials and confirm whether you are eligible to participate and when the next enrollment date occurs.

For examples of documents that created ESPPs in 2019 and outline their structure, see the ESPPs offered by two high-profile IPO companies, Uber and Levi Strauss.

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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Register For Our National Financial-Planning Conference

Our special one-day conference is coming up soon: Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In a fresh lineup of talks and panel sessions, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

Continuing education credits, including 8.0 CFP® credits and 7.0 CEP credits, are available. You can register and make hotel reservations now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, conference@mystockoptions.com).

Private Company Stock Grants: Recent SEC Filings By Uber And Other IPO Companies Reveal Plan Design Trends

Uber, Lyft, Pinterest, Zoom: Some major private companies in the tech sector have recently gone public or are about to. This is a big moment for their employees who have stock grants. A question we at myStockOptions.com are often asked: How do stock grants work in privately held companies?

Filed with the Securities & Exchange Commission (SEC), the Form S-1 registration statements of IPO companies show trends in these grants. These filings also reveal that the stock options and restricted stock grants that private companies make are often more complex than the standard types of grants used by public companies.

Typical Stock Options And Restricted Stock

The standard variety of employee stock options allows you to exercise the options only when they have vested, usually after you have worked at the company for a specified time. With restricted stock and the now more commonly used restricted stock units (RSUs), the event that triggers vesting is employment for a set period after the grant date and/or perhaps the attainment of specified company performance goals.

Example: You have a grant of 10,000 stock options or RSUs that vest 25% after the first anniversary of the grant, and then 25% yearly for the next three years (i.e. four-year annual vesting). After the first year 2,500 options vest and are exercisable (or 2,500 RSUs vest), and a similar number vest annually from there.

Private Company Stock Options And RSUs Can Be Different

One big difference in private companies is the illiquidity of the stock. Employees cannot sell shares at exercise or vesting, even to pay the taxes owed on the income recognized. This lack of liquidity, along with securities-law restrictions on resales of stock, does not delay the tax-measurement date at option exercise or restricted stock vesting.

Given the vastly differing liquidity situations of private and public companies, having the same tax treatment for stock grants at pre-IPO and large publicly traded companies seems out of balance. To address this issue, a provision in the Tax Cuts & Jobs Act (tax reform) created “qualified equity grants” for private companies under the new tax code Section 83(i). While this alters the standard tax treatment when various conditions are met, in its current form this provision will get little use. (For details, see our past blog commentary on it.)

However, long before this provision came along, smart lawyers and accountants had already come to the rescue. Operating within the existing tax laws and IRS regulations, they developed new structures for stock option grants and RSUs at private companies that work around the standard tax treatment. You can see this widespread use in a review of the Form S-1 registration statement filed with the SEC by Uber Technologies (April 11, 2019 draft), and in the effective registration statements for the now-public companies Lyft, Pinterest, and Zoom Video Communications.

Early-Exercise Stock Options

One of these equity innovations for employees at private companies is early-exercise stock options. Instead of letting you exercise options only after the vesting date, when you might face a big taxable spread between the exercise price and the fair market value of the stock, the company instead grants options that are immediately exercisable. When you exercise the options, you receive restricted stock with a vesting schedule identical to that of the option grant. Until vesting occurs, if your employment ends your company has a repurchase right in the stock.

The advantages to these types of option grants is that you exercise when the spread is $0 or very small and start the capital gains holding period. A major risk is that to profit from these options you need the shares to become liquid, whether through an IPO, M&A deal, or private resale market. Uber seems to have used early-exercise stock options in its initial stock plans (see pages F-8 and F-55 of its S-1 registration statement), as did Zoom (see pages 101-105, F-6, and F-29 of its S-1).

Alert: To get this tax treatment, you should make a Section 83(b) election and file it within 30 days of exercise with your local IRS office, whether you are exercising nonqualified stock options (NQSOs) or incentive stock options (ISOs).

Restricted Stock Units With Double-Trigger Vesting

Larger, later-stage pre-IPO companies often grant RSUs instead of stock options for many reasons, including concerns about dilution and about high valuations which could lead new option grants at that exercise price to go underwater. This shift from stock options to RSUs is found in Uber’s registration statement. See the tables below from page F-56 of its Form S-1. These show a big difference between the number of stock options recently granted and the number of RSUs granted.

