11th Annual CEP and Silicon Valley NASPP Symposium March 24, Copyright 2015 CEP Institute 1

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1 Outline CliffsNotes on Equity Compensation Elizabeth Stoudt, ASA, CEP, Radford, An Aon Hewitt Company Michael Palermo, CEP, Fidelity Investments Ben Needham, CEP, Comverse, Inc. Panelist backgrounds Acronym cheat sheets Overview of Types of Equity Compensation The 4 pillars Resources Q&A Equity Compensation from all walks of life An actuary, recordkeeper, and plan administrator walk into a bar How we cracked our equity compensation egg Career forks and paths Acronym cheat sheet SBC = share-based compensation SO = stock option ISO = incentive stock option; statutory NQSO = non-qualified stock option; non-statutory; NQ RSA = restricted stock award, aka restricted stock RSU = restricted stock unit PSA/PSU = performance share award/unit ESPP = employee stock purchase plan 16B = a top-level employee held to more stringent rules Insider = an employee that has access to non-public information Copyright 2015 CEP Institute 1

2 C-suite = top-level executives with Chief in their title BOD = Board of Directors Blackout = a period of time when insiders cannot buy/sell company shares 10b5-1 = contract to sell company shares even in a blackout 144 = Rule 144; special requirements for insiders to sell company shares 423 = Section 423 of the IRS tax code relating to tax-qualified ESPP 422 = Section 422 of the IRS tax code relating to ISO AMT = alternate minimum tax QD = qualified disposition DD = disqualified disposition OI = ordinary income LTCG = long-term capital gain LTCL = long-term capital loss STCG = short-term capital gain STCL = short-term capital loss 83(b) = an election to pay taxes at time of grant instead of vest ASC718 = formerly FAS123(r); accounting rules on SBC FMV = fair market value FV = fair value B-S = Black-Scholes-Merton valuation, poor Merton DTA = deferred tax asset APIC = additional paid-in capital EPS = earnings per share FR = forfeiture rate OGA = online grant acceptance SOX = Sarbanes-Oxley; controls to prevent corporate or accounting fraud TA = transfer agent = [audience, are there any other acronyms you always see and/or hear about?] Stock Option The original gangster Think GroupOn Key terms: Exercise, Hold, Sell ISO: aka Incentive stock option, aka Statutory stock option, aka qualified stock options AMT $100k rule Employee can benefit if shares held longer than 1 year from exercise and 2 years from grant date by having less taxes taken QD or DD NQSO: aka NQ, aka non-qualified stock option, aka non-statutory stock option Copyright 2015 CEP Institute 2

3 RSA and RSU What?!..equity compensation has to be included in my P&L?! Full-value RSA 83(b) election Recipient becomes shareowner and has voting rights when issued RSA grant Earn dividends before vest date RSU Think I.O.U. of company stock once vested Recipient becomes shareowner once vested Earn dividend equivalents Performance Grants Time-based vesting v. Performance-based vesting If performance conditions are met, then shares will vest Company/internal-based v. Market-based Explicit v. Implicit vest period Performance ratio ESPP Think Black Friday Sale Key terms: Offering period, Purchase period, Enrollment date, Purchase date, Purchase price, Discount, Look-back How it works Section 423, aka Qualified, aka statutory All employees eligible to participate Equal rights and privileges $25k limit QD v. DD Non-qualified The 4 Pillars Administration Regulatory/Legal Tax Accounting Copyright 2015 CEP Institute 3

4 Administration The Players Issuer, aka the company that issues equity compensation Participants recipients of equity compensation Usually employees of the issuer, but can be non-employees (e.g. BOD or consultants) Administrator/Recordkeeper manages the day-to-day activity of an equity compensation plan and stores all of the participant and grant data Broker enables participants to transact their equity compensation with the stock market (e.g. sell company stock) Transfer Agent custodian of Issuer s shares The Referees SEC oversee the stock market and ensure the Company is staying within bounds IRS and Tax Authorities ensure they receive a piece of the income pie Regulatory/Legal Equity Plan Board and Shareholder approval Plan Document Award Agreement Section 16 Subject to additional rules compared to broad-base employees Form 3, 4, and 5 requirements Insiders/Blackouts Rule b5-1 trading contracts Sarbanes-Oxley Tax Death and taxes QD v. DD ISO and 423 ESPP Ordinary Income v. Capital Gain/Loss Stock option RSA/RSU ESPP Domestic v. Foreign rules Section 6039 Accounting FMV v. FV Valuations Stock options: B-S, Lattice RSA/RSU: FMV = FV ESPP: B-S Performance: depends Forfeiture Rate assumption Expense = FV * share Straight-line v. Accelerated Recognized v. unrecognized (aka amortized v. unamortized) Termination If terminate before vest, expense reversed If terminate after vest, expense stays Dilution and EPS DTA and APIC Copyright 2015 CEP Institute 4

5 Resources CEPI Q&A What else is on your mind? CEPI books The Stock Options Book by Alison Wright, Alisa J. Baker, and Pam Chernoff Consider Your Options by Kaye A. Thomas Organizations: NASPP, GEO, NCEO, MyStockOptions.com LinkedIn groups Panelists! Panelist Contact info Elizabeth Stoudt, ASA, CEP Michael Palermo, CEP Ben Needham, CEP Radford, Comverse, Certified Equity Professional Institute, NASPP, and Fidelity Investments are not affiliated I Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI Copyright 2015 CEP Institute 5