The myStockOptions Blog

More Lawsuits Involving Stock Compensation

Back in January, this blog looked at some recent lawsuits of interest involving stock compensation. In recent months, a few additional court decisions involving equity comp have caught our attention.

Online Grant Acceptance

Electronic distribution and acceptance have become common procedures for stock grants. Occasionally lawsuits challenge these, often when the agreement has a provision that restricts an employee who later contends that he or she did not see it or agree to it (e.g. a covenant not to compete). That's what happened in ADP v. Lynch, in which the US Court of Appeals for the Third Circuit upheld a lower court's decision enforcing restrictive covenants in electronically delivered grant agreements. In the company's online procedure, employees needed to check boxes confirming that they had reviewed the documents, which included the plan, the award agreement, and the noncompete. The first page of the grant agreement also specifically told employees that acceptance of the award depended on their agreeing to the noncompete. The court found that by checking the box affirming their reading of these documents, employees agreed to the provisions. It rejected as irrelevant the contention that the employee did not recall doing so and was not adequately informed about the consequences of accepting the grants.

This case is a clear warning that you need to read and understand the provisions in your grants agreement and stock plan. Plus, don't assume that the provisions in new grants you receive are identical to the provisions of prior grants. For more on restrictive covenants in stock grants, including this case and others, see the myStockOptions article Watch For Noncompetes And Other Restrictive Covenants In Stock Grant Agreements.

Divorce

Like other assets and forms of compensation, stock comp sometimes gets dragged into divorce property settlements and alimony payments, though the issues can be more complex. In the case Ludwig v. Lamee-Ludwig, the Massachusetts Court of Appeals looked at the question of whether unvested shares are considered assets for the property settlement and/or income for child care/alimony. The court confirmed a lower court's decision that the calculation of an employee spouse's alimony obligation may include income received from unvested employee stock options that were not subject to equitable division as assets, under application of the "time rule" in Baccanti v. Morton (434 Mass. 787, 2001), for dividing unvested grants. This would not constitute "double counting" if the income were included in determining the husband's alimony or child support. At his blog, divorce attorney Jason Owens discusses the importance of this case, which in his view offers "precision" for treating unvested options not divided under the property settlement (Treating Stock Options And RSUs As Assets Vs. Income In A Divorce).

For more details on the treatment of restricted stock and stock options in an divorces, see the articles and FAQs in the Life Events: Divorce sections of myStockOptions.com.

10 Ways Stock Compensation Can Make You Happier

From being solely a subject for philosophers and poets, the pursuit of happiness has become a pragmatic, widely acknowledged arena of interest for companies and their employees. Stock compensation, if fully appreciated and understood, can improve happiness. Excerpted from an article by Bruce Brumberg, the editor-in-chief of myStockOptions.com, the 10 points summarized below show how. You can also read his full article at our website.

1. Wealth creation. When your company's stock price increases—whether you have grants of stock options or restricted stock/RSUs, participate in an ESPP, or own company stock—your wealth increases, perhaps substantially. Remember that what really matters for your financial wellness (and overall happiness) is what you do with that wealth and how you fit it into your funding of personal financial goals.

2. A sense of anticipation. Wealth accumulated from your company's stock plan can bring satisfaction and financial security. Moreover, research has found that anticipating the benefits of these gains can be equally (if not more) enjoyable.

3. A feeling of being special. If you equity awards, you're typically receiving a benefit many employees do not get. Mindfully feeling grateful, appreciative, and enthusiastic about something that's special is another way to further your own happiness.

4. ESPP participation and discount. Most employee stock purchase plans (ESPPs) are a good deal. They offer a discounted purchase price, and some use a lookback to calculate it. Everyone loves a discount; getting one from your company should help to make you happy.

5. Control over when you receive income and pay taxes. You have the opportunity to avoid immediately triggering ordinary income and taxes when you receive a grant of stock options or stock appreciation rights or when you enroll in an ESPP. From our experiences with stock plan participants on myStockOptions.com and the popularity of our Tax Center, it seems that no matter how wealthy people are, they always want to reduce or defer taxes.

6. Donations and gifts of company stock. Studies have shown that charitable people tend to be relatively happy overall. Donations of appreciated company stock you have held long-term can support organizations and causes that you believe in.

7. Being an owner in your company. When you receive a stock grant or acquire company stock, you gain an ownership interest in your company. Ownership often brings more control over your work life and perhaps even some input into your company's decisions, making you happier at what you do for a living.

8. New friends. Bonding with other people is a source of happiness. Stock compensation can be a tie that strengthens your relationships with colleagues: talking with co-workers about ways to handle grants and taxes, or how you'll use gains from equity awards or ESPP participation.

9. Feelings of financial security. Even if your 401(k) plan is well funded and you are expecting meaningful Social Security benefits, you will probably face a gap between the cash these sources can generate and your spending needs and wishes in retirement. Income from stock compensation and company stock holdings can help you plug that gap.

10. Mindfulness and meaningfulness. When your honest, ethical, hard work elevates your company's stock price, equity compensation rewards you. That can heighten your feelings of engagement, optimism, and happiness by providing additional meaningfulness to your job. In doing so, it gives you the right mindset for professional and personal success.

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.

Lawsuits And Court Cases Of Interest That Involve Stock Compensation

Here at myStockOptions.com, we keep an eye on major court cases and rulings that involve stock compensation or stock holdings, as these developments can influence both stock plans and the actions of stock plan participants. A few recent lawsuits and court decisions have drawn our interest.