Vesting Structure Impacts RSU Taxes

The standard tax treatment of RSUs triggers taxes at vesting. However, because a private company's stock is illiquid, employees at private companies cannot sell shares to pay those taxes. In this situation, some private companies with enough cash may either lend employees money for the taxes or provide a cash bonus that covers them (this can be done for stock options too). But many private companies now structure their RSU grants to add  a second vesting provision, which requires a liquidity event for the grant to fully vest.

For example, in various places in Uber's Form S-1 (e.g. pages 15, 108, 142) and in Pinterest's S-1 (e.g. pages 7, 32, 76, 82), the filing states that RSU grants (and some options) have both service-based vesting and liquidity-event-based vesting. Some employees meet both conditions immediately after the IPO, facing a big tax bill, and others just the second condition. The big downside to this structure is that suddenly employees owe huge taxes on shares that are likely to be much higher in value than when the grants were made.

Employees are also then bumped up into the top tax brackets for all their other income, whether salary or capital gains, because of this income hit from the IPO timing that they cannot control. Lyft reveals a 42% withholding rate (page 15) while Pinterest used 48% (page 11). Should your grant fully vest in an IPO, welcome to the top income-tax bracket (though hopefully also a high level of wealth).

Tax Withholding

Most companies automatically withhold shares from the grant to pay the taxes owed, sometimes referred to as net settlement. Employees do not need to come up with the cash, though some would like to keep the shares instead of this indirect form of diversification through share withholding. The obligation of the company to fund the tax liabilities with the withheld shares, which requires the company to send cash and not shares to the IRS to pay it, can create an onerous financial and administrative burden for the company.

Companies often disclose that funding withholding taxes is one of the uses for IPO proceeds. This could affect a company’s financial condition or add to dilution, according to risk factors disclosed by companies, as in Uber’s SEC filing (see page 69). Alternatively, companies can allow for stock sales for taxes by employees as an exception to the lockup, as Uber discloses on page 266.

Additional Resources On Private Company Stock Grants

For more information about stock grants in pre-IPO and post-IPO companies, see the section Pre-IPO at myStockOptions.com. For a one-day live event covering these topics, consider attending the myStockOptions.com national conference in San Francisco (details below).

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Register For Our National Financial-Planning Conference

Our special one-day conference is coming up soon: Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In a fresh lineup of talks and panel sessions, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

Continuing education, including 8.0 CFP® credits and 7.0 CEP credits, is available. You can register and make hotel reservations now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, conference@mystockoptions.com).

Amazon Ends RSU Grants To Hourly Employees, But The Benefits Of Broad-Based Employee Stock Grants Live On Elsewhere

When Amazon announced a pay increase for warehouse workers and other hourly employees to at least $15 per hour, we were surprised to hear that Amazon also eliminated bonuses and restricted stock units (RSUs) for those same workers. Amazon's move was widely reported by news outlets, such as Bloomberg. (We note, however, that some of the articles, along with Senator Bernie Sanders, mistakenly referred to these RSU grants as stock options.)

Amazon apparently cut bonuses and RSUs to redirect expenses for the increase in hourly wages and calculates that these workers will still see an overall pay rise. It also stated that as the pay these workers receive is "no longer incentive-based, the compensation will be more immediate and predictable."

Benefits Of Broad-Based Stock Grants

So what should we make of Amazon's decision? In past blog commentaries, we have reported favorably on stock grants made by various prominent companies, including Apple and Starbucks, to their broad employee populations. An article on similar topics in The Wall Street Journal rightly observes that broad-based equity can be a "powerful recipe for an engaged workforce," mentioning that modest restricted stock grants at this employee level "is good for the bottom line because it generates loyalty."

We are, therefore, very curious about the internal calculation, evaluation, and (hopefully) debate that Amazon went through before its decision to eliminate the RSU grants and cash incentive bonuses. When your company's stock price has skyrocketed and is expected to remain strong, as at Amazon, that is often when employees want equity the most. That is when stock compensation can play its most powerful role in recruitment, retention, and motivation, whether in the executive suite or in the warehouses. Plus, it is often the lower-level employees who most appreciate how equity pay increases their wealth and helps them with financial planning and funding for important life events.

Not surprisingly, some hourly employees at Amazon were disappointed by the company's elimination of bonuses and RSU grants, as discussed by articles in The New York Times and the magazine Money. The NYT gives details on both the variable compensation plan, which provided for the monthly attendance and productivity cash bonuses, and on the RSU grants. The NYT article reports that some employees "were saddened to lose the sense of ownership that the stock compensation provided." That is a message which we at myStockOptions.com have always emphasized as a major reason for having stock compensation.

