5 Equity Plan Numbers You Need at Your Fingertips Sean Kelly, CEP Morgan Stanley Lisa Klevence, CEP Plan Management Corp. CJ Napolitano Paradata
Don t I just need numbers to complete my reporting requirements? No! All of those equity plan numbers you re tracking aren t just for your quarterly and annual filings There are many parties outside of FASB and the IRS who are interested in your plan data, including your Board of Directors/ Comp Committee Investors Plan participants (especially executives!) Proxy advisory groups (i.e., ISS & Glass Lewis) Auditors supporting your organization And each of these groups has its own interest and motive! -2-
Can t I just figure it out as I go along? We often hear from administrators that they DREAD the sound of their phone ringing! No one wants to be caught off-guard by an ad hoc request Knowing where to quickly find the numbers below can help you be prepared for some of the most common request Shares available to issue EPS Dilution/ Overhang Run Rate/ Burn Rate Weighted Average Remaining Period of Expense Status of Executive Grants - Sec 16, (award info, vesting, tax status, filing needs, etc.) Today we will discuss each of these numbers: who wants it, what it is, and how to get it -3-
1 Shares available to issue What it means Who s asking Why they ask The number of shares that are available to issue from the equity plan before shares authorized number is reached. Board of Directors Comp Committee CEO This number supports future planning by identifying how many new shares can be granted as incentives or to new hires. As the number gets low, the company will also need to plan to ask the Board or shareholders for approval to authorize additional shares. -4-
1 Shares available to issue How do I find it? Basic shares available to issue = Authorized shares - Shares Granted + Shares Canceled + Shares Held for Taxes Shares Available to Issue For most plans canceled shares will be returned to the available share pool. Some companies may also allow for shares held for taxes to be returned to the plan. To confirm your plan rules, check your SEC plan registration or corporate plan documents. -5-
1 Shares available to issue In some cases, if a company has a fungible share pool, the shares available to grant math will be impacted by the fungibility ratios For example, if a company plan has a 1:1 ratio for stock options, and a 1:2 ratio for restricted (i.e., full value ) awards, then the Shares Available to Issue math becomes: Authorized shares - Options Granted - (Restricted Award Shares Granted X 2) + Options Canceled + (Restricted Award Share Forfeits X 2) + Shares Held for Taxes Shares Available to Issue -6-
2 EPS Dilution/ Overhang What it means Who s asking The extent to which shares authorized or issued as part of an equity compensation plan will dilute the earnings and voting power of existing shareholders. Investors Proxy advisory groups Why they ask Investors are concerned about plan activity impact on the value of their securities and voting rights. Higher EPS = greater return on investment Dilution impacts ISS scorecard, and is now calculated both with and without overhang -7-
2 EPS Dilution/ Overhang How do I find it? Basic overhang calculation = A = Equity Plan Shares Authorized but Unissued B = Outstanding Equity Plan Shares C = Total Outstanding Common Shares Dilution (Overhang) = (A + B) / (A + B + C) Example: Company X has 100 shares outstanding J. Doe has 10 shares, or 10% ownership Company approves a plan for 20 shares If all plan shares are issued, there are now 120 shares of Common stock outstanding Dilution impact/ overhang = (20)/(120) = 16.667% -8-
2 EPS Dilution/ Overhang EPS Dilution How do I find it? Diluted EPS = Net earnings divided by Common stock and potential Common stock (equity awards, convertible securities, Warrants, etc.) The most common method for equity plan EPS dilution is to use the Treasury Stock Method Key assumptions: Exclude underwater options Weighted outstanding either full period or based on grant date The exercise proceeds from theoretical exercises are assumed to be used to buy back shares on the open market based on the average share price during the period Weighed shares minus the shares repurchased with exercise proceeds are the additional shares from the plan to include in the diluted EPS calc. -9-
2 EPS Dilution/ Overhang Treasury Stock Method Steps Disregard underwater options Calculate weighted shares outstanding (WSO) in the period (weight by the entire period unless shares were granted or settled in the period) Calculate the exercise proceeds used to repurchase buyback shares A Exercise price: (Exercise Price * WSO) B Tax benefit: ((((MV-Price) Fair Value) * Tax Rate) * WSO) C Avg. unamortized expense: (((Beg. Unamortized Expense + Ending Unamortized Expense) / 2) * (WSO / Total Shares)) Calculate the buyback shares = (A + B + C)/Avg Market Value If buyback shares > Weighted Shares Outstanding (anti-dilutive), remove grant from dilutive share number Weighted shares minus buyback shares = dilutive shares to add to the common stock number to get diluted EPS -10-