Class-Action Lawsuit Claims Uber Made Unfair Changes In Stock Grants

Uber is facing a lawsuit related to changes it made in its stock grants, according to the complaint in a class action recently filed against the company. The acquisition centers around the technical ISO rule that only grants with an aggregate value of $100,000 can be exercisable in any one calendar year. Any grants that vest in a year with a value over that automatically become NQSOs, and income, Social Security, and Medicare taxes are withheld at exercise. According to the complaint, Uber recruited software engineers with whom it had employment agreements to grant ISOs with a vesting schedule of 25% after the first 12 months and then monthly vesting thereafter (see Exhibit 1). However, the company changed the provision to allow all of the shares to become exercisable after six months, forcing some ISOs to become NQSOs (see Exhibit 2). This situation raises the issue of whether "exercisable" means "vested" in the related tax-code provision, which was adopted before a distinction between exercisability and vesting existed in certain pre-IPO stock options with early-exercise provisions.

Various news publications picked up on this lawsuit, including TechCrunch and Courthouse News Service. TechCrunch reports a statement issued by Uber, which explains that the company gives employees a "real stake" in its success and that it is "proud to offer equity compensation in service of that goal."

State Supreme Court Confirms Nonresidents Cannot Escape Taxation On Options Earned In The State

You cannot escape state taxation of vested stock options by moving to a state without an income tax. In Allen v. Commissioner of Revenue Services, the Connecticut Supreme Court confirmed that Connecticut can tax income from option exercises by a nonresident if the options were granted as compensation for performing services within the state. Connecticut, like many states, has a provision that authorizes the taxation of income "derived from or connected with sources within this state of each nonresident." The court rejected the plaintiff's creative positions, including the argument that it is "unconstitutional" to impose a tax on income derived from the exercise of nonqualified stock options by someone who at exercise is a nonresident. For more about this case, see an article about it at the website of Forbes. The taxation of mobile employees in the US and in other countries shows the eagerness of governments to find tax revenue in stock compensation.

Supreme Court Issues A Major Decision On Insider Trading

Everyone working for or advising a public company needs to know the insider-trading rules. Even if you unintentionally violate the laws of insider trading, you can face a serious punishment. (For details, see the FAQs on insider trading at myStockOptions.com and the Think Twice video series for insider-trading prevention.) It is not hard to imagine a situation in which you casually tell a relative or a friend about upcoming important company news, and that this person then uses that information to make a stock-trading profit. Although the tipoff would probably be a violation of your company's confidentially rules, you might not have miscreant intentions or expect anything in return from the tipped-off person, and therefore might (wrongly) not view this act as insider trading.

The US Supreme Court has issued a major decision on insider trading that involves just that type of situation. In its ruling on Salman v. United States, the Supreme Court makes it very clear that whenever a friend or relative is tipped, insider trading has occurred, regardless of whether the tipster receives a benefit. Prosecutors do not need to show something of value was received for providing the valuable information. In the court's view, "the tipper personally benefits because giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds." The tipper does not need to receive something of a "pecuniary or similarly valuable nature" in exchange for this gift to a trading relative.

The ruling is seen as a victory for the US government, as it strengthens the position of federal prosecutors and their will to bring insider-trading cases. The case prompted several commentaries, including articles from the law firms Morgan Lewis & Bockius and Goodwin Procter and an analysis in the blog of the Supreme Court itself.

What A Trump Presidency And Tax Changes Could Mean For Stock Compensation

Objectively, we know that stock compensation is not one of the biggest issues on people's minds as the United States slithers toward the unexpected reality of a Trump presidency. Naturally, however, it is our role to consider how stock compensation and employee ownership will be affected.

How Do Trump And His Supporters View Stock Compensation?

To get a sense of Donald Trump's views on stock comp, the myStockOptions staff did some in-depth research into SEC filings made by him and his companies. In 1995, the board of Trump Hotels & Casino Resorts adopted what it called its 1995 Stock Incentive Plan, which it amended in 1996 to increase the number of authorized shares it could issue (see pages 20–22 of the company's 1996 proxy statement). Trump himself received 500,000 stock options per year between 2000 and 2002 (see the tables, text, and footnotes on pages 16–18 of the company's 2003 proxy statement). Later, when Trump was chairman of the board at Trump Entertainment Resorts, the company adopted a stock plan at its 2005 annual meeting as part of its reorganization, and it canceled its prior plan and all of the grants made under it (see Proposal 3 on page 35–41 and Annex A of the company's 2005 proxy statement). Like other senior executives, Trump had to file Form 4 with the SEC to report his grants under the rules of Section 16 (see, for example, the reporting of his 2002 grant). Therefore, we can assume that Trump is familiar with stock options and restricted stock, though his company's subsequent bankruptcy eliminated the value of its grants.

It doesn't take a degree from Trump University to know that equity awards made broadly to a company's employees, along with employee stock purchase plans and other forms of employee ownership (e.g. ESOPs), are forms of egalitarian capitalism that can spread a company's wealth and reduce income inequality (see our recent blog commentary on this topic). Trump's supporters seem likely to approve of such a populist approach to employee compensation. However, the recent narrowing of stock grant eligibility and the huge equity comp gains made by senior executives have perhaps given stock compensation an elitist image that Trump's blue-collar supporters can be expected to find deplorable.

