extreme makeover: espp edition - stock & option solutions · 2016-08-10 · extreme makeover:...
TRANSCRIPT
Stock & Option Solutions, Inc. October 13, 2015
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Extreme Makeover:
ESPP Edition
Elizabeth Dodge, CEP, Stock & Option Solutions, Inc.
Emily Cervino, CEP, Fidelity Stock Plan Services
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Important Information
• The following discussion and examples do not necessarily
represent the official views of Stock & Option Solutions, Inc., or
Fidelity Stock Plan Services, with respect to any of the issues
addressed. Moreover, this presentation and the views
expressed by the individual presenters should not be relied on
as legal, accounting, auditing, or tax advice. The outcome of any
individual situation depends on the specific facts and
circumstances in which the issue arises and on the
interpretation of the relevant literature in effect at the time.
• Anyone viewing this presentation should not act upon this
information without seeking professional counsel and/or input
from their advisors.
Stock & Option Solutions, Inc. October 13, 2015
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Materials Slides
http://www.sos-team.com/pdfs/espp_makeover.pdf
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Agenda
• ESPP Foundations
• Currently trending
• ESPP Look Book
• Make over stories
• Finding your fit
• Just a touchup? Or a whole new look?
• Does this look fit your budget?
Stock & Option Solutions, Inc. October 13, 2015
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Foundations
• Prior to FAS 123R (ASC 718), ESPPs were common
programs, and, where offered, nearly always provide 15%
discount AND look back, with no compensation expense.
• The compensation cost resulting from FAS 123R (ASC 718),
along with overall concern about dilution and stock
programs, caused some companies to discontinue the
plans, or convert to “safe harbor” plans (5% discount, no
look back).
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Foundations
• Despite FAS 123R (ASC 718), ESPPs are still an important
component of many equity compensation plans.
• ESPPs can help promote an ownership mentality across a
broad base of employees at a relatively low cost.
• Plan design, particularly those related to discount rates
and look-back periods, often have a big impact on
participation rates.
Stock & Option Solutions, Inc. October 13, 2015
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FoundationsResearch indicates that stock plans increase employee loyalty
Strongly Agree Somewhat Agree Neutral Somewhat Disagree Strongly Disagree
31%
10%
10%
29%
21%
Source: Fidelity Stock Plan Services Participant Survey, January 2012
More loyal as a result of
stock plan grants• 52% of all respondents state
that stock plans increase
loyalty to their employer
• Stronger loyalty impact for
respondents with options /
restricted stock awards
• Loyalty impact increases with
compensation
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FoundationsResearch also indicates that stock plans increase employee motivation
Strongly Agree Somewhat Agree Neutral Somewhat Disagree Strongly Disagree
29%
9%
11%
31%
20%
Source: Fidelity Stock Plan Services Participant Survey, January 2012
Work harder knowing my
stock plan will reward me• 49% of all respondents state
that they work harder
knowing that they are linked
to company performance
• Stronger motivation impact
for respondents with options
/ restricted stock awards, but
not as strong as loyalty
• Motivation impact increases
with compensation
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Currently Trending
• Compared to RS and SOP, ESPP is more
likely to be considered a benefit rather
than compensation
• The most common reason for
implementing an ESPP is to remain
competitive in hiring practices
– 29% - To remain competitive in hiring
and attracting new employees
– 21% - To retain more highly valued
employees and reduce attrition
– 20% - To supplement employee
compensation
ESPP
Em
plo
ye
es
Pla
n A
dm
inis
tra
tors
Separately
on its own
15%
Part of
Benefits
50%
Part of
Compensation
35%
Separately
on its own
19%
Part of
Benefits
51%
Part of
Compensation
30%
Fidelity Stock Plan Decision Maker Research Study, December 2012
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Currently Trending
What changes have you made to
your plan in the past 3 years?
What changes to your plan are being
considered in the next 2-3 years?ESPP
6%
8%
13%
8%
10%
17%
2%
7%
11%
No discount10%
Smaller discount7%
Larger discount14%
Longer look-back10%
Removed look-back5%
Added look-back
Expand
internationally
Shorter look-back6%
5%
Fidelity Stock Plan Decision Maker Research Study, December 2012
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Currently Trending: The Hot Looks of ESPP
• Broad based
• Cash inflow
• Guaranteed appreciation
– With right combination of discount, look back, and offering
• Employee motivation, loyalty, engagement
• Opportunity for employee ownership outside of constraints of 401K
• Non-Excessive
• Expense efficient
• Minimal share usage (no ISS concerns)
• Corporate tax deduction
– Section 423 – upon disqualifying disposition
– Non Section 423 – upon purchase
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Today’s Hottest ESPP Looks: Plan Design
Features
80%
20%
Offering Type
Fidelity/Radford ESPP analysis, October 2014; Fidelity ESPP clients as of March 31, 2014.
