Survey Says: 10 Dos & Don ts in Stock Plan Administration. Summary of Key Findings

Transcription

1 Survey Says: 10 Dos & Don ts in Stock Plan Administration Summary of Key Findings

2 Speakers Kathleen Cleary NASPP Joseph Rapanotti Deloitte Consulting LLP Donna Spinola McKesson Corporation m Christine Zwerling Twilio czwerling@twilio.com

3 Agenda Survey Overview #1 Staffing #2 Outsourcing #3 Domestic Mobility #4 Participant Communications #7 ESPP Design #8 Insider Trading Compliance #9 10b5-1 Plans #10 Stock Ownership Appendix: Participant Profile #5 Grant Acceptance #6 ESPP Prevalence

4 Survey Overview

5 Survey Overview About the Survey Longest-running, most comprehensive survey on stock plan administration practices NASPP has been conducting this survey since 1994, Deloitte Consulting LLP has been a co-sponsor since 2004 Full survey consists of over 250 questions Over 460 companies participated; responses collected from March through May 2017 Part of the NASPP s triptych of surveys covering Domestic and Global Stock Plan Design and Administration About the Participants Respondents from broad range on industries and regions 37% are high-tech companies 96% are public companies and 45% are Fortune 500 companies Located throughout all regions of the United States 13% have headquarters in Silicon Valley 62% have more than 5,000 employees globally

6 #1: Staff Appropriately and Leverage Shared Resources

7 Administration Ownership Human Resources holds primary/lead responsibility for stock plan administration while many have shared responsibility in administration success. In Silicon Valley, Legal, Human Resources, and Accounting most often hold primary/lead responsibility. All Companies Silicon Valley* Stock Plan Responsibility Primary Involved Primary Involved Human Resources/ Compensation and Benefits 70% 87% 22% 78% Legal 9% 71% 26% 78% Finance 7% 54% 19% 61% Accounting 6% 65% 21% 68% Treasury 3% 35% 7% 29% Corporate Secretary 2% 28% 2% 20% Payroll 1% 63% 0% 61% Shared Services/Service Center 1% 7% 2% 7% Tax 0% 45% 2% 42% HRIS/Information Technology 0% 22% 0% 25% Other 1% 1% 0% 0% *Includes companies who are headquartered in Silicon Valley, San Francisco, Oakland, San Jose or any areas suburban to these cities

8 Administration Staffing Model Companies rely on a shared, HQ based team to deliver stock administration. This team has responsibilities for stock admin and other non-related activities. All Companies Silicon Valley Number of Personnel Full Time Part Time Full Time Part Time 0 29% 8% 5% 29% 1 40% 25% 55% 29% 2 18% 20% 22% 24% 3 6% 16% 5% 10% 4 or more 7% 30% 12% 8% % of Companies Using Alternative Arrangements Non-HQ Domestic Office All Companies Overseas Telework Non-HQ Domestic Office Silicon Valley Overseas Telework Full Time 7% 10% 5% 11% 11% 7% Part Time 15% 24% 7% 12% 21% 4%

9 #2: Consider Outsourcing or Co- Sourcing

10 Administration Outsourcing 87% of all companies and 80% of Silicon Valley companies outsource a portion or all of their stock plan administration (excluding ESPP). Of these companies, Silicon Valley companies are outsourcing less of their stock plan administration. Percentage of Stock Plan Administration Outsourced All Companies Silicon Valley Less than 25% 30% 59% 25% - 49% 19% 20% 50% - 75% 21% 10% More than 75% 30% 12% Why Companies Are Not Outsourcing All Companies (13%) Silicon Valley (20%) Have in-house capability 72% 92% Not necessary/cost effective 38% 67% Cost to outsource 28% 17% Concerns with reduced control 25% 8% Vendor capabilities 15% 8% Additional workload to outsource 7% 0%