Republican Tax Reform May Increase The Value Of Stock Compensation

Tax changes are widely expected under Trump's presidency and the incoming Republican-dominated Congress (see a commentary from CCH). The House GOP Tax Reform Blueprint calls for the simplification of individual income tax rates to 12%, 25%, and 33%. 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.

Trump's tax plan does not propose to change the capital gains rates (15% and 20%). However, 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.

Changes may also include the elimination of the alternative minimum tax (AMT). That would be welcome news for anyone receiving grants of incentive stock options (ISOs), as currently the income spread at ISO exercise can trigger the AMT and complicate tax planning.

In addition, Trump vehemently asserted throughout his campaign that he wants to "repeal and replace" Obamacare. Presumably, that would eliminate the additional Medicare taxes used to fund Obamacare under the Affordable Care Act. Those additional taxes are:

• The 3.8% surtax on net investment income, such as capital gains and dividends, for single filers with yearly modified adjusted gross income of over $200,000 ($250,000 for married couples filing jointly). The removal of the surtax would increase the appeal of holding shares.
• The extra 0.9% Medicare tax owed by the same taxpayers through the withholding on compensation income, such as income from the exercise of nonqualified stock options or the vesting of RSUs.

Given the enormous federal budget deficit, the likely need for 60 votes in the Senate to defeat a filibuster and pass a major tax overhaul, and Trump's inexperience in the art of political compromise, there are no guarantees that these proposals will become law. One possible way to fund them to reduce the impact on the national debt would be to eliminate provisions that are favorable to stock compensation, such as the performance-based exception for limiting the corporate tax deduction under IRC Section 162(m).

Outlook For The Future

In the short term, with little risk of tax increases in 2017, there is no pressing tax-law reason to accelerate income into 2016. Even if you do predict that your tax rates are likely to drop or rise in the future, taxes should never be the only planning consideration for stock options and company stock at year-end. Instead, you may want to let investment objectives and personal financial needs, not tax considerations, drive your year-end planning.

In the long term, your company's stock price, not tax legislation, is likely to be the most crucial factor for your equity compensation. When a stock price falls after grant or becomes excessively volatile, equity grants tend to lose their perceived value (even if stock options do not actually go underwater). Therefore, if stock prices continue to perform well and we avoid the falling prices of a bear market, we can perhaps reasonably expect that stock compensation, ESPPs, and employee ownership will continue to thrive, especially when these opportunities are granted broadly to most or all employees in an egalitarian way. Additionally, the success of stock compensation depends not only on a company's share price but also on the efficacy with which it both communicates its stock plan to employees and provides them with educational resources on their grants. 

Legislative Update: Senate Considering Tax Change For Options And RSUs In Pre-IPO Companies

Alert: A version of this bill was enacted as part of the Tax Cuts & Job Act, though with a five-year deferral period. See our blog commentary on the adopted legislation.

We wrote a blog commentary in July about the Empowering Employees Through Stock Ownership Act (HR 5719), which was subsequently approved by the House of Representatives, through a vote of 287 to 124. The bill is now in the Senate for consideration. In short, HR 5719 seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at option exercise or RSU vesting. Instead of paying taxes at the exercise of nonqualified options or at the vesting of stock-settled RSUs, employees would be allowed to elect to defer the resulting income, and thus the taxes on that income, for up to seven years.

A staff member for Congressman Erik Paulsen (R–MN), the bill's leading sponsor in the House, told myStockOptions that "Rep. Paulsen is hopeful that the Senate will pass the legislation soon and that it will make its way to the President's desk sometime in the lame-duck session, either as a standalone bill or as part of a larger package." He added that Rep. Paulsen is not aware of any timetable for Senate consideration. When we checked with the office of Senator Mark Warner (D–VA), a leading sponsor of the bill in the Senate, his staff confirmed that the legislation had just been introduced. With Congress now in recess ahead of the general election on Nov. 8, it is very unlikely that anything will happen with the legislation until after the election. There is a chance that the bill will be adopted during the lame-duck session, a busy time when many laws with populist intentions tend to be hastily enacted while the outgoing president is still in office. At Congress.gov, you can follow the progress of the legislation in the House and the Senate.

Details Of The Proposed Law Could Unintentionally Discourage Its Effectiveness

In general, we support a beneficial tax-law change for equity awards at pre-IPO companies and favor broad-based stock plans. However, in the report on the bill from the House Ways & Means Committee (see pages 10–14, "Explanation of Provision"), we do see some aspects of the legislation that might somewhat dampen enthusiasm for the proposed tax-qualified grants. The tax deferral would not apply to Medicare, Social Security, or state taxes. It would not apply to early-exercise options. As we interpret it, the deferral election apparently would turn ISOs into NQSOs. Furthermore, clarifications are needed on various aspects of the proposed law. For example, the House report states that an "inclusion deferral election" would be required within 30 days of vesting but does not mention that for options the election would need to be 30 days from exercise (not vesting). Also, the numerous rules that companies would have to follow to grant what the bill calls "qualified stock" might make these awards appealing only to large pre-IPO companies and not to true early-stage startups.

Moreover, companies currently already have a way to structure pre-IPO RSU grants so they do not trigger taxes until there is a liquidity event. Without liquidity and the ability to trade their stock, employees who exercise options in pre-IPO companies face the risk of tying up their money in stock that could be worthless. The proposed tax-deferral feature includes a seven-year period before taxes are owed, but for some employees this may not be long enough to encourage them to exercise options and create the widespread employee ownership that the bill wants to promote.

For additional analysis on the bill and the issues it raises, see a commentary from the consulting firm Compensia and an article by columnist Kathleen Pender in the San Francisco Chronicle.