8%
16%
33%
39%
4%
Length of Purchase Period
7%
9%
23%
9%
52%
DiscountMatch if 0% Discount
41%
59%
1 Month
3 Months
≤ 2 Weeks1 Year
6 Months
0% Discount - No
Match
15%
Discount
0% Discount - Match
10% Discount
5% Discount
423
NQ
0% - Match
0% - No
Match
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Today’s Hottest ESPP Looks: Plan Design
Features
77%
11%
12%
Sale Restriction
Looking at all plans, most have no sale
restrictions and no transfer
restrictions. However, transfer
restrictions are far more common for
Section 423 plans.
49%
82%
51%
18%
ISO NQ
Transfer Restriction by Plan Type
None Some…
Fidelity/Radford ESPP analysis, October 2014; Fidelity ESPP clients as of March 31, 2014.
None
3 or 6
Months
1 Year or
Greater
55%
2%
7%
8%
15%
10%
3%
Transfer Restriction
None
3 Months
6 Months
1 Year
1.5 Years
2 YearsNo Transfers
Allowed
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Today’s Hottest ESPP Looks: Plan Design
Features
9, 8%
8, 7%
18, 16%
22, 19%
13, 11%
40, 35%
5, 4%
1 Year; All
Discounts
6 Months; 15%
Discount
6 Months; 5% or 10%
Discount
3 Months; 15% Discount
3 Months; 5% or 10% Discount
< 3 Months; 0% Discount, Match
< 3 Months; 0% Discount, No Match
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Today’s Hottest ESPP Looks: Participation
23%
17%
25%
18%18%
10%
ISO NQ
Offering Type
15%17% 19%
27%
19%17%
20% 21%
29%
19%
8%
12%16%
20%22%
Length of Purchase Period
12%
22%
12%
18%
28%
12%
24%
13%
19%
31%
8% 8% 10%12%
23%
Discount
Qualified plans have higher
participation, as do plans with
greater discounts.
� Total Part Rate� U.S. Part Rate � Outside the U.S. Part Rate
15% Discount
10% Discount
5% Discount
0% Discount -Match
0% Discount -No Match
≤ 2 Weeks 1 Month 3 Months 6 Months 1 Year
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Today’s Hottest ESPP Looks: Participation
8% 8%10%
14%
26%
21%
12%
22%
12%
18%
25%
29%
Look-back drives participation, but
discount is a bigger driver.
Total U.S.
Outside the U.S.
Fidelity/Radford ESPP analysis, October 2014; Fidelity ESPP clients as of March 31, 2014.
� Ending Price � Look-Back
15% Discount
10% Discount
5% Discount
0% Discount -
Match
0% Discount -No Match
15% Discount
10% Discount
5% Discount
0% Discount -
Match
0% Discount -No Match
15% Discount
10% Discount
5% Discount
0% Discount -
Match
0% Discount -No Match
12%
24%
13%
20%
27%
32%
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Finding the Right Fit
• Tax Qualification
– Section 423
o Offers tax benefits to US employees; tax at sale; typically tax at purchase for
OUS
o Must meet § 423 requirement for eligibility, discount, offering length,
limitations, etc.
– Non qualified plan
o Tax at purchase for US employees; typically tax at purchase for OUS
o More flexibility with design considerations (i.e. matching shares)
• Design Choices
– Discount
– Look back
– Offering Period
– Other – purchase limitations, sale/transfer restrictions, eligible compensation,
dates
• Design drives participation and compensation expense
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Finding the Right Fit: Set Up Considerations
• Shareholder approval
• US and OUS rollout plans
– Operational and plan differences
– Translation
– Threshold considerations
• Multiple stake holders
– Legal
– Tax
– Administration
– Payroll
– Human Resources
– Finance
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Does this Look Fit Your Budget
• Style has a cost
• Understand your style
– Tuxedo
– Suit
– Business Casual
– California Casual
• Understanding your budget
– Neiman Marcus?
– Banana Republic?
– The Gap?
