NASPP Michigan
Chapter Meeting
November 13, 2012
Chapter Announcements
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NASPP Memberships
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All NASPP memberships expire on December 31
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Chapter Announcements
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NASPP Conference Audio
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All NASPP Conference session are recorded; audio is available
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developments, and hear some of the fabulous sessions
presented by the industry’s top speakers
NASPP members can purchase a single session for just $65,
additional discounts are available for multi-session purchases
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Chapter Announcements
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Introducing the NASPP Career Center
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Post a job, post your resume details, browse jobs and gain
valuable career information
Web site highlights
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Free Job Bank: Any employer (NASPP member or not) can post an industryrelated position
Chapter Job Board: Positions listed in our chapter area. When posting a
job, you can associate it with up to three chapters
Resume Bank: Active NASPP members can post a resume profile for visibility
to employers looking to fill job openings; resumes are searchable by those
with access to the Career Center
Message Center: Central messaging area for communication between
resume posters and employers, as well as email updates about new job
openings or candidates that match your search criteria
Move forward in your career now by visiting the NASPP’s Career
Center today at: http://www.naspp.com/CareerCenter/
Chapter Announcements
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Respond to new interactive questions and/or “like” our posts as you feel
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Highlights from the 20th
Annual NASPP Conference
October 8th-12th
New Orleans
Presented by: Erin Newell, CEP
Alicia Mladsi, CEP
Making Your Vendor Relationships
More Effective
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Larry Petz, CEP, Dana Holding Corp
Erin Madison, CEP, Broadcom
John Hammond, CEP, AST Equity Plan
Solutions
Jen Baehr, CEP, NASPP
Making Your Vendor Relationships
More Effective
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Service Options
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Outsourcing
Self-Administration
Partial Administration
Multi-vendor
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Brokers
Record-keeping
Tax/Legal
Merchant Bank (India)
Trustee (Israel)
Making Your Vendor Relationships
More Effective
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Service Definition in the contract
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Anyone involved in Equity should be included in the
contract process
Attorneys will focus on legal language
Service Level Agreement, often not standard and
should be requested in the contact
Making Your Vendor Relationships
More Effective
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Implementation of new vendor
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Understand services & capabilities
Ask questions
Request references
Current Vendors
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Schedule periodic meetings
Make suggestions for future enhancements
Training classes
Advisory Boards
Preserve Your Reserve (and your
Sanity)
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Megan Arthur, Cooley LLP
Denise Miller, Adobe Systems Incorporated
Scot Witz, W.W. Grainger, Inc
Julie Mrozek, Stock & Option Solutions, Inc.
Fungible Share Reserve Design
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“Full Value” awards (Restricted stock, RSUs,
Performance shares, etc.) count as more than
one share
Example: Share reserve consists of 10M new
shares with a 2 to 1 ratio for full value awards:
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Stock options covering 10M shares may be issued OR
Full-value awards covering 5M shares OR
Some combination of full-value awards and options
Fungible Share Reserve Design
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Where does the ratio come from?
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Most often, from an ISS derived “value-neutral” ratio
for determining the “cost” of the share increase, based
on the ratio of the value of a full value award and an
option/SAR award under the ISS proprietary model
What is ISS?
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Institutional Shareholder Services (“ISS”, a division of
RiskMetrics Group) - a leading provider of corporate
governance data and investment decision support
tools
Fungible Share Reserve Design –
Adobe Systems
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Have multiple plans with multiple sets of ratios
Tracking is done by:
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Placing fungible ratios in a user defined field on each
grant record
Filtering on this field for reporting
Reconciliation Example of Fungible
Share Pool Tracking
Share Counting - Liberal
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Only shares actually issued reduce the share
reserve. Reserve is nt reduces by any shares
subject to all types of stock awards that:
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Expire or terminate
Are settled in cash
Are forfeited back to or repurchased by the company
Are reacquired by the company in satisfaction of tax
withholding obligations or as consideration for the
exercise or purchase price of the stock award.