Sharing Financial Success With Front-Line Workers

After Gardner Denver Holdings granted $100 million in shares to 6,000 employees, including hourly workers and staff in customer service and sales, a Bloomberg news report quoted chairperson Pete Stavros about the reasons. He explained that employee ownership at manufacturers can be effective at improving operations in which the company needs to do a "a million things a little better." He observes that "it's the workers on the front lines that often know where the inefficiencies are to fix and they share in the success through their equity stake." His statement succinctly expresses why broad-based grants, particularly to those in front line and hourly positions, are often a smart compensation approach. 

For data from studies exploring the benefits of equity comp to companies (and employees) and the various reasons why they make them, see an FAQ at myStockOptions.com.

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.

Leading Industry Experts Speak At Sold-Out myStockOptions Financial-Planning Conference

Organized by myStockOptions.com and held on June 18, the one-day conference Financial Planning for Public Company Executives & Directors attracted financial advisors from all over the United States. These professionals work with or seek to advise executives, directors, and high-net-worth employees who have stock compensation, holdings of company stock, and other company benefits, such as nonqualified deferred compensation.

The conference was a big success. All available space was sold out, and the event received glowing reviews from attendees. myStockOptions thanks those who attended, our speakers, and the conference's sponsors: Eaton Vance, Fidelity Charitable, StockShield, StockOpter, Social Security Solutions, and the NASPP.

The enthusiastic feedback and constructive suggestions we received will help to shape similar events in the future. “Excellent content,” said an advisor after the event. “I haven’t come across anything else that is geared toward advisors like this.” Many attendees told us that the coverage of the presented topics was just right: “Technical but not too basic or overly technical,” wrote one. Another praised the event as the “only conference addressing and focused solely on financial planning for executives and directors,” and one advisor even called it the “best conference focused on executive/equity comp.”

A selection of other attendee feedback:

• “A huge amount of practice-relevant information in a very efficient and engaging format.”
• “The speakers were very informative and didn’t focus too much on the basics—got into deeper conversations.”
• “Consistently high quality.”
• “It’s hard to find seminars that provide this much detail.”

Conference Sessions: Engagement With Expertise

Leading Investment Manager Reveals Current Strategies for High-Net-Worth Clients (Paul Bouchey, Parametric Portfolio Associates, interviewed by Bruce Brumberg of myStockOptions.com)

Trends in Stock and Executive Compensation: What They Mean for Financial Advisors (Richard Friedman, Ayco Company)

Important Tax, SEC, and Legal Developments Impacting Financial Planning for Stock and Executive Compensation (Bruce Brumberg, myStockOptions; Susan Daley, Perkins Coie)

Leading Financial Advisor Reflects on His Career Working with Executives (Tim Kochis, Kochis Global, interviewed by John Barringer of Executive Wealth Planning Partners)

Financial & Tax Planning Strategies for Stock Options, Restricted Stock/RSUs, Performance Shares, and Company Stock Holdings (Caroline Emswiler, Wealth Financial Consultants; William Baldwin, Argent Wealth Management; Jackie Kunkel, UBS Financial Services; Kristin McFarland, Darrow Wealth Management; moderator: Bill Dillhoefer, Net Worth Strategies)

Estate Planning & Charitable Giving With Company Stock & Equity Comp (Geoff Zimmerman, Mosaic Financial Partners; Kirsten Howe, Absolute Trust Counsel; Matthew Connor, Fidelity Charitable)

Rule 10b5-1 Trading Plans: Cornerstone of Legal Protection for Stock Diversification (Michael Andresino, Posternak Blankstein & Lund; Mark Bach, Morgan Stanley)

Retirement Distribution Planning for Executives: Key Role for Stock Compensation and Holdings of Company Stock, Executive Retirement Plans, and NUA (Chuck Steege, SFG Wealth Planning Services)

Strategies for Concentrated Positions in Company Stock (Dave Gordon, Eaton Vance; Bob Gordon, Twenty-First Securities; Brian Yolles, StockShield; moderator: Tim Kochis, Kochis Global)

Pursuing the Equity Compensation Opportunity: Attracting and Retaining Individuals Who Receive Company Stock and/or Options (John Barringer, Executive Wealth Planning Partners; Bill Dillhoefer, Net Worth Strategies)

Conference Met A Strong Need Among Advisors

From our experience with financial planners using the content, tools, and advisor directory at myStockOptions.com, we sensed a strong need for this type of event. Moreover, a recent national survey of 1,000 stock plan participants 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.

