extreme makeover: espp edition - stock & option solutions · 2016-08-10 · extreme makeover:...

15
Stock & Option Solutions, Inc. October 13, 2015 1 Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP, Fidelity Stock Plan Services 2 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.

Upload: others

Post on 03-Jul-2020

1 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

1

Extreme Makeover:

ESPP Edition

Elizabeth Dodge, CEP, Stock & Option Solutions, Inc.

Emily Cervino, CEP, Fidelity Stock Plan Services

2

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.

Page 2: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

2

Materials Slides

http://www.sos-team.com/pdfs/espp_makeover.pdf

3

4

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?

Page 3: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

3

5

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).

6

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.

Page 4: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

4

7

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

8

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

Page 5: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

5

9

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

10

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

Page 6: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

6

11

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

12

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

Page 7: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

7

13

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

14

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

Page 8: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

8

15

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

16

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%

Page 9: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

9

17

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

18

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

Page 10: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

10

19

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?

20

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

Page 11: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

11

21

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

22

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

Page 12: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

12

23

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.

24

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

Page 13: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

13

25

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

26

ESPP Communication Makeover

Screenshots for illustrative purposes only.

Page 14: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

14

27

Do It Yourself!Estimating the Cost of a Makeover

Screenshots for illustrative purposes only.

28

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

Page 15: Extreme Makeover: ESPP Edition - Stock & Option Solutions · 2016-08-10 · Extreme Makeover: ESPP Edition Elizabeth Dodge, CEP, Stock & Option Solutions, Inc. Emily Cervino, CEP,

Stock & Option Solutions, Inc. October 13, 2015

15

29

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]

30

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