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.

Stock Options In Startup Companies Could Become More Popular Than Ever Under Proposed Tax Change

Alert: A version of this bill was enacted as part of the Tax Cuts & Job Act, though with a five-year deferral period. See our blog commentary on the adopted legislation.

Stock options continue to be very popular at startups and other pre-IPO companies, where they are often broadly granted to most or all employees. While these options can have wealth-creating potential, one big challenge is lack of liquidity: employees cannot sell the stock at exercise to pay the exercise price and any taxes owed. As the IRS confirmed in regulations issued during 2014, the tax measurement date (at exercise for options and at vesting for restricted stock) is not delayed by any lack of liquidity or securities law restrictions on resales of stock.

The fact that the tax treatment for stock grants at pre-IPO and large publicly traded companies is identical seems oddly unfair when you consider the vastly differing liquidity situations of private and public companies. Seeking to address this imbalance, recently proposed bipartisan legislation could provide a new optional tax treatment (pun intended) and make stock options more appealing than ever at startups and other pre-IPO companies. Introduced in the House of Representatives and the Senate on July 12, as explained by an article at The Hill, the Empowering Employees Through Stock Ownership Act seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at exercise. The proposed extra time is considerable. Instead of paying taxes at exercise with nonqualified options (or at RSU vesting when settled in stock), this legislation would allow tax deferral for up to seven years.

Senators Mark Warner (D–VA) and Dean Heller (R–NV), members of the Senate Finance Committee, sponsored the bill in the Senate, while Representative Erik Paulsen (R–MN) is the sponsor in the House. In the press release supporting the bill, Sen. Warner states that "extending employee stock programs to a broader universe of workers will strengthen business growth and create new economic opportunities, especially for rank-and-file workers." For his part, Sen. Heller asserts that "it's important to give employees the flexibility to pay their taxes on stock options."

Company And Employee Requirements

To make the new deferral election available (under Section 83 of the Internal Revenue Code), a company would have to issue what the bill calls "Qualified Equity Grants." These grants would need to be made to at least 80% of the company's employees annually. The company would have to provide information or a warning about the tax impact, especially if the share price should decline, and it would be required to report future tax liability on each employee's Form W-2. Qualified grants would be unavailable to major owners, corporate officers, and the highest-paid executives.

Sounding in some ways similar to the procedure for the Section 83(b) election, the deferral election for qualified equity grants would need to be made by employees within 30 days of either when the shares became transferable or when they were no longer subject to a substantial risk of forfeiture, whichever occurred earlier. If the company were to go public or the employee were to sell the shares for cash during the seven-year period, taxes would have to be paid at the time of the liquidity event. The deferral election could also be revoked by the employee at any time, triggering taxes at that point.

Details Still Need To Be Worked Out

Open issues remain. A few questions that occurred to us:

• How, exactly, would these grants be structured?
• Why is the deferral for seven years?
• What information would be required in the election, and how would it be filed?
• How would this deferral election apply to early-exercise stock options that result in restricted stock which must then vest?
• Would Social Security and Medicare taxes be deferrable as well as income tax?

Nevertheless, this bill is a good way to start a discussion about changing the tax treatment of stock options and restricted stock units in startups and other pre-IPO companies. The approach of this legislation is more understandable than that of the Expanding Employee Ownership Act of 2016, which recently proposed another new type of stock option (covered at the end of a recent commentary elsewhere on this blog).

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.

Broad-Based Stock Grants And Employee Ownership Are Expanding

We like it when companies make broad-based grants of equity awards to all of their employees. These moves show that stock compensation and share ownership are not just for executives and directors but are also practical, commonsense ways in which companies can reward rank-and-file employees above and beyond salary and encourage a commitment to workplace excellence through a culture of employee ownership. From an economic perspective, the wealth that middle-class employees can create through grants of stock options and restricted stock/RSUs has the potential to reduce income inequality.

Unfortunately, many employees and managers saw a significant reduction in their equity compensation after stock option expensing became mandatory during the last decade. This is why we are especially pleased by the new generation of broad-based grants that we have observed. In perhaps the most famous example, last year Apple declared its intention to issue RSUs to all of its employees, as reported by an article at the tech-news website 9to5.

Now Chobani, a popular yogurt-maker, has announced that all 2,000 of its employees will receive shares worth 10% of the company when Chobani eventually goes public or is sold. This move was both reported and praised by several high-profile media outlets, including The New York Times and NPR. The Times estimates that if Chobani were to be valued at $3 billion in an IPO or acquisition, the average employee stake in the company could be worth $150,000—and some long-tenured employees could have stock worth more than $1 million.

Chobani's gesture is very good news to Professor Joseph Blasi of Rutgers University. A long-time advocate of employee ownership, he has extensively researched this topic and recently co-authored a book called The Citizen's Share: Reducing Inequality in the 21st Century. In an article for The Huffington Post, he states that Chobani's push to award equity for all workers may be part of a new trend in employee ownership. "When you taste that next teaspoon of Chobani," he writes, "you may be tasting a new corporate ideology of shared capitalism, inclusive prosperity, and profit sharing." As he puts it, this broad-based grant is "a promise that any future Chobani shareholders will not simply be those who play the stock exchanges but will also include those workers who help create the broad wealth that stock markets are supposed to be all about." He then asks whether "middle class capital shares" of this type are a possible alternative to tax redistribution that could help to counteract the recent stagnation of wages among the middle class in the United States.

