New NCEO Report Looks at Equity Issues in the Downturn

A new NCEO issue brief, Equity Compensation in a Down Market: Repricing, Accounting, ESPP, and Employee Communications Issues, examines issues that arise in dealing with equity compensation plans in a down market. Contributors to the 63-page publication include leading experts on the topic from around the United States.

Some of the key concepts that emerge from the publication include:

• The most popular option exchange programs trade options for cash (48%) and options for stock (36%).
• Only 31% of companies allow directors to participate in options exchanges, and 58% allow CEOs.
• The median options-for-options exchange ratio is 1.4 to 1.
• Most exchange offers are treated as tender offers under SEC rules and must be carefully designed to be compliant with those rules.
• Changes in market volatility in the last year have made prior valuation assumptions for many companies outdated. No method is perfect for valuing new awards. The issue is not just one for accountants to worry about. The valuation of options becomes a human resources issue, especially when exchange ratios are based on assumptions about the present value of new awards.
• In some jurisdictions outside of the U.S., an exchange program will trigger taxation.
• Companies whose stock prices have fallen sharply are often finding they do not have enough authorized shares to satisfy the number of shares needed for exercise in their employee stock purchase plans (ESPPs).

The issue brief also explores how best to communicate changes in equity programs and the impact of the economy on existing programs. Equity Compensation in a Down Market: Repricing, Accounting, ESPP, and Employee Communications Issues is available to NCEO members for $15 and non-members for $25.