11 #3: Utilize the Domestic Mobility Data Being Collected

12 Administration Outsourcing 60% of all companies and 65% of Silicon Valley companies track domestic movement* of employees during the life of their awards for tax withholding and reporting purposes with 92% of all companies and 88% of Silicon Valley companies using data for withholding calculations. All Companies Silicon Valley 40% 60% Top Reasons for Not Tracking 1. Small population 2. Looking for solution 3. Unknown 35% 65% Track Data Do Not Track Data Track Data Do Not Track Data Who Calculates Withholdings? All Companies Silicon Valley Internal Payroll 43% 20% Third-Party Software 14% 27% External SPA 14% 10% Third-Party Tax Advisor 11% 13% Internal SPA 13% 30% Mobility Department 1% 0% Other 3% 0%

13 #4: Leverage Third-Parties and Web- Based Communication for Participant Communications

14 Grant Notices and Agreements Issuers rely heavily on third-party administrators to deliver notices and agreements while still using internally driven electronic and non-electronic communication channels. All Companies Silicon Valley 100% 88% 100% 95% 80% 80% 73% 60% 60% 50% 60% 40% 40% 34% 25% 20% 15% 11% 7% 4% 20% 4% 4% 11% 9% 4% 0% Third-Party Websites Paper Company Intranet 0% Third-Party Websites Paper Company Intranet Grant Agreement Grant Notice Grant Agreement Grant Notice

15 Stock Option Expiration Alerts 89% of all companies and 93% of Silicon Valley companies notify participants of upcoming option expirations most often through utilizing a third-party. Who is responsible for notice? All Companies Both, 40% In-House Stock Admin, 20% The majority of companies send the first notice of upcoming stock expirations in the last 90 days of exercise period. 60% 50% 45% Third-Party (e.g. Broker), 41% 40% 32% 35% 30% Silicon Valley Both, 38% Third-Party (e.g. Broker), 40% In-House Stock Admin, 22% 20% 10% 0% 21% 21% 18% 11% 6% 4% 1% 2% 2% 1% 0% <1 mth 1-2 mth 3 mth 6 mth 1 yr Once a yr Other All Companies Silicon Valley

16 #5: Require and Enforce Grant Agreement Acceptance, but Skip the Paper

17 Silicon Valley All Companies Grant Acceptance Requirement & Enforcement 80% of all companies and 93% of Silicon Valley companies require grant acceptance and most frequently block grants from exercise/release and follow-up with participant directly to enforce this requirement. No acceptance is required, 9% Acceptance is presumed at exercise, 3% Acceptance is presumed if not rejected, 7% Exercise/release is blocked, 42% Follow-up with the participant, 43% Canceled if not accepted, 17% Other, 1% No enforcement is performed, 4% No acceptance is required, 7% Acceptance is presumed at exercise, 4% Acceptance is presumed if not rejected, 7% Exercise/release is blocked, 73% Follow-up with the Canceled if not accepted, 0% Other, 0% No enforcement is performed, 5%

18 Grant Acceptance Signature Capture 81% of all companies and 88% of Silicon Valley companies utilize digital/electronic signatures to accept grants with most utilizing this approach for all participants to accept grants. Do not permit digital/electronic signature, 19% Do not permit digital/electronic signature, 12% Permit digital/electronic signature for some or all employees, 24% All Companies Require digital/electronic signature for some or all employees, 57% Permit digital/electronic signature for some or all employees, 29% Silicon Valley Require digital/electronic signature for some or all employees, 59% Which Participants are Permitted or Required to Use Digital All Companies Silicon Valley Electronic Signatures? All 92% 91% Some 8% 9%

19 Grant Acceptance Channel Third-party websites are the most common method communication recipients may use to accept or decline grants. Grant Acceptance Channel All Companies Silicon Valley Third-party website 89% 96% Printed agreement signed and returned 21% 21% 12% 10% Fax 2% 0% Company Intranet 3% 2% Telephone 1% 0%

