How Does Your Stock Plan Compare? (Part 1)
It is hard to find comparative data on stock option and restricted stock grants. Fortunately, the 2013 Domestic Stock Plan Design Survey and the 2014 Domestic Stock Plan Administration Survey by the National Association of Stock Plan Professionals (NASPP) offer data letting you compare the terms of your equity awards to those of grants at other companies. Of course, you need to be familiar with the specifics of your company's plan, as those are the rules that apply to you.
Types Of Stock Compensation
|Restricted stock and restricted stock units are now the most commonly used types of equity award.|
After many years of catching up on stock options, restricted stock and restricted stock units (RSUs) are now the most commonly used types of equity award among the companies studied by the NASPP. The 2013 survey revealed that 81% of the responding companies award restricted stock and/or RSUs—and most of them (77%) grant RSUs. For further updates on the use of restricted stock/RSUs at companies, see a related FAQ.
A majority of the surveyed companies (68%) still have plans that allow grants of stock options or stock appreciation rights (SARs). Nonqualified stock options (NQSOs) are still the most common form of option. Among the responding companies that grant stock options or SARs, 92% have employees who receive NQSOs, and 20% have employees who receive incentive stock options (ISOs).
Most of the companies surveyed by the NASPP (93%) have omnibus stock plans in which more than one type of equity award is offered to employees and executives. It is interesting to note that the higher your employment rank in a company is, the more likely you are to receive an equity award, particularly performances shares and stock options. For example, performance-based awards are granted much more often to the CEO and other named executives (at 70% of the companies) than to middle management (at only 24%).
The table below shows the surveyed companies' eligibility practices at various levels in the corporate hierarchy. (The table gives the percentage of companies that make each type of grant available to the specified group.)
|Corporate level||Stock options or SARs||Restricted stock/RSUs||Performance-based awards|
|CEO, CFO, and named executive||52%||73%||70%|
|Other Senior management||47%||76%||58%|
|Supervisors, other professionals, and salaried support staff||17%||45%||9%|
For the types of awards granted to at least one level of employee, 81% of the companies surveyed in 2013 reported that they grant time-based restricted stock, and 72% grant performance awards. Just 54% of the responding companies grant time-based stock options.
Reasons For Making Grants
The 2013 survey gives the following as the most commonly reported corporate reasons for granting stock options and restricted stock/RSUs.
|Reason for making grants to employees or executives||For stock options (% of companies)||For restricted stock/RSUs (% of companies)|
|Align with shareholder interests||79%||86%|
|Remaining competitive with industry peers||67%||68%|
|Fostering a culture of employee ownership||52%||55%|
|Reward for meeting specific performance targets||24%||39%|
|Normal practice at hiring||23%||25%|
Restricted Stock & RSUs: Vesting, Withholding Methods, Deferral Features
For restricted stock and RSUs, the prevailing form of vesting among the companies surveyed in 2013 is graded vesting (65%), and 35% have cliff vesting. Within these groups:
- At companies with graded vesting, 47% vest the grants over a total period of three years and 42% over a total period of four years.
- For graded vesting schedules, 91% of the companies vest shares annually during the vesting period, while only 2% have monthly vesting after a one-year cliff period.
- At companies with cliff vesting, the most common vesting period is three years (83%).
Share withholding is the prevailing method of collecting the taxes owed when restricted stock/RSUs vest. At nearly 80% of the surveyed companies, share withholding is used for over 75% of the restricted stock/RSU awards. At 49% of the companies, employees have no choice in the method used to cover taxes at vesting.
Most of the surveyed companies (71%) do not allow the deferral of share delivery with RSUs. For companies that do allow deferrals, 84% let their employees elect deferrals, and 16% make deferrals mandatory.
Stock Options: NQSOs, Term Length, Vesting
The 2013 survey revealed that at option-granting companies, nonqualified stock options (NQSOs) continue to prevail (92%). Ten-year option terms are still most common (at 70% of the companies).
Most (94%) of the responding companies use a graded vesting schedule for stock options (a certain percentage of options vest each year, month, or quarter). Meanwhile, only 6% offer cliff vesting (100% of options vest at a specified point; 0% vest before then).
Among option-granting companies with graded vesting schedules:
- 48% vest all of the options after four years
- 45% offer complete vesting after three years
- 6% vest the options over five years
At companies where vesting is graded, just about all the vesting is time-based (i.e. not linked to the performance of an individual, company, or stock index). About 81% have annual vesting, 11% have one-year cliff vesting with monthly vesting thereafter, 1% have monthly vesting, and 2% have quarterly vesting.
Broker-assisted cashless exercises are allowed at 92% of the companies surveyed in 2013. Stock swaps (stock-for-stock exercises) are permitted with the exchange of actual certificates at 47% of the companies and by attestation at 51% of the companies. The method known as "immaculate" exercise (e.g. net proceeds in shares) is available at 61% of the companies.
Communication Needs Improvement
According to the NASPP's 2014 survey, companies are doing more to communicate with grant recipients than they used to, though some employees continue to let in-the-money stock options expire, wasting the corporate value of the equity compensation. Among the companies that have stock plan communications:
- 80% of the responding companies provide employees with informational materials on stock grants when the grants are made, 21% do so regularly (e.g. yearly), and 22% do so immediately at hiring. Nearly all of the companies (96%) email this information to employees or provide links to online materials, though a significant minority of the companies (39%) also still distribute these materials in printed form.
- 91% of the surveyed companies distribute plan documents (excluding grant agreements) by an online route, whether the internet, a corporate intranet, or the website of a third-party stock plan administrator. Most (78%) also deliver the plan prospectus in these ways, and about 70% provide FAQs, descriptive documents, or other educational materials through online portals.
- 34% of the companies directly notify optionholders of upcoming expiration dates, while an additional 47% delegate this type of notification to a third party (such as the brokerage firm or transfer agent that handles exercises). However, 18% of the surveyed companies do not notify optionholders at all about upcoming expiration dates. A third of the companies do not notify grant recipients of upcoming vesting dates.
Part 2 of this series digs deeper into the NASPP survey data, covering such topics as grant guidelines, expiration provisions, and what happens to options at job termination or in a merger involving the company.
Editor's Note: The NASPP is the organization that professionals rely on to keep up with practices and developments that affect equity compensation. For more information and a wealth of resources, see www.naspp.com.
Kate Victory is a former content developer and editor at myStockOptions.com. This article continues to be regularly updated by the website's editorial staff.