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H O W - T O S E R I E S

for the HR Professional

Administering
Stock
Option
Plans
Brent Longnecker, CCP, CBP, CCC
Pamela Van Gordon, CEP

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H O W - T O S E R I E S
for th e HR Professional

Administering
Stock
Option
Plans

Brent Longnecker, CCP, CBP, CCC


Pamela Van Gordon, CEP

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About WorldatWork®
The Total Rewards Association
WorldatWork (www.worldatwork.org) is a global human resources association
focused on compensation, benefits, work-life and integrated total rewards to
attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork
provides a network of more than 30,000 members and professionals in 75 countries
with training, certification, research, conferences and community.
It has offices in Scottsdale, Arizona, and Washington, D.C.
The WorldatWork group of registered marks includes: WorldatWork®, workspan®,
Certified Compensation Professional or CCP®, Certified Benefits Professional®
or CBP, Global Remuneration Professional or GRP®, Work-Life Certified
Professional or WLCP®, WorldatWork Society of Certified Professionals®
and Alliance for Work-Life Progress® or AWLP®.
WorldatWork Journal, WorldatWork Press and Telework Advisory Group
are part of the WorldatWork family.

Any laws, regulations or other legal requirements noted in this publication are, to the best of
the publisher’s knowledge, accurate and current as of this book’s publishing date. WorldatWork
is providing this information with the understanding that WorldatWork is not engaged, directly
or by implication, in rendering legal, accounting or other related professional services. You are
urged to consult with an attorney, accountant or other qualified professional concerning your
own specific situation and any questions that you may have related to that.
This book is published by WorldatWork. The interpretations, conclusions and recommendations
in this book are those of the author and do not necessarily represent those of WorldatWork.
© 2008, 2005, 1996 WorldatWork.
ISBN 978-1-57963-192-5 (Spiral bound)
978-1-57963-250-2 (E-book)
No portion of this publication may be reproduced in any form without express written
permission from WorldatWork.

14040 N. Northsight Blvd., Scottsdale, AZ 85260


480/951-9191 Fax 480/483-8352
www.worldatwork.org
Editor: Andrea Ozias
Production: Deb Shenenberg

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Table of Contents
Introduction and Acknowledgements ........................... 3
Chapter 1: Equity Compensation as a
Component of a Total Rewards Package ....................... 7
Why Grant Stock Options? ..................................................................8
Other Environmental Factors ..............................................................9
Other Types of Equity ..........................................................................9
Regulatory Agencies Involved in Equity Compensation ...................9
Privately Held Companies .................................................................10
Internal Company Involvement ........................................................10
External Service Provider Involvement .............................................12

Chapter 2: Designing and Implementing a


Stock Option Program .................................................. 13
Plan Design .........................................................................................14
Plan Documentation, Approval and Registration ............................15
Setting Up an Administration Infrastructure ....................................16
Deciding on the Right Type of Administration Infrastructure ........16
Selecting and Implementing Service Providers ................................18
Developing Processes That Work ......................................................18
Understanding Timing of a New Program Rollout ..........................19

Chapter 3: Stock Option Data Management............... 21


Stock Plan Recordkeeping Systems ...................................................22
Corporate Data, Plan Terms and General Information ...................23
Fair Market Values ..............................................................................23
Personnel Data ...................................................................................23
Stock Option Details ..........................................................................24
Types of Stock Options ......................................................................25
Option Price........................................................................................26
Vesting .................................................................................................26
Other Recordkeeping Data ................................................................26
Importance of Data Integrity .............................................................27

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Chapter 4: Stock Option Grants and Exercises ........... 29
Grant Guidelines ................................................................................30
Grant Approvals and Entry ................................................................31
Grant Data to Broker ..........................................................................31
Types of Exercises ...............................................................................32
Exercise Process ..................................................................................33
Tax Withholding and Reporting ........................................................34
Audit and Reconciliation ...................................................................36

Chapter 5: Reporting .................................................... 39


Payroll .................................................................................................40
Corporate Tax .....................................................................................42
Accounting ..........................................................................................42
Insider Reporting and Trading Policies.............................................43
Other Corporate and Financial Reporting ........................................45
Employee Tax Reporting ....................................................................45
Using Data to Analyze Optionee Trends ..........................................46

Chapter 6: Communicating with Employees.............. 47


Benefits of a Strong Communications Program...............................49
Avoiding Advice..................................................................................49
Developing a Communications Program .........................................49
At the Time of Hire ............................................................................50
At the Time of Grant ..........................................................................52
At the Time of Vest .............................................................................52
At the Time of Exercise.......................................................................53
At the Time of Option Expiration .....................................................53
At the Time of Termination ...............................................................53
Methods of Communication .............................................................54
Focused Audiences .............................................................................54
Data Privacy ........................................................................................54
Ongoing Communication and Education ........................................54
Measuring Employee Satisfaction......................................................55