20 #6: Decide Whether to Implement or Keep an ESPP

21 ESPP Participation About half of companies offer an ESPP. Existing plans are most often at least 3 years old. About one quarter of issuers without plans are considering implementing an ESPP. Do you have an ESPP? All Companies Silicon Valley Yes 52% 76% No 48% 24% Plans are more than 3 years old: No Yes Never had an ESPP: 29% 28% 71% 72% 25% No 17% 75% Yes 83% No 0% 50% 100% SV All Yes Considering a Plan: 69% 80% 31% 20% 0% 20% 40% 60% 80% SV All 0% 50% 100% SV All

22 #7: Understand Whether or Not Your ESPP is Competitive

23 Silicon Valley All Companies ESPP Participation Section 423 ESPP plans have higher participation rates than Non-Section % 50% 40% 35% 50% 39% 30% 27% 20% 10% 0% 17% 16% 8% 4% 5% 0% 0%-20% 21%-40% 41%-60% 61%-80% 81%-100% Section 423 Non-Section % 40% 40% 40% 43% 30% 20% 10% 0% 25% 20% 10% 13% 10% 0% 0% 0%-20% 21%-40% 41%-60% 61%-80% 81%-100% Section 423 Non-Section 423

24 Silicon Valley All Companies ESPP Disposition of Acquired Shares Approximately two-thirds of all companies and one half of Silicon Valley companies report that participants hold shares acquired under the Section 423 plan for at least one year: Sold almost immed., Held <6 mos, 8% Held 6 months to 1 year, 15% Held 1 to 2 years, 26% Held 2 years or more, 41% 94% of companies plans do not offer a quick sale program*. 83% of plan participants (other than executives) are required and 8% are encouraged but not required to use specified broker(s). Sold almost immed., Held <6 mos, 10% Held 6 months to 1 year, 29% Held 1 to 2 years, 23% Held 2 years or more, 23% 87% of companies plans do not offer a quick sale program*. 95% of plan participants (other than executives) are required and 5% are encouraged but not required to use specified broker(s). *Under a quick sales program, shares purchase by employees are automatically sold immediately following the purchase.

25 Silicon Valley All Companies ESPP Discount 15% discount is most commonly offered in both Section 423 and Non-Section 423 plans. Non-Section 423 plans discounts rates are more evenly distributed as indicated by companies who offer this plan. 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 1% 27% 16% 2% 10% 13% 73% 31% 25% 0% 1% 0% 5% 10% 15% Match instead of Section 423 Non-Section 423 Discount 93% Other 2% 80% 60% 67% 40% 20% 0% 0% 33% 5% 0% 3% 0% 0% 0% 0% 0% 0% 5% 10% 15% Match instead of Other Discount Section 423 Non-Section 423

26 Silicon Valley All Companies ESPP Lookback Period Applying a discount to the lower of beginning or end of the offering/purchase periods is most common for both Section 423 and Non-Section 423 plans followed by applying discount at the purchase date. 70% 60% 50% 40% 30% 20% 10% 0% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 63% 54% Lower of beginning/end of offering/purchase period 85% 4% Lower of beginning/end of offering/purchase period 35% 39% End of purchase Beginning of offering period period/purchase date Section 423 Non-Section % 4% 0% 2% 4% Other 0% 0% 0% 0% 0% End of purchase Beginning of offering period period/purchase date Section 423 Non-Section 423 Other

27 ESPP Offering Period Offering periods of 6 and 3 months are consistently the most common window used in ESPP plans. 70% 60% 50% 60% 53% 52% 51% 48% Non-Qualified Plan Offering Period The majority of all companies had an offering period of 3 months or 6 months. The majority of Silicon Valley companies had an offering period of 6 months. 40% 30% 20% 10% 0% 25% 21% 18% 19% 18% 16% 15% 11% 11% 13% 10% 9% 10% 8% 7% 6% 3% 1% 1% 0 1% 0% 0 7% 8% 1 month 3 months 6 months 12 months 18 months 24 months Other (All) 2017 (SV) 2% 0% 0