Share Counting – Non-Liberal
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Non Liberal Share counting: ISS and other proxy
advisory firm policies
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Liberal share counting will result in higher “cost” of the
plan
To avoid higher cost, reserve must be reduced by any
shares that:
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Are not issued because they are used for a net exercise
Are reacquired by the company in satisfaction of tax
withholding obligations or as consideration for the exercise or
purchase price of an option or stock appreciation right.
The Future of Equity Compensation
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James Humza, Bank of America Merrill Lynch
Kurt Bremer, Morgan Stanley Smith Barney
Jim Wilforst, ETRADE Corporate Services
Moderated by, Elizabeth Doge, CEP, Stock &
Option Solutions
The Future of Equity Compensation
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What are your thoughts about the future
direction of outsourcing plan administration?
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Outsource will continue, forced to do more with less
War for talent
‘Right Sourcing’ – finding the right solution
The Future of Equity Compensation
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What are the greatest overall challenges facing
the equity compensation industry today?
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War for talent
Education & Tax Planning
The Future of Equity Compensation
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What are the most significant challenges of
global stock plans & how do you envision our
industry rising to those challenges?
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Mobility- need to automate
Communication & Education- translation
Equity Compensation Crossfire:
Cutting-Edge Plan Design
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Terry Adamson, Aon Hewitt
Barbara Baksa, NASPP
Jennifer Kirk, Google
Michael Mclanahan, Fidelity
Russell Miller, ClearBridge Compensation
Equity Compensation Crossfire:
Cutting-Edge Plan Design
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Grant Frequency
Cash Settled
Automated Execution
Equity Choice
Capped Awards
Equity Compensation Crossfire:
Cutting-Edge Plan Design
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Typical Annual Grants
More Frequent
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Quarterly or Semiannually
Administrative Challenges
Less Frequent
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Grant intended to span several years (i.e. Steve Jobs)
Governance challenges
Cash Settled Awards
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Can be authorized under plan but cash (rather
than shares) used to settle the award
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Cash settled RSUs
Cash settled SARs
Cash Payment not from a market sale of stock
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Different accounting treatment
Paying out cash and have no control how much
Automatic Exercise
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Administrative feature designed to ensure that a
participant’s in-the-money grants are exercised
automatically at point of expiration
Typically plan sponsor set percentage or dollar
amount where auto exercise occurs
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$0.50 per share ($20 grant exercises at $20.50)
1% trigger ($20 grant exercises at $20.20 FMV)
Equity Choice Program
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Allow employees to choose the type of award
they receive
Choices might include options, full value awards,
performance awards, cash
Size of award adjusted commensurately so that
employees receive same grant value regardless
of choice (i.e. Solium plan is 3 options to 1 RSU)
NOTE: Need to educate employees on tax and
legal consequences.
Capped Awards
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May be allowing payout of cash and don’t want
to have uncontrolled amount of distribution
Limits effects of dilution for share payouts
Value & Valuations: Making Sense
of Long-Term Incentive Data
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Terry Adamson, Aon Hewitt
Billy Vitense, Starbucks
Fred Whittlesey, Compensation Venture Group
Value & Valuations: Making Sense
of Long-Term Incentive Data
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Starbucks Coffee Company
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How partners perceive value?