"Financial-planning clients and their families look to equity comp or company stock holdings to fund important life goals," said Bruce Brumberg (pictured at the right), the editor-in-chief of myStockOptions.com, during his introductory remarks. "They rely on advisors for help in how to maximize, preserve, and transfer their wealth and how to prevent them from making big mistakes."

Accordingly, our conference team selected stock comp topics that are especially important for advisors to understand in serving their financial-planning clients. Our speakers and panelists shared a wide range of knowledge, insights, and experiences that completely met our high expectations and the goals of the conference. We hope that our conference attendees found the event a boost for their professional development, helping them deepen client relationships, further develop their reputations, gain more client referrals, and advise more employees with stock comp in ways that help them achieve their financial and life goals.

The mission of the conference is also one of our perpetual missions at myStockOptions.com: to provide an independent, unbiased source of educational content and tools on all types of equity compensation. Full access to our website is available via our Premium or Pro membership levels. Additionally, our extensive and engaging educational content on all aspects of equity compensation can be licensed by stock plan providers and companies for their plan participants. The content includes not just our easy-to-understand articles and FAQs but also our videos, podcasts, modeling tools, and fun quizzes on many different topics.

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).

Stock Comp In The News: Grants At Apple, Starbucks, And Tesla Show The Versatility Of Equity Compensation

At myStockOptions.com, we never tire of seeing our favorite subjects in the news. In fact, our daily routine here includes keeping up with stories about stock compensation that make their way into the popular news media. Three recent big developments at high-profile companies show the versatility of stock compensation, from broad-based grants for rank-and-file employees to carefully crafted long-term incentives for corporate CEOs.

The business news media widely reported Apple's decision in January to issue grants of restricted stock units worth $2,500 to each of its employees (see, for example, Apple Gives Employees $2,500 Bonuses After New Tax Law, Bloomberg). The Apple news blog 9to5Mac published the text of the email that CEO Tim Cook sent to Apple's employees about the grant and other increased or new benefits. His statement nicely expresses the importance of stock grants and the reasons why companies award them broadly to employees:

I'm excited to let you know that we're also increasing our investment in our most important resource—our people. You are the heart and soul of Apple and we want you to share in the success made possible through your efforts. Your dedication helps Apple make the best products in the world, surprise and delight our customers, and ultimately make the world a better place.

To show our support for our team and our confidence in Apple's future, we’ll be issuing a grant of $2,500 in restricted stock units to all individual contributors and management up to and including Senior Managers worldwide. Both full-time and part-time employees across all aspects of Apple’s business are eligible.

Meanwhile, Starbucks announced stock grants to all eligible full-time, part-time, hourly, and salaried employees at stores, support centers, and bean-roasting plants (see Starbucks Gives Workers Raises, Stock Grants Due To Tax Law in the Seattle Times). In April, for example, Starbucks granted $500 worth of its stock to every retail partner and $2,000 in stock to each store manager. These grants, which have a one-year vesting period, were awarded in addition to what those employees were already receiving this year. According to the Starbucks press release announcing the new program, the grants have a total value of more than $100 million.

Naturally, major equity awards for celebrity CEOs always attract prominent media attention. A good example occurred when Tesla recently granted stock options to nerd hero Elon Musk, the much-admired CEO of both Tesla and SpaceX, as reported by major media outlets (see, for example, Tesla Shareholders Approve Pay Plan For Elon Musk Worth Up To $55 Billion Over 10 Years in the Los Angeles Times).

The grant to Mr. Musk is 100% stock options—but this is not your typical stock option grant. In fact, Tesla's new award to its CEO has some of the most detailed performance-based vesting features that we have ever seen for stock options. According to Tesla's announcement of the award and its proxy statement for the related shareholder vote, the stock options (worth $2.6 billion) can vest in 12 tranches depending on whether Tesla achieves key marketplace and operational performance milestones over 10 years. Each tranche equals 1% of the company's outstanding shares.

Tesla needs to hit 12 market capitalization milestones and 16 revenue or EBITDA operational targets for the award to vest in full. It has to reach a market cap of $100 billion for the first tranche to vest, and then each of the remaining 11 tranches require an additional $50 billion in market value. (Whew. We told you the grant was detailed!)