– Old Navy?
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History of Style
• APB Opinion No. 25 = Non-compensatory
• SFAS No. 123 (Revised) (Now ASC 718)
– Expense impacts income statement
– Non-compensatory if:
o No “option-like” features
o Discount not greater than 5%
• Staff Technical Bulletin 97-1 (STB 97-1) now 718-50
– Fair Value determined on “Grant date” (enrollment date)
– Value of ESPP has three components
o Discount: Value of discount on enrollment date
o Look-Back: Proportionate value of call option
o No Beginning Price Share Limit: Proportionate value of put option
� Represents additional shares that participants can purchase when the price
declines during the period
– Each purchase period is treated as a separate option
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Building Blocks of Style
Input Description
Market Value Market Value on Enrollment Date
Price Market Value (No discount!)
Expected Term Purchase period length
No “guess work” like with options
Interest Rate Treasury rates
(http://www.federalreserve.gov/Releases/H15/data.htm)
Volatility Same as for options – reflects expected term
Historic, peer (recently public) implied
Dividend Rate Reflects expected term
ESPP Valuation Input Factors
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Just a Touch Up? Or a Whole New Look?
Type of
Plan
Just a
Touch Up
Make Me
Shine
A Whole
New Look!
5% discount
no look back
6 month offering
(i.e. safe harbor)
Reduce offering
period to 3 months
Raise discount to
10% or 15%
Add look back
Reduce offering period to
3 months
Raise discount to 15%
Potential Impact
on Participation
Potential Impact
on Expense no change $ $$
Example Expense
per Share $0 $2 - 3 $4.75
*Assumes $20 FMV, 50% volatility, 1.5% risk-free interest rate
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Just a Touch Up? Or a Whole New Look?
Type of
Plan
Just a
Touch Up
Make Me
Shine
A Whole
New Look!
10% discount
no look back
6 month offering
Reduce offering
period to 3 months
Reduce offering
period to 3 months
and add look back
Reduce offer to 3 months,
add look back, and increase
discount to 15%
Potential Impact
on Participation
Potential Impact
on Expense ($)** $ $$
Example Expense
per Share $2.20 $4.02 $5.01
*Assumes $20 FMV, 50% volatility, 1.5% risk-free interest rate
**If new offering, not modifying existing.
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Just a Touch Up? Or a Whole New Look?
Type of
Plan
Just a
Touch Up
Make Me
Shine
A Whole
New Look!
15% discount
no look back
3 month offering
Add a look back
Extend offering
period to 6 months
and add a look back
Extend offering period to 12
months (with two 6-month
purchase periods with a
look back)
Potential Impact
on Participation
Potential Impact
on Expense Minimal $ $$
Example Expense
per Share $5.01 $5.85 $7.03
*Assumes $20 FMV, 50% volatility, 1.5% risk-free interest rate
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Just a Touch Up? Or a Whole New Look?
Type of
Plan
Just a
Touch Up
Make Me
Shine
A Whole
New Look!
Any plan designRun a "campaign"
around enrollment
Redesign
communication
and education
pieces for
enrollment
campaign.
Add to communication
and education for
enrollment campaign,
including video,
broadcast voicemail,
onsite banners and desk
drops.
Potential Impact
on Participation
Potential Impact
on Expenseno change no change no change
*Assumes $20 FMV, 50% volatility, 1.5% risk-free interest rate
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ESPP Communication Makeover
Screenshots for illustrative purposes only.
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Do It Yourself!Estimating the Cost of a Makeover
Screenshots for illustrative purposes only.
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Other ConsiderationsReducing Expense
• Implement contributions limits based on max
contributions for targeted employees
– If targeted employees have average salary of $80,000,
limit contributions for all participants to $8,000/year
• Exclude Section 16 officers
• Improve discount rather than look back
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Contact Information
Elizabeth Dodge, CEP
Vice President
Bus: (408) 979-8700
E-mail: [email protected]
Emily Cervino, CEP
Vice President
Bus: (408) 832-9080
Email: [email protected]
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Important Additional Information
FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.
The tax information contained herein is general in nature and for informational purposes only. Fidelity
does not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific
legal or tax situation.
Stock & Option Solutions and Fidelity Investments are not affiliated.
Stock plan recordkeeping and administrative services are provided by Fidelity Stock Plan Services, LLC.
The Fidelity Investments and pyramid design logo is a registered service mark of FMR LLC.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
734828.1.0