Show partners how economic value is translated to #
of shares
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Stock Options
Performance RSU
Value & Valuations: Making Sense
of Long-Term Incentive Data
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Make it clear on upcoming events
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Provide schedule of grants & vesting
5 P’s- Proper Planning Prevents Poor
Performance
Planning leads to overall goal of creating
Financial Wellness
Paying for Performance in an
Unpredictable Market
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Yonat Assayag, Clearbridge Compensation
Group
Mark Borges, Compensia
Rose Marie Orens, Compensation Advisory
Partners
Paying for Performance in an
Unpredictable Market
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Shareholders demanding more evidence that
executive pay is aligned with company
performance
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Increased use of performance based Long Term
Incentives
Improved disclosure
Companies are challenged with effective
performance measurement / goal setting
process
Paying for Performance in an
Unpredictable Market
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Incentive measure selection requires balancing
the shareholder and executive perspectives
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Shareholders: Want concrete results that justify cash
payments or ownership dilution
Executives: Want to be motivated to increase
company value
Paying for Performance in an
Unpredictable Market
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Key considerations
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Possible performance measures
Performance measurement timeframes
Goal setting
Pay / performance relationship
Identifying Incentive-Based
Performance Measures
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Why stock price is not always the answer
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Management’s day to day decisions are not
immediately reflected
Measures should be under the control of the executive
and be correlated with shareholder return in the long
run
Selection should take into account the incentives
“motivational impact” on various participant types
Evaluating Different Measures
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Total Shareholder Return (TSR)
With Pricebegin = share price at beginning of period,
Priceend = share price at end of period, Dividends =
dividends paid and TSR = Total Shareholder Return,
TSR is computed as:
TSR = (Pricebegin – Priceend + Dividends ) / Pricebegin
Evaluating Different Measures
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Total Shareholder Return (TSR)
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Advantages
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Gets to the heart of what investors desire
Easy to calculate and communicate
Can’t be manipulated
Disadvantages
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Still uses stock price as a component, which does not reflect
managements day to day decisions and includes market
conditions not in control of management
Evaluating Different Measures
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Revenue
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Advantages
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Rewards “top line” performance/growth of the company
Ideal for developing companies with the only objective to build
scale and market share
Aligns to outcomes that executives can directly impact
Easy to measure and understand
Disadvantages
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Ignores several important factors such as costs of goods sold,
tax strategies, etc.
Does not reward for managing the other aspects of the
business and may discourage leadership decisions
Evaluating Different Measures
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Gross Profit
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Advantages
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Aligns to outcomes that executives can directly impact
Easy to measure and understand
Encourages selling more product at the highest martin
possible
Disadvantages
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Does not reward for managing other aspects of the business
May discourage leadership decisions
Evaluating Different Measures
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Earnings before interest taxes depreciation
amortization (EBITDA)
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Advantages
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Encourages selling more product at the highest cash operating
margin
Excludes legacy decisions such as capital expenditures,
acquisitions, financing and tax strategies that may take away
from current operating achievements
A good short term measure of operating performance
Disadvantages
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Requires calculation rather than a reported number
Ignores several important factors such as costs of goods sold,
tax strategies
Effective Goal Setting in a Volatile
Market
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Proper alignment of threshold, target and
superior performance and payouts is critical
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Typically threshold performance levels are very
achievable (85% - 90% chance of achievement)
Target performance levels are more difficult to
achieve (~60%)
Maximum performance levels represent “stretch” and
are very difficult to achieve (10-15% chance)
Top 10 Pay for Performance Pitfalls to
Avoid
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Wrong Measure
Right Measure, Wrong Goal
Right Measure, Wrong Behavior
Not Enough Stretch
Too Much Stretch
Paying Below Street Guidance
The “Perfect” Measure vs. the “Right” Measure
Pay for Failure
Poor Disclosure
No Surprises!!
Withhold Now Or Forever Speak Your
Piece
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William Dunn, PricewaterhouseCoopers LLP
Wendy Jennings, Riverbed Technology, Inc.
Ameena Majid, Seyfarth Shaw LLP
Donna Spinola, McKesson Corporation
Withhold Now Or Forever Speak Your
Piece
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General Administrative Considerations
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Timeline
Communicate
Choices vs. Requirements
Withhold Now Or Forever Speak Your
Piece
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Share Withholding vs. Sell to Cover
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Pros and cons of each
Cash Withholding
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FICA withholding for retirees
Rule of Administrative Convenience
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Delay the timing in which employer make take into account
deferred amounts, no later then end of calendar year
International withholding for ESPP
Withhold Now Or Forever Speak Your
Piece
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ISO
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General rule, no withholding for ISO
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Pennsylvania does require withholding
Managing Mobile Employees at Home
and Abroad
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Scott Sander – Amazon.com
Mark Miller – Deloitte Tax LLP
Rive Rutke – Deloitte Tax LLP
Managing Mobile Employees
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There is an increasing need for countries to find
new sources of revenue.