28 ESPP Purchase Period For companies with interim purchases during their offering, 6 months remains the most common purchase period length. 100% 90% 80% Non-Qualified Plan Length of Interim Period* 88% 70% 60% Biweekly 30% 1 month 30% 70% 68% 66% 61% 50% 40% 30% 20% 10% 0% 5% 24% 21% 22% 13% 8% 9% 8% 6% 6% 4% 2% 1% 2% 0 Bi-weekly 1 month 3 months 6 months *Silicon valley data is omitted due to low sample size (All) 2017 (SV)

29 #8: Consider Reviewing Adherence to Insider Trading Requirements

30 Silicon Valley All Companies Insider Trading Compliance A significant majority of companies require insiders to clear all transactions in advance. Of these companies, approval for transactions is most likely authorized by the General Counsel. Require Insiders to clear all transactions, including stock plan transactions, in advance: Authorized to provide approval for insider transactions: No, 15% No, 25% Yes, 85% Authorized to Provide Approval All Companies Silicon Valley General Counsel 75% 49% Corporate Secretary or Assistant Corporate Secretary 34% 27% Deputy General Counsel 23% 22% Chief Financial Officer 20% 41% Other Legal Executives 21% 24% Chief Executive Officer 16% 22% Yes, 75%

31 Insider Trading Compliance At least 90% of all Section 16 insiders, senior management/executives, outside directors, and employees with material non-public information are subject to quarterly blackouts. Section 16 Insiders Other Senior Management Outside Directors Employees w/ non-public, material info Middle Management Other Exempt Employees Non-Exempt Employees Contractor/Consultants/Temps Other 32% 39% 46% 49% 64% 74% 68% 69% 70% 84% 96% 98% 92% 100% 91% 100% 91% 98% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% All Companies Silicon Valley

32 Insider Trading Compliance Companies prohibit the following types of transactions during black-out periods: Transaction All Companies Silicon Valley Broker-assisted cashless option exercises 89% 87% Stock-for-stock option exercises 63% 60% Net stock option exercises 62% 51% Cash option exercises 55% 30% Share withholding on option exercises 54% 55% Pledges 42% 43% Gifts 40% 45% Transactions in 401(k) plans 39% 36% Share withholding on restricted stock/unit awards 36% 26% Changes in ESPP contribution rates 22% 11%

33 #9: Consider establishing 10b5-1 guidelines that support your insider trading policy

34 Silicon Valley All Companies 10b5-1 Plans A majority of companies utilize 10b5-1 Plans. Permitted for all, 43% Not Permitted, 16% Insiders permitted/others not permitted, 34% Insiders required/others permitted, 6% Insiders required/others not permitted, 1% Not Permitted, 4% Permitted for all, 63% Insiders permitted/others not permitted, 23% Insiders required/others permitted, 10% Insiders required/others not permitted, 1%

35 10b5-1 Plans Of companies that permit (but do not require) Rule 10b5-1 trading plans for insiders, companies indicated insiders use the plans for many types of transactions: Transaction Type Used by 10b5-1 All Companies Silicon Valley Open market sales 76% 85% Broker assisted cashless option exercises 69% 88% Other option exercises other than same-day sales Sales of shares or share withholding to cover taxes due on restricted stock/units 41% 40% 31% 43% Open market purchases 27% 23% Enrollment and/or changes to ESPP participation 2% 0%

