The first article in this “Stock Options on the Precipice” series covered some of the main issues that are currently impacting employee stock options (check it out here). This article will discuss some of the paths you might take if you are having stock option concerns. For many executives, human resources and compensation professionals, this may be the first time to experience the trials and tribulations of stock options. For others, the questions below and the assessment process may be a new way of addressing this issue. Luckily, the medical field deals with potential disasters so frequently that they have devised a methodology for triage assessment called START (Simple Triage and Rapid Treatment.) A version of the START flowchart can be viewed here. I have created the modified version below to assist you in evaluating whether you need to perform corrective actions on your equity compensation plans.
The Equity Compensation Triage assessment identifies three priority levels.
Non-Priority: If your equity awards have a value of at least 70% of the initial objective for the award, you should probably focus on more critical compensation issues. These awards may have lost some value, but they are in a range that most people would consider recoverable. This is especially true when the grants are unvested.
Low-Priority: Check the flowchart to determine if your equity issues are low priority. Low priority awards should be reevaluated monthly or quarterly to ensure you there are no surprises. In a volatile market, these awards may recover fairly quickly or may fall into a hole that drives corrective action.
High Priority: Refer to the flowchart to determine high priority equity issues. The impact of these awards requires immediate attention. The strategy you choose and tactics you employ should be carefully considered. While these types of corrections often flow in waves of similarity, that similarity is seldom equally beneficial to every company following the same path.
If you identify high priority equity compensation issues what should you do?
Should you jump into the pool early and take advantage of positive (and/or negative) press and attention?
If your correction is obvious and fairly simple, you may be a great candidate to become a “first mover”. Performed and communicated correctly, a swift correction can garner great press and give your employee base confidence. But, early movers will also get the lion’s share of attention for any program that is deemed too unfriendly to investors.
Should you wait until there are enough others in the pool so no one notices that your body is not really “swim-ready”?
Being part of the crowd can work well for corrections that follow the lead of successful early movers. You may lose the benefit of the press coverage and employee goodwill, but you won't have to be part of the risk taking vanguard. If your need is truly urgent, you may not be able to wait until the crowd has started executing their programs.
Should you stay the course and hope that you can avoid the pool altogether? Is there another philosophy to consider?
In every past period like this, there have been many companies who moved too early only to find that a recovery or rule change has made their decision a bad one. The opposite is also true. Many companies wait for the perfect moment only to find investor sentiment no longer supports any type of correction. These companies must then try and survive with an equity compensation program that does more harm than good.
And, finally, what is meant by “correction program”?
Correction programs can take many forms. They range from fairly subtle approaches with no need for external communication to programs requiring full-fledged SEC filings, public announcements and shareholder approvals. Early identification of issues is the first step to success. Understanding your correction options (no pun intended) is equally important. The next article in this series (2/24/2016) will explore some of these subtle and not-so-subtle programs.
Would this Equity Compensation Triage Assessment work for your company? If not, what would you add or remove to make this tool more useful? I look forward to exploring this issue as we navigate the choppy waters ahead.
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including, Performance-Based Equity Compensation and “Everything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.