Stocks Capital One
Stocks Capital One
Ten Stock Plan Administration Pitfalls and How To Avoid Them
Equity compensation plans can be very beneficial to your company and employees, but only if they’re properly implemented and executed. Unfortunately, there are several common pitfalls when it comes to plan administration. Ask yourself the following ten questions to ensure you’re avoiding these pitfalls and maximizing the benefits of your plan.
- IS THERE ONE PERSON ULTIMATELY IN CHARGE OF YOUR OVERALL PLAN ADMINISTRATION?
While it’s typically the job of the Board or the compensation committee to oversee the design and structure of the plan, the responsibility of day-to-day operations should fall to equity compensation experts within the organization. And within this group of experts, it is essential to have a ‘first among equals,’ responsible for monitoring the program’s overall operation. This person should be clearly distinguished as such to everyone in your organization, and must understand the deliverables and accountabilities of all areas that touch the plan, as failing to do so will negatively affect your plan’s performance. This person should also have the status and title to carry out this leadership role, as they will be the person the CEO and/or Board Chairman go to with questions or issues. - HAVE YOU CREATED PROCEDURES FOR ALL MAJOR ACTIVITIES?
It’s critical that your designated program co-ordinator ensures that procedures are created for all key transactional, filing and reporting activities. Nothing ruins a plan administrator’s day quite like an incomplete stock option exercise, or a missed deadline for an SEC Form 4 filing. - HAVE YOU MEASURED THE TOTAL EXPENSE OF YOUR EQUITY COMPENSATION PLANS?
Certainly there is great emphasis placed on the accounting expense and shareholder dilutive impact of your equity compensation program – and rightly so. However, the total cost of your program includes all the administrative expenses and the errors relating to the program (see Question 2 above). To accurately measure the cost-effectiveness of your plan, you need to understand what these costs are, and then take the necessary steps to improve upon them. - HAVE YOU SPECIFIED KEY PERFORMANCE MEASURES TO GAUGE THE SUCCESS OF YOUR EQUITY PROGRAM?
This is the “benefit” side of the cost-benefit analysis (see Question 3 above). Work with your management team to determine which factors you can use to gauge the success of your plans. These factors should be quantitative and measurable so that you can regularly track results against those standards. Don’t be afraid to raise the bar over time. - DO YOU HAVE EFFECTIVE PARTICIPANT COMMUNICATIONS?
Don’t overlook the importance of effective and regular communication with your participants. Many administrators make the mistake of assuming their participants have at least a working knowledge of the plan and the industry, but without a strong communication plan to facilitate this, this is not often the case – even with higher level managers. Participants and potential participants may undervalue their awards if they don’t fully understand how and when the awards will directly benefit them and, equally as important, how they need to perform to achieve the desired outcome. - HAVE YOU SURVEYED THE PROGRAM’S CONSTITUENTS?
How do you know whether your plan is operating well without surveying your participants and other impacted parties? Are there any deficiencies that can be improved upon? You won’t know unless you ask, and you can ask by creating a simple participant survey. If possible, make this survey available online and ensure your participants know how and where to access it. Going forward, you can standardize similar surveys to allow for year-over-year trend analysis, which you can then use to establish new performance standards and implement improvements. - DOES YOUR PLAN FIT ALL YOUR COMPANY’S OPERATIONS, NO MATTER HOW FAR REACHING AND DIVERSE THEY MAY BE?
In an era of globalization, many equity plans operate in multiple countries simultaneously, and this can create unique challenges for stock plan administrators. Details such as securities registration and requirements for filing, tax, accounting and privacy may differ significantly between countries. Failing to properly track international employee mobility and other tax-withholding requirements can also be detrimental to your plan administration. - DO YOU REGULARLY MAINTAIN THE INTEGRITY OF YOUR PLAN DATA?
Garbage in, garbage out. Although this seems obvious, don’t neglect to maintain the integrity of your plan data. This is done by regularly auditing all transactions and monitoring plan shares granted against shares approved, and plan shares issued against total shares outstanding. This management is not something you want to depend on your auditors for – data deficiencies suggest control issues and will raise a red flag for the audit overall. An ounce of prevention is worth a pound of cure. - DO YOU KEEP YOUR PLAN CURRENT WITH CHANGING REQUIREMENTS?
Equity compensation practitioners are aware of how frequently securities, tax and accounting standards can change. Remaining abreast of these changes is undoubtedly challenging, but is essential in ensuring your plan’s compliance. Also, don’t forget to verify that your equity plan software is up to date. Knowing about the changes is only half the battle; ensuring your software allows your company to conform to new requirements is the other half. - DO YOU KNOW WHEN TO GO OUTSIDE FOR HELP?
While we would all like to be completely self sufficient in managing our equity programs, the reality is that plan management is complex and dynamic. No one person should be expected to have a mastery of all the securities, accounting, tax, payroll and international requirements involved in a plan’s operations. Instead, make sure you and your team know which parts you can handle, and which parts you need help with – and who you can go to when you do need help. By using an outsourced provider and software specifically designed to address the changing landscape of plan administration, you can alleviate a significant portion of the risk associated with running equity-based compensation plans. Asking yourself the above questions will help you avoid the all-too-common pitfalls involved with stock plan administration, and the problems that commonly undermine a plan’s effectiveness.
Financial Stocks to Watch: American Express, Capital One – Bloomberg
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