Another private company encouraging broad-based employee stock ownership is Zingerman's, a mail-order purveyor of gourmet food that has grown out of a popular deli and restaurant in Ann Arbor, Michigan. Valued at $60 million, Zingerman's has given employees the opportunity to buy stock at $1,000 per share and is offering to help them finance purchases, according to an article at Forbes.com. More than 200 employees have elected to buy stock. Ari Weinzweig, a co-founder of the company, observes that this initiative is "allowing people who don't have the cash, but who have the emotional and intellectual interest and engagement and want to commit to it, to do it." (For more about this program and other topics, listen to an interview with Mr. Weinzweig at the website of WBUR, a radio station in Boston.)

This trend toward broad-based grants reminds us a little of the optimistic, positivity-charged culture of employee ownership in which stock options first thrived during the 1990s. In fact, we started myStockOptions with the primary goal of providing stock plan education for these employees. As we recently wrote in a retrospective piece, the 1990s "democratized stock options, bringing them down from the lofty heights of Mt. Executive into the workaday foothills of middle-class people who in an earlier era might never have heard of them." As the examples above show, stock compensation continues to have the potential to improve the financial wellbeing of anyone, not just those at the top. All you need are the right equity incentives and some honest, hard work.

Millennials And Stock Compensation: How To Tailor Stock Plan Education For The Instagram Generation

"We play dumb, but we know exactly what we're doing." —Taylor Swift (b. 1989), "New Romantics"

Millennials, people born between the early 1980s and the late 1990s, now form the largest generation in the United States. According to a commentary from the Pew Research Center, which theorizes that the oldest Millennial was born in 1981 and the youngest in 1997, Millennials "have surpassed Baby Boomers as the nation's largest living generation." Citing estimates of population from the US Census Bureau, the Pew Research Center states that there are now more than 75 million Millennials in the US—with the addition of Millennial-aged immigrants, that number is projected to reach about 81 million in 2036. Other sources claim the number of Millennials in the US has already swelled beyond 80 million.

Some experts estimate that the workforce in the US is already about 50% Millennial. You, the reader of this blog, are probably a Millennial. For several years, countless talking points have discussed how workplace culture has had to adapt to the vast influx of multi-tasking, online-chattering, shrewdly ambitious Millennials—often said to have famously short attention spans, but equally often praised for rejuvenating companies with smart new ideas and insights about creating excellence in the digital age.

Here at myStockOptions.com, the talking point that most concerns us is, naturally, the issue of stock compensation for Millennials and the related stock plan education and communications. As we all know, stock plans work well to attract and retain talent only if participants understand their grants, making education and communications essential. Given the differences between the Millennial mindset and that of the Baby Boomers and Generation Xers who entered the workforce before them, how should stock plan education adjust to ensure that Millennials are getting its messages?

We have a few answers. A few weeks ago, at the annual conference of the Global Equity Organization (GEO) in Boston (our hometown), myStockOptions editor-in-chief Bruce Brumberg took part in a panel session entitled Millennials: Investment Attitudes, Behavior, and Education Strategies for Equity. His four fellow panelists were Nooper Iyur, the senior manager of global equity admin and payroll at Akamai Technologies; Jean-Michel Robiou, a stock comp analyst at Google; Renee Trotta, a senior manager at Charles Schwab; and a director of shareholder services at a privately held company who did not want to be named.

The session featured case studies from Akamai, Google, and the (unnamed) private company of the fourth panelist.

Akamai reports that 54% of its employees are of the Millennial generation. Amongs its various equity plans, the company boasts and enviable 90% ESPP participation rate among its US workforce. What guidance does Akamai have for communicating stock plans to time-strapped Millennials?

• Avoid information overload. Akamai favors brief, concise, timely emails with "Action required" or "Informational purposes only" in the subject line.
• Develop relevant content that engages your employees. For Akamai, this means conducting equity surveys, creating newsletters, asking a question in each educational session or webcast, and even prize raffles.
• Make your documents an easy, quick read.

The workforce at Google is also 54% Millennial. The company's equity awards consist solely of RSUs. Here are some of the tips Google has for tailoring stock plan education and communications to Millennial employees:

• Understand their priorities.
• Focus on the basics. Consider that employees value what they understand. "Participants won't be motivated by complexity," noted Google's representative on the panel.
• Use email to communicate, not traditional media. ("Embrace the magic of Harry Potter and drive engagement.")
• In a vast company, win trust by being the familiar "voice and face of your education initiatives" in the various corporate villages where employees spend most of their working lives.

The private company that presented in the session offers equity plans that include grants of restricted stock units and performance share units. Its techniques for engaging employees include the following:

• One-day, all-day educational sessions for employees a month after they start. These have been popular: the company says each live session has had "standing room only."
• The use of live, internet-based, and intranet-based sessions has helped employees take part amid their busy workloads.
• Flexibility about educational tactics. The company reports that some employees want "hand-holding" with information about their equity awards, and it is willing to do that.
• Brevity wins engagement. The company keeps its stock plan communications short—indeed, the company says that for its Millennial employees, "communications need to be short so they read them."

In his portion of the session, our editor-in-chief Bruce Brumberg colorfully provided a review of fundamentals for stock plan education, whether for Millennials or others. In his view, topics companies should examine include:

• mechanics, including account setup
• core broker and IRS forms
• exercise methods
• tax-withholding elections
• enrollment procedures
• goals for the plan, and why it is a special benefit
• core tax rules and reporting forms

For a young employee population that is continually busy and multi-tasking, Bruce emphasized the need for timing education to occur during "teachable moments." These moments may include hire, tax season, the year-end period (especially if your company’s stock price has increased), vesting, and ESPP enrollment.

