April 8, 2009
Volume 2, No. 4

In this Issue:

Keeping Up with SOS

Webinar on April 22nd: China/India Syndrome

IFRS is Coming! (Part II)

Differentiating Equity Grants

SOS Xposé

Xtra Profile

Subscribe to Xtra!

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People Solutions

Data & Technology Solutions

Strategic Solutions

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Ideas or Questions:

Do you have ideas for our next newsletter or webinar? Topics you're dying to see addressed but haven't yet? Please send us an e-mail with your ideas to: xtra@sos-team.com.

Keeping Up with SOS
If you cannot see this e-mail, please open the following link: SOS Xtra: Volume 2 No. 4

As conference season isn't far from kicking into high gear, we thought we'd remind you of just a few of the conferences that SOS will be attending and presenting at this year and hope that you will take a moment to stop by and chat with our personnel, either at our booth or at one of their sessions. (Or just stop us in the hall, we love to network.  The more you people you know, the more connected you are to the industry.)

The NCEO/Beyster Conference April 22nd - 24th in Portland, OR. SOS will be presenting The Reprice is Right!
The E*TRADE Directions 2009 Conference, May 12th- 15th, in Hollywood, CA. SOS is presenting Big Trouble in Little China (& India), Strictly Restricted: Polishing Your Practices, and The Winds of Exchange.
The Global Equity Organization Conference June 10th-12th in Paris, France. SOS is presenting Nightmare on M&A Street.
The NASPP Silicon Valley Chapter All-Day Conference on June 18th. SOS will be presenting, but we will wait to announce our topic until after the SVC chapter publishes the conference schedule.
The NASPP National Conference: Just announced! November 9th-11th in San Francisco, CA. The speaker line-up is still being finalized, but SOS will be there!

Hope to see you!

Russ Cortez, VP Sales & Marketing
Stock & Option Solutions

P.S. It was pointed out to us after last month's article in Xtra on Keeping Up that we had omitted a couple of key sources of free information on equity compensation: the Equity Compensation Experts group and MyStockOptions.com. We apologize for the omissions!

*Please feel free to forward this newsletter on to others who might be interested in the content. You can join the SOS Xtra mailing list by clicking here.

Webinar: The China/India Syndrome - April 22nd

Follow this link to register for our next webinar:

Please join us for our next free webinar on Wednesday, April 22nd at 11am Pacific Time.

In spite of the ever-mounting challenges, equity compensation in China and India hasn’t been discontinued. How do you get SAFE registration completed or FBT handled and still maintain your sanity? This panel of international experts will provide:

- Overview of China SAFE registration requirements and documents/information required
- Survey data on how other companies are handling their SAFE registration
- Challenges and concerns: What to do before you begin the registration process
- Solid, real-world approaches for getting the SAFE registration completed
- Description of the India Fringe Benefits Tax (FBT) and impact to US issuers
- Ramifications of implementing a pass-through of FBT to employees
- Suggestions for solutions that you or your vendor can implement to ease compliance
- Market data on what other companies are (or aren’t) doing to comply with the requirements

 - Veena Bhatia, CEP, Stock & Option Solutions
 - Tracy de Swiet, CEP, Stock & Option Solutions
 - Craig Tanner, Reed Smith LLP

(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

IFRS is Coming! IFRS is Coming! (Part II)

In the March edition of Xtra, we summarized several of the key differences between FAS 123(R) and IFRS in accounting for "share-based payments". This month we continue that summary.  

- Liability treatment of net-settled awards
- Accrual for anticipated employer taxes based on intrinsic value
- Non-employee grants receive same accounting treatment as employee grants
- No safe-harbor ESPP

Liability Treatment of Net-Settled Awards
Under IFRS, awards that allow payment of taxes via share withholding are subject to liability accounting. This difference could be extremely problematic for many firms with RSUs since a large percentage of those companies allow (or mandate) share withholding as an easy way for participants to pay taxes due at the time shares are delivered (released).

In theory this treatment is only required for the portion of the award that is "cash-settled" (the shares due for taxes) but as a practical matter may be necessary for the entire award since the number of shares withheld for taxes will vary as the tax rate varies (common in international jurisdictions where a "flat rate" of withholding is generally not available).

Let's consider an example: An RSU for 100 shares is granted when the market value is $10 and allows the participant to choose to have shares withheld to cover the tax liability. At the most recent quarter close the market value of the stock is $25. The tax rate is 40%. The taxes due would therefore be $1,000 ($25*100*40%). Hence 40 shares would be required to cover taxes ($1,000 / $25). So 40 shares should receive liability treatment this quarter. The shortcut method to derive the number of shares that require liability treatment is to multiply the shares granted by the tax rate.

So 60 shares would be expensed at the grant-date market value of $10 and 40 shares would be "marked-to-market" each quarter.

