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Administering
Stock
Option
Plans
Brent Longnecker, CCP, CBP, CCC
Pamela Van Gordon, CEP
Administering
Stock
Option
Plans
Any laws, regulations or other legal requirements noted in this publication are, to the best of
the publisher’s knowledge, accurate and current as of this book’s publishing date. WorldatWork
is providing this information with the understanding that WorldatWork is not engaged, directly
or by implication, in rendering legal, accounting or other related professional services. You are
urged to consult with an attorney, accountant or other qualified professional concerning your
own specific situation and any questions that you may have related to that.
This book is published by WorldatWork. The interpretations, conclusions and recommendations
in this book are those of the author and do not necessarily represent those of WorldatWork.
© 2008, 2005, 1996 WorldatWork.
ISBN 978-1-57963-192-5 (Spiral bound)
978-1-57963-250-2 (E-book)
No portion of this publication may be reproduced in any form without express written
permission from WorldatWork.
Editor’s Note: The discussion in this book is very general and may not be appropriate
in every circumstance. It is not meant to be legal, tax or accounting advice. Each
company should consult with its own internal and external advisers.
Personnel Data
Stock plan recordkeeping systems securely store personnel data, so that
equity grants can be assigned to specific employees. This data can include
all employees eligible to receive stock options or just those receiving grants.
Personnel data includes (but is not limited to) full employee names,
Vesting
Another important detail for the recordkeeping system is the vesting
schedule. There are two common forms of vesting schedules: time-based and
performance-based. With time-based vesting, shares subject to the option
become available for the employee to purchase at a stated frequency after
the grant date. For example, 25 percent of shares granted will vest on the
anniversary of the grant date over four years, or 100 percent at the end of
year four. Shares subject to options with performance-based vesting become
purchasable when the performance metrics are met, such as when the
company reaches specific revenue or earnings-per-share targets.
In some cases, a stock option will have both time- and performance-based
criteria, with the vesting occurring at the earlier of the time-based schedule or
the performance goals being met.
Types of Exercises
An exercise is the act of purchasing shares underlying a stock option: The
employee is exercising his/her right to purchase the shares granted by the
company. The process of a stock option exercise is very basic: The employee
pays to the company the option price multiplied by the number of shares
exercised, plus applicable taxes; the company then delivers the shares to the
employee, either directly or through a transfer agent. In its simplest form, this
type of exercise often is referred to as a “cash exercise.”
As the usage of stock options has expanded throughout companies,
this basic process has shifted to enable greater trading efficiency and allow
the employee to fund the exercise without out-of-pocket cash. This type of
exercise commonly is called a “cashless” or “same-day-sale” exercise. Because
many employees opt to sell shares as soon as they are exercised, a captive
broker can facilitate that process by conducting the sale based on verification
from the company that the employee has the right to exercise those shares.
The company delivers the shares to the broker to cover the sale; the broker
remits the total option cost and taxes to the company and the resulting net
cash to the employee. This enables the employee to fund the exercise out of
the sale without direct handling of the shares. It is standard for these types
of transactions to finalize or “settle” within three business days.
Another variation is the “sell-to-cover” exercise, in which the employee
sells enough shares out of the shares exercised to fund the option cost,
plus applicable taxes, resulting in net shares that the employee can sell at
a later date.
A type of exercise that is gaining in popularity is the “net exercise.” In this
type of transaction, the company withholds shares equal to the amount owed
Exercise Process
If the company utilizes a captive broker, the employee contacts the broker to
initiate the exercise, often through the broker’s Web site or call center. The
broker confirms the employee’s stock options, including the number of shares
available to exercise. The employee selects the option to exercise, the number
of shares and the exercise type. If a sale of shares is involved, the broker sells
the shares according to the employee’s instructions. If no sale is involved,
the broker may collect the funds to pay for the shares directly from the
employee’s brokerage account.
The broker notifies the company of the exercise, with the company
determining the total amount owed and collecting the funds from the broker.
The company instructs the transfer agent to send the shares to the broker to
cover the exercise. The broker settles the transaction by releasing the total
Payroll
Communication with the payroll system is very important, as it drives tax
reporting for employees. Typically the payroll department provides certain
types of basic data about the employee, so at the time of exercise, the correct
tax withholding can be calculated. For example, this may include state rates
based on the employee’s location at the time of exercise and whether the
employee has exceeded the Social Security cap for the current year. Many
companies create an automatic, regular data feed from the payroll system to
the stock plan recordkeeping system to ensure this information is updated
frequently; the information can then be sent to the captive broker to speed
Corporate Tax
At the corporate level, companies receive a tax deduction for all taxable
income reported on employee Form W-2s, either from ISO disqualifying
dispositions or NQSO exercises, so the company should ensure all
transactions have been captured and recorded in a timely and accurate
fashion. Usually the company’s tax department requests reports on
transactions to record the associated tax deductions.
