Looking to make changes to an existing equity compensation plan?

Knowing when and how to make changes to an equity compensation plan is important. It might be a public company looking to broaden eligibility, a private company preparing for an initial public offering (IPO) or a business that’s reassessing how executives are rewarded. Here, we highlight some of the possibilities and plan types available as you look to make sure your incentives strategy is still serving you.

When might a company look to expand employee equity compensation?

• Recruitment and retention: In a competitive job market companies want to make themselves as attractive as possible to potential new hires and existing talent. One way to stand out from competitors is to offer stock-based incentives.
• Review recommendations: A company might hire an experienced third party to conduct a review of their equity compensation practices, either in response to specific circumstances, e.g., current plan expiring, tax code changes, employee feedback etc. or at regular intervals. The outputs from this will normally recommend changes based on gaps identified, changes to the business environment since the last such review, etc.
• Growth and expansion: High-growth companies may frequently revisit and expand their equity-based incentives as they achieve and surpass certain milestones. It’s not unusual for pre-IPO companies to adopt this approach.

What about switching providers?

This can also be an ideal moment to assess whether it’s time to move to a new equity compensation provider. This kind of change may seem like a hassle, but sticking with a vendor who you’ve outgrown or who no longer meets your needs isn’t going to benefit you in the long run.

Points to consider:

• Regional limitations: Can they cater for all your needs, including regional considerations for all the employees you want to make the plan available to?
• System functionality: Are there specific pain points that you have today or in the near future that aren’t being addressed, e.g. reporting, API connection, managing global stock plan, participant support.
• Growth restrained: Is the technology capable of supporting you as your company expands and grows through IPO, mergers and acquisitions or even into new regions globally?
• Offering restrictions: Are the employee equity plan types that you’re looking to offer supported?
• Cross-team breakdowns: Are all of your company’s stakeholders across HR, Comps & Benefits, Finance, Legal, Tax and more who input into your equity plan catered for? Are their pain points and needs addressed too?

Finding an equity compensation provider who is capable of meeting your needs, not only now, but into the future too is crucial for the long-term success of any equity plan. Look for a provider who can help make switching platforms as straightforward as possible for you.

At J.P. Morgan Workplace Solutions we have a dedicated implementation team who can walk you through the migration process, step-by-step and provide support along the way – from discovery around your requirements, through data import, testing and approvals, right up to go live.

What equity plan type is right for you?

When it comes to expanding your equity-based offering there’s no one-size-fits-all solution. What works best for you will be a function of your particular set of circumstances, i.e., your objectives, your size and your industry. Here are some of the most popular types.

Employee stock purchase plan (ESPP)

• Allows employees to purchase company stock, with the cost paid for via after-tax, payroll deductions.
• Shares are usually made available at a discount, normally between 5% and 15% of FMV.
• The discount will usually be calculated based on FMV on either the first or last day of the offering period, depending upon which price is more favorable to the purchaser, i.e., the lower price.
• Two types of ESPP – qualified and non-qualified. Qualified ESPPs are eligible for more favorable tax treatment, but companies have more leeway in how they design a non-qualified ESPP, e.g., they can offer a greater discount.
• Commonly used across many different business types.

Stock options

• Individuals are given the right to buy a set number of shares at an agreed price within a specific time period.
• There will usually be a vesting schedule linked to performance and/or time goals.
• There are two types of options: Incentive stock options (ISOs) and non-qualified stock options (NSOs). NSOs allow for more leeway, but ISOs are eligible for more favorable tax treatment.
• When the fair market value (FMV) is higher than the strike price, participants will be in line to make a profit when exercising shares.

Restricted stock

• Similar to stock options but differs on one key point – restricted stock is an upfront award, but with conditions attached, usually relating to time and/or performance. When the terms are met, participants then assume full ownership of the shares.
• Granted either for free, at a discount, or in line with FMV.
• The initial agreement will specify the number of shares, the purchase price (if any), and the vesting conditions.
• It is possible for participants to avail of favorable tax treatment, if they choose an Section 83(b) election and pay the bill upfront.
• Usually targeted at senior executives, which should be borne in mind when considering a restricted stock plan in the context of expanding your offering.

Restricted stock units (RSUs)

• A promise from the company to award stock in the future, when specific vesting conditions have been met.
• Recipients will receive stock free of charge. The only cost to them will be settling whatever tax bill arises at vesting.
• Whereas restricted stock tends to be for executives, RSU agreements are most commonly made with less senior employees.
• At vest, their value is based on FMV at that moment.
• Unlike with many other forms of equity compensation, companies can offer RSUs to outside consultants.
• Popular with large, successful companies, whether public or private.

What next?

Whether you’re thinking about switching providers, making changes to an existing plan or looking to introduce a brand-new offering we can help. At Workplace Solutions, we’ve worked with companies at all stages of their journey, both private and public, from around the globe with their equity compensation solutions.  Contact us today to speak to one our equity specialists.