Employer Taxes Liability Accrued (Mark-to-Market)
Under FAS 123(R), the amount of employer taxes to be paid is determined at the time the taxable event occurs (exercise, vesting, etc.). As with other liabilities, under IFRS the taxes that must be paid by the employer must be anticipated and a liability accrued for them. Since the amount of employer tax to be paid obviously varies each quarter depending on the market value of the underlying stock, the liability must be "marked up" and "marked down" with the movement of the market. Essentially this results in "liability accounting" for the employer portion of the payroll taxes. The calculations are the same as they would be for grants that receive liability treatment, but then the calculated gain is multiplied by the applicable employer tax rate.

This calculation becomes even more complicated when you consider that there are sometimes caps on the employer taxes (such as FICA); the mark-to-market calculations cannot be performed in a vacuum. The YTD wages for the employee must be known and used to determine the amount of tax remaining to be withheld. If the employee holds several outstanding grants, the hypothetical gain on the other awards must also be considered when computing this liability. Theoretically a first-in-first-out (FIFO) approach could be used, counting the hypothetical gain from the oldest grant against the limit before moving to the next oldest grant, but applying a FIFO methodology comes with its own share of headaches since the grants must be related to one another before the calculations can be performed.

Non-Employee Grants
The silver lining of IFRS 2 may be the treatment of non-employee grants. Non-employee grants receive the same equity treatment as employee grants. As you're probably aware, under FAS 123 and FAS 123(R) the accounting treatment of non-employee grants is governed by EITF 96-18 which required recalculation of the fair value of the grant at each reporting period up until the grant vested. Treatment is complicated further should an employee's status change and the grant is retained in that the accounting treatment must also change, prospectively. Under IFRS, none of these complications exist and changes of employee status will be accounted for much more simply.

No Safe-Harbor ESPP
Under FAS 123(R) section-423 qualified ESPPs can be considered non-compensatory (and therefore did not require the booking of compensation expense) as long as the discount on the ESPP does not exceed 5% and there is no lookback. For those companies that adopted "safe-harbor" plans in an effort to avoid compensation expense, they may now consider eliminating their ESPP all together. However, since participant rates generally dropped sharply when plans were modified to meet the safe-harbor requirements, hopefully this will not impact too many employees. Many companies kept their ESPPs intact with a 15% discount and a 6- to 24-month lookback. This change will obviously not impact those companies.

Please feel free to e-mail us with questions about or comments on this article. We love your feedback!

Differentiating Equity Grants:  The Dilution Solution
Fred Whittlesey and Kiran Sahota
Buck Consultants

The continual changes in accounting rules, tax law, proxy disclosure rules, institutional shareholder and proxy advisor policies, government regulation, and capital markets have caused companies to rethink equity compensation.  Pressure to reduce dilution has led to reductions in participation as well as frequency and size of grants.  During this evolution, the primary focus has been the financial impact:  accounting expense, tax effects, cash flow, dilution, and value transfer.  This, and a parallel focus on governance issues, has driven equity compensation practices without balanced attention to strategic and behavioral considerations. As a result, there is a growing concern that the core purposes of equity compensation have been compromised.

Efforts to reduce usage have put pressure on managerial decision-making processes that drive the allocation of equity to employees.  To improve the effectiveness of equity compensation, organizations must reconsider how some core human capital management processes – performance management, succession planning, and overall talent management - can support equity compensation decisions and restore the potential that equity compensation holds for improving organization performance. 

Effective differentiation requires considering the “past, present, and future” of each employee’s performance and allocating pay and provisions for that pay that address the incumbent’s unique status within the three criteria.  In addition, an equity compensation portfolio review must overlay the decision process due to the multi-year and cumulative nature of equity compensation.   Behavioral differentiation with a multi-year portfolio-based methodology is the solution for companies facing dilution constraints and pay governance challenges.


SOS Xposé
...tender tidbits about people and players in our industry...

Richard Edde of KLA Tencor welcomed Jeffrey Daniel Edde to the family on March 26th. Big sister Katie seems pleased with the addition so far.
Carmen Schlueter-Arszman delivered Chloe Marlene Arszman on March 23rd.
Tim Mercer of eHealth is expecting an addition to the family on August 21: a baby girl!
Emily Van Hoorickx, of UBS, was honored by Barron's for 2009 in The Top 1000 Financial Advisors nationwide.

On the Move!...
E*TRADE Corporate Services welcomes John Williams as Large Market Segment Manager, and John Carson as National Sales Manager.

April 9th: Boston NASPP: Are You Ready for IFRS2? 
April 9th: Radford Consulting's National Conference: The Future of Compensation: Strategies for the Evolving Global Economy in San Jose.
April 15th: Chicago NASPP: Stop Before You Swap
April 16th: San Fernando Valley NASPP: Rescuing Equity Compensation From Volatile Markets
April 17th: NY/NJ NASPP: Latest Trends And New Developments In Global Equity Plans
April 22nd: Carolina's NASPP: Spring Lunch Meeting
April 22nd: Denver NASPP: Equity Comp and Retirement Wealth Decline
April 22nd: LA NASPP: Equity-based Compensation – Where Are We Heading?
April 22nd-24th: NCEO/Beyster Annual  Conference, Portland OR
April 23rd: Seattle NASPP: Option Exchanges & Tender Offers
April 23rd: Twin Cities NASPP: Special Double Program
April 23rd: Houston NASPP: Option Exchanges - The Good, The Bad, and The Ugly
April 23rd: Western PA NASPP: Breakfast Briefing

CEP exam registration closes on April 24 (for the June 6 exam)! It's never been more important to get the right credentials - getting your CEP can actually save out-of-pocket expense - building expertise can reduce reliance on costly outside advice. And remember that SOS clients registering for a new CEP exam may be eligible for a discount - contact SOS for details.