There are other particularly complex tax rules companies need to be aware
of and, in some cases, track and administer. Stock plan administration and
the stock plan recordkeeping system are keys to providing accurate transaction
and tax-related data and reports to support these efforts.
Accounting
Under the Statement of Financial Accounting Standards (SFAS) No. 123 and
123(R), companies must calculate the fair value of all stock options at the
time the options are granted. The calculation requires various inputs into
a valuation model. The fair value, or expense, of the option must then be
taken as an actual cost to the company’s bottom line on its financial reports.
Section 16 Insiders
For publicly held companies, transactions performed by certain employees
and affiliates must be reported directly to the SEC subject to Section 16 of
the Securities Exchange Act of 1934. Typically the persons subject to these
rules are the board of directors, executive officers and any employee or
affiliate deemed to possess a consistently high degree of nonpublic material
knowledge about the company. For example, a senior vice president of sales
or the corporate controller may be included in this group. These regulations
Insiders
Section 16 insiders usually are part of a larger group of designated insiders
who are subject to “trading windows,” or specific times of the year when
these employees are allowed to conduct company stock transactions,
including stock option exercises. The period during which a trading window
is closed is called a “blackout.” Regular insiders may include employees
down to the manager level, and those in finance or sales with confidential
access to company performance information. The company’s legal counsel
will be in charge of defining persons subject to these policies and pre-
clearance procedures to ensure all transactions conform to the company’s
trading controls.
All Employees
Both privately and publicly held companies should have formal insider
trading policies that prevent all employees from distributing or misusing
nonpublic material knowledge outside of the company. Companies may
require employees to sign an acknowledgement of receipt and understanding
of the policy.
Reprinted with permission from the 2000 Stock Plan Design and Administration Survey, presented by the
National Association of Stock Plan Professionals (NASPP) and PricewaterhouseCoopers LLO, published by the
NASPP (www.naspp.com), Copyright 2000.
Avoiding Advice
As a form of equity ownership, stock options are an investment and must be
treated as such. While communicating the value of stock options, companies
should avoid giving tax and financial management advice to employees. They
should be advised of both the risks and benefits in order to make proper
decisions based on their own situation, such as whether to exercise, when to
exercise, what kind of exercise to conduct and how many shares to exercise.
The company may choose to recommend a network of professional tax and
financial management advisers knowledgeable of stock options for employees
to contact on their own. It is helpful to provide a list of suggested questions to
qualify an adviser regarding personal circumstances.
the number of shares to be granted. It should be noted in the offer letter that
the grant is subject to approval by the board of directors and will be governed
by the terms of the plan under which it is granted. In other words, the grant
offer is conditional until the board approves the option.
When the employee begins work, he/she may attend a new-hire
orientation and receive a new-hire packet. Some educational information can
be provided at that time, such as when to expect a stock option agreement
package. It is advisable to keep this discussion to a minimum, as not all
employees attending the orientation may be eligible to receive stock options.
Stock options also usually do not vest for some time, so new-hire orientation
may be premature for any detailed discussion.
Focused Audiences
In most cases, companies will have different types of employees requiring
education. These may include: senior executives and/or Section 16 insiders,
managers, rank-and-file employees, specific departments or divisions, or
employees in non-U.S. countries or geographic regions. Communications and
methods of information sharing should be tailored to these groups, as their
motivations, responses and behaviors may be different.
Note that some countries require the company to translate documents
into an employee’s local language.
Data Privacy
There are regulations that protect the privacy of data transmitted outside the
United States. If the company wishes to transmit any sensitive stock option
information to non-U.S. employees, it should obtain legal counsel
on what can be provided and in what format. In some cases, employees must
authorize the company to transmit this information electronically. Data
privacy laws also cover external service providers who may outsource certain
functions requiring the transmittal of client data.
The Option is granted under the ABC Company 20XX Long-Term Incentive Plan (the
“Plan”) and subject to the Terms and Conditions of the Option (the “Terms”) attached to
this Option Agreement (incorporated herein by this reference) and to the Plan. The Option
has been granted to the Participant in addition to, and not in lieu of, any other form of
compensation otherwise payable or to be paid to the Participant. The Option is intended
as an incentive stock option within the meaning of Section 422 of the Code (an “ISO”).
Capitalized terms are defined in the Plan if not defined herein. The parties agree to the
terms of the Option set forth herein, and the Participant acknowledges receipt of a copy
of the Terms and the Plan.