3 Share plan run rate/ burn rate What it means Who s asking Why they ask Used interchangeably, run/ burn rate measures the annual usage of shares for incentive purposes. Board/ Comp Committee Investors Proxy advisory groups The share pool will be used more quickly with a higher run rate, and mid to long-term, a high run rate may lead to high dilution (overhang) levels. ISS scorecard plan evaluation includes the 3-year average burn rate -11-
3 Share plan run rate/ burn rate Where do I find it? Gross run rate calculation A Total shares issued in fiscal year for incentives (option, RSU, restricted share grants) B Total Common shares outstanding at year end Run rate = A / B Net run/ burn rate subtracts canceled and forfeited equity awards from A Performance awards may be included as earned, rather than at grant Run rate calculation Run rate also becomes the denominator if trying to calculate how long the current share plan reserve will last: Estimated Plan Duration = (sum of new shares requested + shares remaining available for issuance) / average annual burn rate shares Investors may consider a run rate that is consistently higher than peer companies to be a sign of poor governance -12-
3 Share plan run rate/ burn rate The ISS Perspective ISS uses a 3-year average burn rate, as percentage of market cap Burn rate is compared to benchmark for peers in the same industry ISS burn rate calculation also applies a factor to full-value awards to give them extra weight (factor varies based on company stock price volatility) ISS does not calculate burn rate for companies with less than 3 years of history (i.e., IPO or companies recently out of bankruptcy) ISS scorecard also looks at Plan Duration A Total options issues + full value shares awarded * multiplier B Weighted Average Common Shares Outstanding Run rate = A / B As long as performance awards are clearly and consistently disclosed, ISS will also include performance awards in the burn rate calculation when earned, rather than granted -13-
4 Weighted Average Remaining Period of Expense (WARP) What it means Who s asking Why they ask Provides an estimate of the amount of time it will take to fully expense the remaining amount of unrecognized equity compensation expense. CFO/ finance team Audit teams WARP is a disclosure requirement under ASC718, and also gives the finance team a weighted average estimate of the remaining periods during which the company will carry stock comp expense for the plan. -14-
4 Weighted Average Remaining Period of Expense (WARP) Where do I find it? WARP Calculation Calculated by grant or tranche A Expiration date current reporting period end date for a grant/ tranche B Total unamortized expense for the grant/ tranche C Total unamortized expense for all grants/ tranches N Represents number of tranches or grants being evaluated WARP = SUM N (A*B for each grant or tranche)/ C -15-
4 Weighted Average Remaining Period of Expense (WARP) Example calculation Report date 12/31/2015 Grant Expiration Date A Days remaining at 12/31/2015 Unamortized expense at 12/31/2015 A x B 1/1/2009 1/1/2019 1,097 $1,200 1,316,400 6/1/2011 6/1/2021 1,979 $1,800 3,562,200 1/1/2013 1/1/2023 2,558 $2,400 6,139,200 Total: $5,400 11,017,800 WARP = 11,017,800/ $5,400 = 2,040 days 2,040/365.25 = 5.59 Years B C -16-
5 Executive Grant Status What it means Who s asking Why they ask How many awards are held by Executives? What portion are vested vs. unvested? Are all Executive filings up to date? Are there any special provisions (e.g., holding period or clawback)? Executives HR Investors Proxy advisory groups Executives want to understand their own award positions HR is often tasked with supporting Executives in managing their awards Both investors and proxy groups look at CEO grant amounts & features -17-
5 Executive Grant Status What do Executives and HR need to know? What do Executives and HR want to know? Exercisable shares 10b5-1 enrollment status Corporate insider filing rules must file with the SEC a statement of ownership regarding those securities Form 3 - insiders must file a Form 3 within ten days of becoming an officer, director, or beneficial owner. Form 4 changes in ownership must be reported on Form 4 to the SEC within two business days of the transaction Form 5 Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. If a Form must be filed, it is due 45 days after the end of the company's fiscal year. -18-
5 Executive Grant Status What investors and proxy advisors want to know about Executive awards? Proxy advisors and ISS scorecard look for the following CEO s grant vesting period for all awards received in last 3 years CEO's proportion of Performance-Conditioned awards (conditioned on achievement of a disclosed goal) Whether or not awards are subject to clawback in the event of certain financial restatements Holding period whether or not company requires shares received from grants under the plan to be held for a specified period following their vesting/exercise -19-
Phew, that s a lot, now what? You don t have to memorize everything! Update numbers each period (or as needed for executive filings) Stay organized and know where to find key figures Consider a system or provider to automate calculations and facilitate ad hoc reporting In no time you ll be accepting those calls with confidence! -20-
QUESTIONS? -21-