Dan Walter's latest article: Goldilocks and the 3 Broad-based Stock Plans

2 followers
0 Likes

Goldilocks and the 3 Broad-based Stock Plans




I don't normally email these, but I would love comments from the ECE community! ~Dan




Goldilocks and the 3 Broad-based Stock Plans




Stickman goldilocksThere
once was a dedicated professional who was tasked with creating a
company-wide stock plan at her new company. Henrietta Rachel Goldilocks
(let’s just call her “HR Goldilocks”) had years of Human Resources and
Compensation experience, but little interaction with broad-based equity
compensation. She searched the web and spoke to some experts on the
topic. Each expert had a ton of information, but many tended to discuss
general trends rather than HR Goldilocks’ very specific needs.


You see, HR Goldilocks worked at a company that had been publicly
traded for many years. They had tried stock options and restricted stock
in the past, but currently only used these for management-level staff.
There weren’t many internal notes on why the company had stopped
granting lower-level grants and awards. When she brought the topic up
finance simply said “too expensive”, the CEO said “didn’t work”, the
head of engineering said “worthless” and several staff members simply
looked confused when asked.


HR Goldilocks knew that her company’s stock price had a history of
volatile ups and downs. She also knew they depended on a purchase cycle
that lent itself to periods where bonuses were strong and others when
they were nonexistent. As a company that built most of its own goods and
supported their own customer service center, she knew her staff was
both broad and deep. As she continued her search she finally found a
blog article that had a story that covered the main equity compensation
issues at a high-level. The story went something like this…


HR Goldilocks stumbled upon a house in the woods that was filled
with compensation instruments. Cash hung from the ceiling. Bonuses
wallpapered the walls. The floor was covered in check stubs and total
reward statements. And, on the massive desk in the middle of the room,
there were three equity compensation plans.


She first saw a stock option plan. HR Goldilocks read how the
employees recevied no compensation until they chose to exercise. They
paid what the stock would have cost at grant and the company expensed
the amount that was determined using a mathematical model. The staff
received any gain. She also read that if the stock price went down (as
her company’s often did) these grants had little retention value.
However, if the stock price soared, values also skyrocketed often to
unsustainable levels. These grants generally carried vesting
restrictions of four or five years, far longer than some of her
employees planned in advance. HR Goldilocks looked at the risks and
rewards and decided that stock options were too hot for her company.


The second plan described restricted stock units. HR Goldilocks
liked that they had value from the date of award. She read on to find
that employees often viewed these awards as “gifts” and devalued them
accordingly. She also found out that they often resulted in such small
award sizes for lower level staff that communications became difficult.
“Imagine,” she thought, “trying to explain a 3-year vesting of 17
shares!”. HR Goldilocks decided that RSUs were to cold for her company.


The third plan was an IRC 423 ESPP. It stated the rules were
designed to support plans for broad-based participation. HR Goldilocks
read that these plans require the employee participants to purchase
stock from the company. The caveat was that the employee could be
offered a discount of up to 15%. Even better, this discount could apply
to both the start of a grant period or the purchase date. This gave the
employees some value at the start and, if the stock price rose, an even
better value at the end. And, this plan virtually ensured some value
even if the stock price fell. She read how requiring the employees to
make payroll contributions during each grant period helped them have
some “skin in the game” and stay engaged.  She also liked that fact that
she could structure the plan to limit the number of shares purchased by
any one employee and that even the highest compensated employees were
limited by the plan to $25,000 in value each year. All this and
purchases could be scheduled frequently, usually in six-month intervals.
This plan was flexible enough to meet her compensation needs while
limiting expense to meet the needs of the company. HR Goldilocks decided
an ESPP was JUST RIGHT.


HR Goldilocks worked with a consultant and her internal team to
create an ESPP that was custom-fit to their needs and everyone worked
happily ever after.


Dan Walter is the President and CEO of Performensation
an independent compensation consultant focused on the needs of small
and mid-sized public and private companies. Dan’s unique perspective and
expertise includes equity compensation, executive compensation,
performance-based pay and talent management issues. Dan is a co-author
of
“The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts
a free networking group. Dan is frequently requested as a dynamic and
humorous speaker covering compensation and motivation topics. Connect
with him on
LinkedIn or follow him on Twitter @Performensation and @SayOnPay




2 Replies

You've written a creative, clever parable, that is also a sophisticated and insightful way to present the benefits of using an ESPP (with a meaningful discount) for a broad-based plan compared to stock options or restricted stock. You might want to add that an ESPP still provides a positive return in a "Bear" market!


Of course, you could have an ESPP, along with those other types of porridges (i.e., grants) , too. Perhaps that's a topic for another parable or you could expand it to include the chairs and bed (for those confused see: http://www.dltk-teach.com/rhymes/goldilocks_story.htm )  ?


 Bruce Brumberg, Editor-in-Chief
www.myStockOptions.com and www.myNQDC.com

Bruce,


Thanks so much for the comments.  I agree that ESPPs can work well with other types of equity compensation. I will see what I can do to expand on the parable. 


perhaps it will end up becoming a story in "Father Goose's Fairy Tales about Equity Compensation"


 


Dan

Reply
Subgroup Membership is required to post Replies
Join ECE - Equity Compensation Experts now
Dan Walter
about 13 years ago
2
Replies
0
Likes
2
Followers
1592
Views
Liked By:
Suggested Posts
TopicRepliesLikesViewsParticipantsLast Reply
LinkedIn will be the ONLY home for the ECE beginning October 1, 2020
Dan Walter
over 4 years ago
00101
Dan Walter
over 4 years ago
Mergers and Acquisitions and Section 16(b) Romeo and Dye treatise
John Olagues
almost 6 years ago
00715
John Olagues
almost 6 years ago
IRS and Social Security Limit Changes for 2019
Bruce Brumberg
about 6 years ago
00529
Bruce Brumberg
about 6 years ago