CONSENT OF SPOUSE
In consideration of the Corporation’s execution of this Option Agreement, the undersigned
spouse of the Participant agrees to be bound by all of the terms and provisions hereof
and of the Plan.
_________________________ _______________________
Signature of Spouse Date
John Doe
Address 1
Address 2
Address 3
Enclosed are:
1. An optionee statement which summarizes your stock option account
2. Exercise forms which can be used with the above-mentioned vesting
I elect to purchase _____________ (company name) common shares at $ _____ per share
under my stock option date_______. I understand that I must pay the Company
not only the purchase price of these shares, but any additional withholding necessary
for federal income, Social Security, and state and local tax, where applicable. Enclosed
is a check payable to (company name) for $_______.
Following is my name and address as I wish it to appear on the registration of the stock:
Note: Your name must appear in the registration of any stock you purchase pursuant to
the exercise of a stock option. If permitted by the laws of your state, you may have your
stock issued in joint tenancy, such as “John Doe and Mary Doe, Jt. Ten.” In such case,
the word “and” must be used, not “or.” If you have any questions concerning the legal or
tax implication of joint ownership of your shares, you may wish to consult your attorney
or tax advisor.
The undersigned (the “Purchaser”) hereby irrevocably elects to exercise his/her right,
evidenced by that certain Incentive Stock Option Agreement dated as of
____________________ (the “Option Agreement”) under the ABC Company Inc.
Long-Term Incentive Plan (the “Plan”), as follows:
the Purchaser hereby irrevocably elects to purchase __________________ shares of
Common Stock, par value $0.01 per share (the “Shares”), of Resources Connection Inc.
(the “Corporation”), and such purchase shall be at the price of $__________________ per
share, for an aggregate amount of $__________________ (subject to applicable
withholding taxes pursuant to Section 6.5 of the Plan).
Capitalized terms are defined in the Plan if not defined herein.
_______________________________________________________________________
_______________________________________________________________________
Plan and Option Agreement. The Purchaser acknowledges that all of his/her rights are
subject to, and the Purchaser agrees to be bound by, all of the terms and conditions of
the Plan and the Option Agreement, both of which are incorporated herein by this
reference. If a conflict or inconsistency between the terms and conditions of this
Exercise Agreement and of the Plan or the Option Agreement shall arise, the terms and
conditions of the Plan and/or the Option Agreement shall govern. The Purchaser
acknowledges receipt of a copy of all documents referenced herein and acknowledges
reading and understanding these documents and having an opportunity to ask any
questions that he/she may have had about them.
Notice of Sale. Upon any sale or other transfer of the Shares within either one year of
the date that they are acquired by the Purchaser or two years after the Award Date set
forth in the Option Agreement, the Purchaser agrees to provide the notice required
under Section 2.4.3 of the Plan.
ACCEPTED BY:
ABC Company Inc.
“PURCHASER”
a Delaware corporation
_________________________________ By: ________________________________
Signature
Print Name: ________________________
_________________________________
Print Name Title:________________________________
(To be completed by the Corporation
_________________________________
after the price [including applicable
Address
withholding taxes], value [if applicable]
_________________________________ and receipt of funds is verified.)
City, State, Zip Code
July 8, XXXX
You are hereby authorized to prepare and issue stock certificate(s) and deliver the
shares of Common Stock as indicated below. The shares are being issued to cover
the exercise of stock options under ABC’s Stock Option Plan.
Best regards,
XXXXXXX
Manager, Stock Plan Administration
July 7, XXXX
You are hereby authorized to issue and deliver the shares of Common Stock as indicated
below via DWAC. The shares are being issued to cover the exercise of stock options under
ABC’s Stock Option Plan.
Best regards,
XXXXXXXXX
Manager, Stock Plan Administration
John Doe
Address 1
Address 2
Address 3
Note: For nonqualified stock options, the market price is your per-share basis price.
John Doe
Address 1
Address 2
Address 3
John Doe
Address 1
Address 2
Address 3
As of XX/XX/XX
Pamela Van Gordon, CEP, is the Chief Operating Officer of Stock &
Option Solutions (SOS), a leader in providing expert stock plan
management consulting and administration to companies nationwide.
In this role, she manages strategic consultative divisions and internal
functions, including human resources. Her experience covers compen-
sation and benefits programs, shareholder relations, private/pre-IPO
and global enterprise companies, and corporate services business
development with a major brokerage firm. She is a Certified Equity
Professional and a member of the Certification Council of the Certified Equity Profes-
sional Institute. She also is the Western region liaison for the National Association
of Stock Plan Professionals. She has spoken on issues in equity compensation
administration at a national level.