For more examples, including extensive survey data, that reveal equity comp trends among major companies, see a detailed FAQ at myStockOptions.

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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

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

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.

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.

President Trump's Tax-Reform Principles Could Affect Stock Compensation

Soon after Donald Trump was elected president, we blogged about the likelihood of tax reform and its impact on stock compensation. We expected that to be the initial top priority of President Trump, but after his inauguration other matters took precedence. Finally, however, during the last week of April, his administration released general tax-reform principles in a one-page outline. Generally consistent with proposals Trump made during his election campaign, they include the following:

1. Simplification of individual income tax rates. The outline proposes just three income-tax rates: 10%, 25%, and 35%. As we have mentioned, how changes in income-tax rates would tie into the flat supplemental rate of withholding on stock compensation is unclear and would need clarification, as the structure of the rate is based on the current seven tax brackets.

2. No change the capital gains rates (15% and 20%), but a cut in tax on investment income. While Trump does not seek to alter the capital gains rates, he does want to the repeal of the 3.8% Medicare surtax on investment income, including stock sales, that is paid by high-income taxpayers to fund Obamacare. A reduction in the difference between ordinary income rates and the capital gains rates might affect tax-planning decisions, e.g. whether to hold shares at exercise, vesting, or purchase. As for the Medicare surtax, we have found that individuals and their financial advisors often develop strategies to avoid it. If it were eliminated for tax years after 2017, that planning need would go away in 2018. However, for the remainder of 2017, you would want to consider whether you can defer income (e.g. NQSO exercises) into 2018 if that income would push you over the threshold for triggering the Medicare surtax in 2017.

3. Termination of the alternative minimum tax (AMT).  Among those who receive grants of incentive stock options (ISOs), much rejoicing would occur if the AMT were repealed. Currently, the income spread at ISO exercise can trigger the AMT, which warrants complex tax planning.

4. Elimination of the estate tax. That would end the need to implement most gifting strategies with company stock, including those involving transferable stock options. However, estate-tax repeal might also end the step-up in the basis of investments, such as company stock, that currently occurs with a deceased person's holdings. That would create the need for other estate-planning strategies.

Next Steps

Don't expect the Trump administration's tax plan to become adopted legislation soon. As an article in The New York Times points out, numerous obstacles stand in the way of its enactment this year. In addition, as the political news website The Hill reports, the lack of detail in the tax-reform plan is setting off aggressive lobbying efforts, which will take time to play out. Plus, as columnist Bernie Becker notes at the news and commentary website Politico: "THIS THING HAS TO GET THROUGH CONGRESS: That sort of goes without saying, but there's really no better idea how that happens than there was before the newest Trump principles."

Tax Brackets Matter

For the many upper-middle-class employees and managers who receive stock compensation, there is an important issue to follow with any type of tax reform (though we remain uncertain about whether Trump's proposal represents reform, simplification, or just a big tax cut). That issue involves the taxable income that would fit into the three proposed tax brackets (the Republican tax-reform blueprint takes a similar approach with rates of 12%, 25%, and 33%). Journalists in the news media tend to focus on the tax rates themselves, not the tax-bracket thresholds, which are also significant aspects of any tax law.

The proposals merely cut off the current top tax brackets, which could mean that anyone currently in the brackets between 25% and the new top bracket would get stuck paying a higher rate both on ordinary income and on short- and long-term capital gains. (The 20% top rate on long-term capital gains and qualified dividends is currently tied to the top income-tax bracket.) For example, in 2017 if you have taxable income between $153,100 and $416,700 (married, filing jointly) or $91,900 and $416,700 (single), you are currently in the 28% or 33% tax bracket. Aside from the most senior executives, individuals with stock compensation tend to be in that income range.

In the interests of both economic growth and fairness, myStockOptions.com has long contended that it would be better to keep the current top income-tax rate of 39.6% and instead broaden the 25% rate to encompass those in the current 28%, 33%, and 35% marginal tax-rate brackets. It is the upper middle class in this income range that would be most likely to either spend the money from this tax reduction, boosting the economy, or save it to bolster lagging college and retirement savings.

Additional Resources

For more on the tax-reform principles released by the Trump administration, see commentaries from Ropes & Gray, Latham & Watkins, and PwC. In addition to the potential impacts we describe here, the NASPP blog covers further ways in which the proposals could affect stock compensation.