E*TRADE Corporate Services is pleased to announce that Harold Ford, Jr will be presenting the keynote address at Directions 2009, May 12-15 in Hollywood.

Have something to Xpose? Email me! (But keep it clean, people!)
(All of the content included in SOS Xposé has been approved by the firms/people discussed.)

Xtra Profile:
Stephen Buckhout, Manager of Shareholder Services at Synopsys

Synopsys is a world leader in electronic design automation software and related services for semiconductor design companies. They deliver technology-leading semiconductor design and verification software platforms and integrated circuit manufacturing software products to the global electronics market. In addition, they provide intellectual property, system-level design hardware and software products, and design services to simplify the design process and accelerate time-to-market for their customers.

SOS began working with Synopsys in January of 2004, but the relationship between Stephen Buckhout and SOS’ founding Principals, Henley Hom, Barrett Scott, and Marianne Snook, pre-dates the existence of SOS itself.   Synopsys has weathered the economic storm rather well, but has still seen some “unanticipated consequences” of the rough patch we are all going through. We had the opportunity to speak with Stephen recently, and he shared his views, experiences, and thoughts.

What is your equity compensation background?  How did you initially get involved in this profession?
I received a degree in Industrial Psychology, which involves the study of man and machine interfaces, and figuring out how to motivate people to do the best job possible.  My father worked in a factory, and I wanted to work in an area where I could figure out a way to make working conditions better.  I eventually started working for Bank of America’s stock transfer agency handling M&As, which is about as crazy as equity comp.  After leaving BofA I kicked around for a few years until discovering equity compensation.  I worked for StockPlan until they went to New York, had a short stint at Synopsys, went to Intel for a year, then returned to Synopsys where I have been full time for the past 9 ½ years.  I currently hold the position of Manager of Shareholder Services, but have several co-workers who think the department should be renamed Rocket Science.

Tell us about equity compensation at your company.  Where is it handled? What are your responsibilities? What are the challenges you have worked to overcome internally?
We are a pay-for-performance company, and the top performers get the lion’s share of equity compensation.  Like many companies we’ve moved from options to RSUs, and also have a very attractive ESPP program, with 80% participation.  It allows for a two-year rolling lookback.  My position rolls up through Finance to the CFO by way of the Treasurer and the Controller.  Internally our biggest challenges are coordination between departments, and international issues resulting from issuing equity compensation globally.

I understand that Synopsys has not been impacted as much as many others by the economic troubles in the world.  What effect has Synopsys felt from the economic downturn?
We have actually seen some unanticipated consequences from our stock doing well in troubled times.  Our stock was up 15% in the last several weeks, and we have seen a significant increase in transactions. We had a lot of equity awards that were close to being underwater, and when the stock price rose there were a lot of unanticipated exercises.  We are also seeing a greater number of ESPP shares being flipped than in more normal economic times.

What industry-specific issues do you feel are having, or will have, the biggest impact on the way equity programs are managed?  How are (will) you coping with those challenges?
Internationally, I think that country-specific regulations are a hot-button issue, and I believe that IFRS is going to be a big challenge.  Generally, I am not happy about some of the knee-jerk reactions to the financial scandals of the last few years.  In theory, some of the changes appear helpful to solving the problems we’ve seen but, in practice, their effect can sometimes be to shift more and more of a company’s equity compensation away from the rank-and-file to senior people.  I would also like to see more focus on best practices, from a real world, as opposed to an academic perspective.  Everyone does things differently, so the more I can talk to people and see the different ways they handle things, the better I am able to determine what works and what doesn’t and get that information to everyone in my department.

What are the trends or changes in equity compensation that you think will have the most positive impact?
The growth and strength of professional organizations for information-sharing and networking will have a very positive impact on us all, especially those who are actively involved. Because international is so big for us, GEO is a big one for me and a fantastic resource, though I wish there was more involvement and participation.  I am excited to see three active NASPP chapters in the Bay Area, and GEO also has two chapters which provide great opportunities to network.  You just can’t learn everything there is to know about equity compensation on your own.

Tell us about your experience with SOS, and how you heard about us. 
I worked with the founders of SOS at StockPlan, so I was always aware of SOS and grew up with it.  Having worked with Henley, Marianne, and Barrett, I respected them and anticipated that the quality of SOS’ work would reflect the quality of the people I had worked with at StockPlan.  We’ve worked on a number of projects together over the years.  Folks like me are a real pain in the butt, because I call in SOS for a project and then ask “Shouldn’t you do it this way?” SOS often has a different approach, so we debate intellectually about those things, and come to a conclusion that works out well in the end.

Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisors. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.