Interactive content is key, Bruce observed, and it is important to have graphics, not just text. Engaging content may include quizzes and videos—and, of course, everything needs to be accessible by mobile phones. However, at the same time, Bruce sought to debunk the common assumption that Millennials are unwilling to read. As he explained, "myStockOptions has found that when a topic really interests them, Millennials can be hungry for knowledge and in-depth information." While messages for Millennials must be tailored to accommodate their busy, frequently online lives, these communications should not be so short that valuable details are lost.

That is a theme we adhere to in our own content at myStockOptions.com. While we have branched out into videos, podcasts, quizzes, and even a glossary app for mobile devices, we maintain a clear, engaging, detailed array of articles and FAQs that deliver information about stock compensation for anyone who wants to dig deeper (and, as Bruce said, we find that many people do). Companies that license our content can choose any or all of these approaches to stock plan education and communications.

In The News: Stock Compensation In The Media Spotlight At Prominent Companies

In the novel Scoop (1938), a satire about journalism by British writer Evelyn Waugh, a character declares: "News is what a chap who doesn't care much about anything wants to read." Respectfully, we disagree. Here at myStockOptions.com, we both care about equity compensation and take a keen interest whenever news about stock comp flashes across our radar screens. In this week's blog commentary, we summarize some recent appearances of stock compensation in the mainstream news media, including stories about equity awards to high-profile figures at prominent companies.

Twitter

After a fall in its stock price, Twitter is increasing its grants of restricted stock units (RSUs) in an effort to retain valuable employees. An article about this development in The Wall Street Journal explains that Twitter has been making additional grants to employees throughout the company at all levels. The grant sizes depend on when the employee started working at the company—an approach described as "shocking and highly effective" by a compensation expert quoted in the article. Employees who have experienced bigger losses from the stock drop since they joined the company get bigger grants. In an example presented by the WSJ, an employee who joined Twitter when the company's stock reached its all-time high of $73.31 on 26 Dec. 2013, a month after the company's IPO, will receive more stock than an employee who started at the company during its pre-IPO days, when the price was much lower. (For an insightful perspective on stock-price volatility for employees with equity comp, see the article on this topic at myStockOptions.com.)

LinkedIn

Meanwhile, at LinkedIn, CEO Jeff Weiner decided to forgo his stock grant and make the shares available for broad use among employees at his company. In its article about this story, the website Re/code says it was informed by a company spokesperson that Mr. Weiner "asked the Compensation Committee to take the stock package he would have received and put it back in the pool for employees." The filings of SEC Form 4 by executives on the day this news came out were all for RSUs, so we can reasonably assume that this was the type of grant which he would have received. Numerous other news outlets picked up this story, including Reuters.

Tesla Motors

An exercise of nonqualified stock options by Elon Musk, the CEO of Tesla Motors (see the related Form 4 filing), attracted substantial attention. See, for example, articles in MarketWatch and USA Today. Mr. Musk exercised 532,000 stock options at a pre-IPO grant price and held all the shares. He did not sell any shares to pay the exercise price for the options or to pay the taxes. Instead he used his own cash, which is unusual. A Tesla spokesperson explained in an email to MarketWatch that Mr. Musk paid taxes of more than $50 million in connection with the exercise.

IBM

An interesting play with premium-priced stock options has occurred at IBM. Unusually, this type of option has an exercise price that is higher than the stock price on the date of grant, meaning that the company's stock price must increase by a specified amount before the option is in the money. As explained in an article by Bloomberg, IBM awarded nonqualified stock options to CEO Ginni Rometty in which the exercise price is 5%–25% above the market price on the grant date (with a three-year vesting period). She was given a total of 1.5 million of these premium-priced options, divided equally into four tranches. According to IBM's proxy statement (see page 26), the respective exercise prices of each tranche are 105%, 110%, 115%, and 125% of the average of the high and low prices of IBM common stock on the date of grant. In other words, the grant imposes a strong incentive to raise IBM's stock price above those levels within the next three years. For more about premium-priced options, along with other company examples, see the related FAQ at myStockOptions.com.

The Pre-IPO Beat: Good Technology And Jet.com

An article in Fortune explains that while private investors and venture capital funds have "pumped up" the paper value of unicorns (pre-IPO companies valued at $1 billion or more), the tech IPO market has changed their prospects. For employees with stock options and company stock holdings, this has resulted either in underwater stock options or in proceeds from the sale of their companies that greatly lag behind what they had expected.

How this has played out for employees at the company Good Technology is covered by articles in The New York Times and Business Insider. Employees of Good Technology received a lot less from the company's sale than they had expected—the disappointment was especially acute for those who had exercised options early and paid taxes on them at a higher value. This story serves as a reminder that stock options in startups are, in the dramatic words of Business Insider, "an incredibly risky asset." (To help spare employees some of these shocks, the website Tech.co presents key points they should understand before taking an option grant at a pre-IPO company.)

Despite such tales of option woes, stock options still have the potential to make employees feel valued, as shown by an article about Jet.com in The New York Times. This privately held company, which competes with Amazon, has started taking a "happiness pulse" of its employees, who rate the company very highly as a place to work. This evaluation of contentment covers not only executives and higher-level employees but also warehouse packers and customer-service staffers, some of whom receive stock options. One warehouse employee expressed his job satisfaction thus: "I can finally wake up and not say in my head 'Ughhh, another work day.'"

