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The Equity Compensation Update

Corey Rosen

March 6, 2014

(Corey Rosen)

Bureau of Labor Statistics National Compensation Survey Says 8% of Private Sector Employees Have Stock Options or Are in ESPPs

The 2013 National Compensation Survey from the Bureau of Labor Statistics shows that 8% of private sector employees, or 9.2 million employees, are in what the BLS defines as "stock option" plans. Unfortunately, the BLS definition simply defines these plans as "plans [that] allow establishment employees the right to buy company stock at a fixed price by a fixed time." That definition would include stock options granted by employers as well as employee stock purchase plans. The definition does not include (nor does the BLS collect data on) other forms of individual equity grants, such as restricted stock, phantom stock, or stock appreciation rights.

More useful are the data the BLS compiles on the distributions of participation by sector and employee type. Not surprisingly, the plans are most common in the information industry, where 31% of employees participate, and least common in leisure, health care, and education (many businesses in these sectors are nonprofits).

In 2011 and 2012, 8% of employees were in these plans, compared to 9% in 2009 and 7% in 2010.
Firm and Employee CharacteristicsPercent Receiving Stock Options or in ESPP
Employee Characteristics
Management and professional12%
Sales and office employees9%
Production employees6%
Lowest 25% percentile in wages4%
26th-50th% percentile in wages6%
51st-75th percentile in wages12%
76th-100% percentile in wages14%
Selected Firm Characteristics
Leisure, healthcare, education2%
Professional and Business Services11%
1-99 employees5%
100-499 employees12%
500 or more employees15%

SEC Proposal Would Make It Easier to Create Internal Stock Markets

Only a handful of companies, most notably CH2MHill, operate internal stock markets to allow employees to buy and sell shares. There are a number of reasons for this, but one has always been regulatory cost and complexity. Companies needed to register the shares, provide extensive financial reporting, and comply with Blue Sky securities laws in each state in which they operate. On December 18, 2013, the Securities and Exchange Commission issued a new proposal to make this process substantially easier. The comment period on the proposal ended on February 18.

The SEC's proposal would change Regulation A, an existing exemption from registration for small offerings of securities up to $5 million within a 12-month period and not more than $1.5 million for existing securities holders. This $1.5 million limit means many employee ownership companies will have too many shares on offer to qualify for the exemption. The revised proposal would provide an option to increase that to $50 million overall and $15 million for existing security holders. It would still require significant reporting requirements, generally comparable to those for public companies, but would exempt companies from Blue Sky compliance in each state in which they operate. Companies that want to offer less than $5 million overall per 12-month period and not more than $1.5 million for employee securities holders would be able to have somewhat less onerous reporting requirements.

IRS Finalizes Rules for Defining Substantial Risk of Forfeiture Under Section 83(b)

In a newly issued final regulation (T.D. 9659, 79 Fed. Reg. 10,663, 2/26/14), the IRS issued final rules defining what constitutes a substantial risk of forfeiture under Section 83(b) of the Code. The final regulations make no changes to existing practice. They stipulate that:

The IRS declined to add to the definition involuntary separation from service. It also clarified that unless an executive would be subject to a lawsuit under Section 16(b) or the Code, which restricts when executives may sell shares, transfer restrictions that require forfeiture or part of all the property do not qualify as a substantial risk of forfeiture.

NASDAQ Creates Secondary Market for Shares in Closely Held Companies

NASDAQ announced that it has created a new secondary market marketplace for private companies. The NASDAQ Private Market, LLC will "provide qualifying private companies the tools and resources to efficiently raise capital, control secondary transactions, and manage their equity-related functions. Securities-related services will be offered through a wholly-owned broker-dealer and SEC registered alternative trading system, NPM Securities, LLC, member FINRA/SIPC."

Companies must meet NASDAQ Private Market's membership requirements. These require that members must meet at least one of the following criteria:
Funding Received $30 million within last 2 years
Enterprise Value$50 million
Total Assets and Annual Revenue$50 million for each
Annual Net Income$750,000
Shareholders' Equity$5 million
HistoryAt least two years of operations
SponsorshipBacking by recognized financial investor(s) with a track record of successful venture investments
Companies can use the platform to manage liquidity programs for employees and other shareholders. The market allows companies to "identify a pool of potential buyers and set parameters on the percentage of holdings that shareholders can sell."

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