According to CIA World Fact Book, government
spending exceeds revenues in numerous
countries including:

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United Kingdom 26%
United States 60%
Australia 11%
● India 47%
● Ireland 94%
● Japan 25%
Why is this my problem?
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Mobile employees may trigger tax withholding
and reporting obligations for the employer in
multiple jurisdictions
Global tax withholding and reporting failures in
the employee tax burden passing to the
employer
HR impact can be as painful as the tax penalties
Amazon Case Study
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Grant broad based RSUs to employees in 29
countries and notable locations include US, UK,
Lux, Germany, India, Japan and China
Ownership is a fundamental leadership principle
at Amazon
Equalization practice for mobile employees (net
pay adjustment)
Amazon Case Study
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Multiple vendor approach to due diligence
Identification of key stakeholders and formalized
process to review guidance (Payroll, Legal, Corp
Tax, Acctg)
Arrive at defensible tax position that aligns with
organizational philosophy.
Practical Guidelines/Summary
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Full compliance may not be achievable; nor is
automation right for everyone
Identify how your company can track movers
Identify larger “risk” states/countries
Review and understand withholding and reporting
obligations
Review and understand where state tax credits/reverse
credits or reciprocity may help to reduce double taxation
Determine how your company will develop a process to
balance the technical requirements with administrative
abilities
Keeping Up with the Updates
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Jennifer Namazi, NASPP
Louis Rorimer, Jones Day
Shoshana Litt, Jones Day
Marlene Zobayan, Rutlen Associates LLC
Brian Buggy, Matheson Ormby Prentice
Keeping Up with the Updates
The NASPP Global Stock Plans Portal
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Country Specific Guides
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33 countries
Alerts
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Countries with most alert subscribers:
1.
2.
3.
4.
UK
Canada
Germany
China
Keeping Up with the Updates
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Other Resources
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Newsletter Alerts
Local Contacts
Webinars, Seminars, Conferences
The Cash Alternative:
What, When and How
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Myrna Hellerman, Sibson Consulting
Takis Makridis, Equity Methods LLC
Thomas Welk, Cooley LLP
The Cash Alternative
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In recent years, economic challenges and new
governmental mandates called into question the
typical incentive design
As a result, many companies have moved away
from the Standard Design. They have adopted
Alternative Hybrid Approaches.
The Cash Alternative
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Cash Settled RSU
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Cash Settled SAR
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Standard ‘Restricted stock unit that is settled in cash
based on the equity value at settlement
Tracks appreciation of equity but paid in cash
Option based award in which the appreciation over
the strike price is paid in cash
Capped Cash Settled SAR

SAR in which the payout may not exceed a certain
level (price ceiling)
The Cash Alternative
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Cash Based Award (i.e. RCU)
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Cash denominated award, so does not track
appreciation or depreciation in equity value (may
contain performance or market conditions)
Hybrid (Floating) Award

Award that is structured so that elected payout
method may be modified during the vesting period as
expectations change regarding treasury shares on
hand for use
Implications and Considerations

Who determines the settlement method,
company or employee and when?

If employee, triggers liability accounting
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Measurement date is the settlement date, not grant date. This
means the fair value needs to be remeasured each period until
settlement
Result is ongoing cumulative-effect adjustments (mark to
market accounting)
Note that if choice not at grant, probably 409A considerations
Providing employees choice precludes establishment
of a grant date until election, so perhaps best to elect
prior to the grant
Implications and Considerations
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Must the awards, if paid in equity, be from a
shareholder approved plan?
What are the registration requirements, if any?
What are the reporting obligations? (e.g.
Section 16)
What tax benefits/drawbacks are there to the
award (and is the employee aware of these?)
Other Updates
2013 Conference Location

Washington DC
Contact Info
Erin Newell, CEP
Account Manager
Solium
Office: 480-308-8174
Email: erin.newell@solium.com
Alicia Mladsi, CEP
Strategic Client Manager
Solium
Office: (203) 447-5845
Email: alicia.mladsi@solium.com