We feel exactly the same way. As we go pleasantly about our own work day, we continue to keep our eyes and ears open for insightful and/or fun news about stock compensation. Keep reading our blog for more trenchant commentaries and updates.

In The News: RSUs And Stock Options At Major Companies

At myStockOptions.com, we see and hear a lot of media coverage and commentaries involving equity compensation. Indeed, part of our daily routine here is staying plugged into news and trends in stock compensation that may affect our content. In this blog piece, we present some of the interesting stories and snippets that have come our way over the past few months.

Apple

In the shareholder-dominated world of publicly traded companies, "pay for performance" continues to be the rallying cry for equity compensation. Apple Insider details a recent payout of shares to Apple's CEO, Tim Cook, after the company met the performance goals attached to his restricted stock units (RSUs). For this slice of Mr. Cook's RSU grant to fully vest, Apple's total shareholder return (TSR) had to rank in the top third of the S&P 500 between 25 Aug. 2013 and 24 Aug. 2015. Apple's TSR performance of 76.76% during that period placed 46th out of 458 companies, putting it in the 90th percentile. If Apple's TSR had been in the middle third, the award would have been reduced to 50%, and the award would have been zero if TSR had ended up in the bottom third. Details of the grant terms occur in Mr. Cook's Form 4 filing.

General Motors

As reported by The Detroit News, General Motors has made its first option grants since the company emerged from bankruptcy in 2009. At least for senior executives, the GM grants have some interesting performance-based quirks not often found in option grants (see the related 8-K filing and grant agreement form). Time-based vesting applies to 40% of each grant, with a vesting date of February 15, 2017. The remaining 60% of each grant vests over the following three years in 20% annual installments, provided the company's TSR meets or exceeds the median of a peer group of automotive companies during the period from the grant date through December 31 of the year preceding each vesting date. The awards also include explicit noncompete and nonsolicitation restrictions: for one year after they leave the company, the executives are not allowed to join a competitor or recruit employees away from GM.

Why are performance-based stock options somewhat rare? Our FAQ on them explains.

Google

Google's move to split into an array of businesses (e.g. Nest, Calico, Google X) under a parent company called Alphabet has spawned much media attention. The coverage includes a commentary in Wired that ponders the shift's impact on Google's stock compensation. Although these companies currently trade under the Google stock symbol, the Wired writer believes that each will eventually be able to grant its own subsidiary-specific stock options. The writer predicts that these separate businesses will be spun off into their own publicly traded companies, potentially boosting the upside of the grants.

Whole Foods

In a feature on John Mackey, the CEO of Whole Foods, Fortune has drawn attention to an unusual practice involving stock options at the company. Famously, Mr. Mackey leads the company on a salary of just $1 per year, and he forgoes stock options. Whole Foods donates to one of its foundations the options that it otherwise would have granted to him. (myStockOptions.com has in-depth content on donating stock options and company stock to charitable foundations.) 

Pre-IPO Companies: Uber, Airbnb, And Twitter

An article in The New York Times notes that the so-called unicorns of the pre-IPO world, i.e. fast-growing startups with valuations of at least $1 billion (such as Uber and Airbnb), are using RSUs to recruit talent from established public companies such as Google. The NYT writer explains the approach:

"To snag employees from large rivals, unicorns have a simple recruiting pitch: They are on a path to success, as illustrated by their rising valuations. Many offer generous equity packages of restricted stock units that can later translate to big paydays for employees if the unicorn goes public or is sold—a lure that neither Google nor any other public tech company can dangle."

Journalists continue to watch the transition from options to RSUs at young technology companies. In a blog commentary, The Wall Street Journal observes that while Twitter employees have felt the decline of the company's stock price, having RSUs instead of options has spared them from worse agony.

Our section Pre-IPO has articles and FAQs on equity compensation at privately held companies.

Keep Up With Equity Comp News

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Stock Plan Impacts Of The Supreme Court's Rulings On Marriage Equality

As regular readers know, we at myStockOptions.com promptly keep our content current for significant developments, whether involving tax laws, securities laws, or (most recently) Supreme Court decisions. We have now updated our FAQ on marriage equality for same-sex couples and its impact on stock plans. Both participants and professionals (along with the rest of humanity) are interested and intrigued by this topic.

While the Obergefell decision was a more significant societal landmark, the Windsor decision had a bigger impact on stock plans. It led companies to look through benefit plans and policies, as well administrative procedures, for situations where marital status matters. As a result, many companies had already made changes even before the Obergefell ruling in June 2015. Among more than 1,000 federal laws and regulations touched by the rulings are those which affect the design and administration of employee benefit plans. In short, spousal provisions in employee benefit plans should treat same-sex spouses and opposite-sex spouses in the same way. While stock plans are not affected by federal laws in the same way as qualified retirement plans (e.g. a 401(k) plan) or health and welfare plans, the changes that will be required in these other benefit plans will probably lead to similar modifications in stock plan documents.

In general, companies will want the definitions of spouse and married to be consistent across benefit and compensation plans, and will extend to same-sex spouses the identical rights that they extend to opposite-sex spouses. In any place where your stock plan documents, forms, and procedures refer to a spouse, this reference can now be defined to include same-sex spouses. This type of wording may appear in spousal consents, beneficiary designations (and default beneficiary rules), limits on transferable options, surviving-spouse rights to stock grants upon death, procedures to be followed for dividing grants in divorce, and insider-trading policies.