36 10b5-1 Plans Most companies have flexibility in 10b5-1 rules including no minimum/maximum duration and allowing changes or terminations. Minimum Duration All Companies Silicon Valley No Minimum 69% 53% 6 Months 11% 9% 12 Months 19% 36% Other 1% 2% Allow Overlapping Plans: 65% No 76% 35% Yes 24% 0% 50% 100% Allow Trades Outside Plan: No 49% 61% Yes 51% 39% 0% 50% 100% Maximum Duration All Companies Silicon Valley No Minimum 56% 52% 6 Months 27% 15% 12 Months 14% 30% Other 3% 2% Allow Plan Termination: 35% No 26% 65% Yes 74% 0% 50% 100% Allow Plan Modifications: No Yes 43% 33% 57% 67% 0% 50% 100%

37 #10: Compare Stock Ownership Guidelines to Industry Trends

38 Stock Ownership Guidelines Executives/Employees The trend in executive/employee stock ownership guidelines has increased over the past seven years, with 84% of all companies imposing stock ownership guidelines. 53% of Silicon Valley companies had them in % 80% 70% 73% 80% 84% 60% 50% 40% 30% 20% 10% 54% 53% 0% All Companies Silicon Valley

39 Stock Ownership Guidelines Non- Employee Directors Non-Employee Director stock ownership guidelines have seen a similar upward trend. 90% 83% 80% 70% 60% 61% 68% 73% 50% 40% 43% 30% 20% 10% 0% All Companies Silicon Valley

40 Stock Ownership Guidelines Participant Guidelines Similar to prior year trends, there has been an increase in stringency of stock ownership guidelines at the top of the house as compared to senior and middle management. Ownership Guidelines Applied To: All Companies Silicon Valley Most Common Multiple (All Companies)* CEO 99% 100% 6 to 9 CFO 98% 90% 3 Other named executive officers 93% 79% 3 Other senior executives 60% 45% 2 Other management 9% 7% 1 Other exempt employees 2% 7% 1 Non-exempt employees 1% 7% *not collected *Silicon valley data is omitted due to low sample size

41 Silicon Valley All Companies Stock Ownership Guidelines Type of Guidelines Stock ownership guidelines are based on: Multiple or percent of compensation, 86% Set number of shares, 7% Other, 7% Set number of shares, 7% Other, 18% Multiple or percent of compensation, 75% *Silicon valley data is omitted due to low sample size

42 Stock Ownership Guidelines Type of Equity Guidelines The following count towards satisfying stock ownership guidelines: Share Type Counts Toward Guidelines All Companies Silicon Valley Unvested restricted stock 61% 36% Unvested phantom stock/restricted stock units 48% 9% Unvested performance shares/units 31% 17% Unvested shares in 401(k) plan 27% 13% Unvested shares purchased through the ESPP 14% 13% Unvested shares held in employee stock ownership plan (ESOP) 6% 4% Vested phantom stock/deferred stock 41% 13% Vested shares in 401(K) plan 55% 40% Vested shares purchased through the ESPP 51% 74% Vested shares held in employee stock ownership plan (ESOP) 14% 26% Shares owned indirectly by a trust or family members 66% 78% Other (not stock options) 8% 0%

43 Stock Ownership Guidelines Treatment of Stock Options About half of all companies and two-thirds of Silicon Valley companies count Stock Options toward Stock Ownership requirements. Stock options don't count, 23% Stock count towards guidelines, 52% All Companies Stock options don't count, 48% Silicon Valley Stock count towards guidelines, 77% Ownership Guidelines Applied To: All Companies Silicon Valley We grant stock options but they don t count 48% 23% We count options only after they have been exercised 27% 38% We count only options that are vested (whether or not they are in-themoney) 3% 4% We count only vested, in-the-money options 12% 8% We count all in-the-money options (vested and unvested) 3% 8% We count a percentage of vested options (whether or not they are in- 0% 0% the-money) We count a percentage of vested, in-the-money options 2% 8% We count unvested stock options (but not vested stock options) 0% 0% We count all options 4% 12% Other 1% 0%