For more on this topic, including IRS and DOL guidance, see the FAQ about it at myStockOptions.com. If you are involved with nonqualified deferred compensation at your company, you will want to read the corresponding FAQ on the topic of marriage equality at our sibling website myNQDC.com.

Major Trends In Equity Compensation During The 21st Century: A Celebration Of Our 15th Anniversary

Happy birthday to us! In June 2015, we at myStockOptions.com celebrated the 15th anniversary of the website's launch. We have seen a lot of changes in equity compensation since myStockOptions.com went live in June 2000. As part of our 15th-anniversary celebrations, our editor and content-manager Matt Simon has written an article that reviews, in rough chronological order, some of the major issues and developments in equity compensation that we have witnessed and covered since the end of the 20th century, including:

• the stock option boom of the late 1990s
• option expensing
• the rise of restricted stock and RSUs
• the backdating scandals
• pay for performance
• the surprising resilience of ESPPs in the age of expensing
• AMT politics in Congress
• Dodd-Frank rules for executive equity comp
• key IRS changes in tax-return reporting

Below is an excerpt of the article, which you can read in full at myStockOptions.com (no sign-in is required).

From The 1990s Through 2000: The Democratization Of Stock Options In The Dotcom Boom

For most of their quiet history, stock options were an elite form of equity compensation, largely for senior executives and directors. As everybody knows, this changed during the 1990s. Technology startups and other fast-growing companies found that stock options perfectly suited their need to attract and retain bright talent on a low cash flow. The popularity of options brought them prominently into the public eye. (In 1997, stock options were even featured in an episode of the TV sitcom Seinfeld.) The lure of stock option wealth after a successful IPO helped many of today's top technology companies expand and flourish into the giants they are today.

By 1999–2000, when myStockOptions.com was developed and launched, there was a frenzy over stock options in the tech industry. Our files of news articles from that time reveal vibrant references to ambitious employees who "crave" or "lust for" stock options. The wealth-building leverage of options was expressed as "the stock option dream." In Silicon Valley, the biggest market for tech options, newspapers such as the San Francisco Chronicle and the San Jose Mercury News assigned reporters expressly to cover the stock option beat. In their pages, articles on option financial planning became as normal as tips on home-buying or personal banking.

This business trend democratized stock options, bringing them down from the lofty heights of Mt. Executive into the workaday foothills of middle-class people who in an earlier era might never have heard of them. And it wasn't just the technorati who derived the benefits. Many "stock option millionaires" included people not on the front lines of technological innovation. For example, one of Google's in-house masseuses became a millionaire from stock options granted to her in 1999.

myStockOptions.com was born into a world where options, and other forms of stock compensation, had the potential to change anybody's life. You no longer needed elite family or business connections: just the right equity incentives and a lot of honest, hard work. Equity comp had become a wealth-builder for the masses, both in the United States and elsewhere in the world.

2001–2006: Underwater Options, Mandatory Option Expensing, And The Rise Of Restricted Stock And RSUs

Long before the financial crisis and recession of 2008–2009, the phrase underwater stock options had become painfully known to many people and their companies. The stock-market downturn of 2000–2002 revealed one of the weak points of options: they were, at least temporarily, worthless if the company's stock price fell below the exercise price of the options. However, after the options-fueled growth of the 1990s, much of corporate America had come to depend on robust equity incentives to draw and keep the brainpower they needed.

As a result, talk turned to alternatives for stock options. The expected change in accounting rules that finally came with FAS 123(R) (now called ASC Topic 718) also encouraged this discussion, as soon all grants would need to be expensed on the company's income statement instead of merely appearing a footnote. Now that stock options were losing their favored accounting treatment, companies had an additional financial incentive to consider other types of grant that could fit their approach to compensation.

Many types of equity award were bruited about, but one in particular was taken up widely. From the ashes of the downturn, restricted stock and restricted stock units rose up and started to gain widespread favor. Like stock options, restricted stock had previously been an obscure form of senior executive compensation—not a pay practice for lower-level executives or regular employees. However, it emerged into the corporate limelight in 2002 as the best broad-based alternative to stock options because, as a "full value" award, it was downturn-proof: a grant of restricted stock is always worth something (unless the stock price falls to zero). In fact, many observers foretold that restricted stock would become the new stock options.

They were half right. As events have unfolded, it is the unidentical twin of restricted stock—restricted stock units, or RSUs—that has become the most popular alternative to stock options at many companies. You are now more likely to receive RSUs than restricted stock. The use of restricted stock and RSUs at companies has continued to grow. While not granted as broadly to employees as stock options were during their heyday, they have joined stock options among the top forms of equity compensation. Many executives now have portfolios of various types of equity awards, including stock options and restricted stock/RSUs.

We at myStockOptions.com spotted this trend as it became evident during the downturn of 2000–2002. Our coverage of restricted stock and RSUs may, in fact, now rival or even exceed our coverage of stock options. While myStockOptions.com has become our trusted brand name, we could just as well be called myRestrictedStock.com (in fact, we own the URL!). This is no exaggeration: our varied content on restricted stock/RSUs includes articles, FAQs, podcasts, calculators, quizzes, and even self-study courses for continuing education credits. myStockOptions.com also has special tools dedicated to financial planning with restricted stock and RSUs.

Continue Reading...

To continue reading this historical review, which covers developments right up to the present day, see the full article at myStockOptions.com (no sign-in is required).