44 Stock Ownership Guidelines Timeframe The timeframe to meet the stated stock ownership guidelines (includes survey companies that specified a timeframe) is most often 5 years: All Companies Silicon Valley 5 years, 57% 5 years, 50% No specific time frame, 27% No Specific time frame, 27% Other, 4% Other, 2% 3 years, 7% 1 year, 3% 4 years, 4% 3 years, 6% 1 year, 7% 4 years, 7%

45 Stock Ownership Guidelines Penalties A majority of companies impose penalties for failing to achieve the guidelines, most frequently requiring holding of exercised/vested shares or prohibiting sales. Require employees to hold all or a percentage of shares acquired upon exercise of options or vesting/payout of awards 25% 27% Prohibit all sales 4% 16% Require other forms of compensation to be taken in stock 4% 7% Disqualify employees from receiving future equity awards 4% 6% Other penalties 0% 1% 0% 10% 20% 30% All Companies Silicon Valley

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47 Appendix: Participant Profile

48 Participant Profile Primary Industry Classification High-Tech is the largest industry represented in this study. 40% 35% 37% 30% 25% 24% 20% 15% 13% 13% 13% 10% 5% 0% 1. High-Technology 2. Entertainment/ Shopping 3. Financial/ Insurance 4. Manufacturing 5. Other 1. High-Tech, Computer Related: Computer Software Services, High Tech Manufacturing, Biotechnology/Life Sciences, Medical Device, Technology Services and Telecommunications 2. Entertainment/Shopping: Food & Beverage, Leisure, Retail/Wholesale, and Media 3. Financial/Insurance: Financial Services and Insurance 4. Manufacturing: Non-Durable Goods and Durable Goods 5. Other: Construction/Real Estate, Energy/Mining, Healthcare, Miscellaneous Services, Pharmaceuticals, Transportation, Utility, and not classified

49 Participant Profile Corporate Headquarters Location There is strong representation of Corporate HQs across the United States. Other 5% Northeast, 20% Northeast (PA, CT, ME, MA, NH, NJ, NY, RI, VT) West, 24% Southeast (DE, DC, LA, MD, VA, WV, KY, AL, FL, GA, MS, NC, PR, SC, TN, VI) Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI, AR, OK) Southeast, 17% Southwest (NM, TX, AZ, UT) Southwest, 11% Midwest, 23% West (CA, CO, AK, HI, ID, MT, NV, OR, WA, WY) Other

50 Participant Profile Publicly Traded Is your company publicly traded? What is the primary exchange your company s stock is traded on? 4% 70% 60% 50% 66% 40% 30% 31% 20% Yes 96% No 10% 0% NYSE Nasdaq Global or Global Select Markets 2% Other

51 Participant Profile Publicly Traded 58% of companies generated less than $5B in revenues during the most recent FY. 20% 18% 16% 18% 17% 58% 29% 12% 14% 12% 10% 12% 13% 9% 10% 8% 7% 6% 4% 4% 4% 2% 3% 2% 0% Less than $ $ $100 million million million $ billion $ billion $5 7.9 billion $8 9.9 billion $ billion $ billion $ billion $25 billion and above Is your company a member of the Fortune 500? (n=467) Yes 45% No 55%

52 Participant Profile Market Cap. 45% of companies have a market capitalization of less than $5B. 25% 20% 45% 31% 12% 20% 15% 15% 15% 12% 10% 8% 8% 5% 4% 3% 5% 6% 4% 0% Less than $ $ $100 million million million $ billion $ billion $5 7.9 billion $8 9.9 billion $ billion $ billion $ billion $25 billion and above

53 Participant Profile Full Time EEs 67% of companies have more than 2,500 employees in the U.S. 25% 23% 20% 19% 19% 17% 17% 16% 15% 13% 11% 10% 8% 9% 8% 9% 6% 6% 6% 5% 2% 2% 3% 3% 3% 0% ,500 1,501-2,500 2,501-5,000 5,001-10,000 10,001-30,000 30, ,000 More than 100,000 In the U.S. Globally