Chapter 7: Getting It Right ........................................... 57


Appendix: Sample Documents..................................... 59
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Introduction and
Acknowledgements

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T
he concept and practice of companies granting equity to employees as
part of their compensation portfolio has certainly changed since the
implementation of FAS 123 (R), requiring a change to stock option
grants. Before this dramatic change, equity grants — particularly stock option
grants — had proliferated for almost two decades, reaching the zenith during
the dot-com boom.
Today, employee stock awards aren’t as common, nor are they as deep,
but they still play a very important role in the total rewards package. In
addition, the understanding of equity value is on the rise like never before,
with boards, executives and the rank and file increasingly becoming more
knowledgeable about these programs and continually looking at more
efficient and effective ways to use them. Successful programs can still result
in a multitude of advantages, from positive employer-employee relations and
wealth creation to long-term retention and a competitive edge for companies
looking to differentiate themselves in the marketplace.
To achieve the objectives, a clear and concise understanding of the
administrative ramifications of managing a successful equity compensation
program is essential. This book seeks to explain many of the core aspects of
stock plan administration, so the obligations of managing these programs
on an ongoing basis may be factored into the overall investment of offering
these programs. HR professionals and stock plan administrators interested
in learning more about equity plan administration should find this book
extremely helpful and valuable.
Finally, a special word of thanks to everyone who worked on this
book. Specific thanks goes to the company Stock & Option Solutions and
Pamela Van Gordon for their insights and work into several of the chapters.
They do stock option administration for a living, so it was great having them
work on this project. Also, thanks to HCK2 in Dallas for constant proofing

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and edits; to the great team at Longnecker & Associates for helping on
everything; and, last but not least, to Andrea Ozias and WorldatWork for
allowing us to contribute and be part of their great team.
Sincerely,
Brent M. Longnecker
Chairman & CEO
Longnecker & Associates

Editor’s Note: The discussion in this book is very general and may not be appropriate
in every circumstance. It is not meant to be legal, tax or accounting advice. Each
company should consult with its own internal and external advisers.

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1
Equity Compensation
as a Component of a
Total Rewards Package

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T
he decision to grant company stock to employees and the form in
which it is granted should be considered carefully. There are numerous
factors involved, such as the type of business, whether it is privately
or publicly held, employee demographics and motivations, financial
performance and condition, and the current stage of the company in its life
cycle. It is important for decision makers to evaluate these considerations
carefully, advisably with the input of external equity-compensation consultants
and regulatory advisers who can guide the company through this analysis.
Equity plays a part of varying importance in a total rewards package,
depending on how the company designs and values compensation.
Combined with base wages, benefits, bonuses, commissions, perks and
other incentives, equity can serve a few different purposes:
• To meet both short- and long-term incentive goals
• To align employee interests with shareholders
• To bring the employee closer to the company, creating “owner” behaviors
• To be a powerful recruiting and retention tool.
A well-designed total rewards package with equity as a component
sends a message to employees that the company values sharing ownership
throughout the organization and tying employees into the long-term goals of
the business. Ultimately, the success of educating employees fully on the value
and benefit of company equity can ensure the effectiveness of the program.

Why Grant Stock Options?


Stock options are advantageous in that many employees are familiar with
this type of equity award, they can control the timing when shares are
purchased, there often is flexibility in the method of payment, and the shares
provide no dilution to the company’s outstanding stock until the options are
exercised and the underlying shares are issued.
Stock options also have several disadvantages. Due to accounting rules,
they can be very costly from a corporate finance standpoint. They also may be

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administratively burdensome and expensive to manage. For employees, they
cannot realize any tangible value until they purchase the shares, and the cost
of funding the share purchase and paying applicable taxes may be prohibitive.
Another drawback is that if the stock price drops after an option is granted,
the award may be useless as an incentive instrument. Finally, stock options
may be inappropriate for the entire employee base targeted to receive equity,
such as those located outside of the United States. Benefits and weaknesses of
offering stock options should be carefully considered beforehand.

Other Environmental Factors


Other factors that may influence the design and administration of equity
compensation plans include company and employee goals and demographics,
technology capabilities and support, staffing resources, global requirements,
centralization/decentralization of certain functions, and budgetary concerns.
All of these aspects should be considered when designing a new equity plan
and managing an administrative infrastructure to support it.

Other Types of Equity


Stock options are not the only type of equity award that can be given to
employees. Other formats include restricted stock awards, restricted stock
units, stock appreciation rights, performance shares and phantom stock,
as well as variations of these awards. There are also broad-based benefits
plans, such as employee stock purchase programs, which allow employees
to enroll in a discounted purchase arrangement through payroll deductions.
With the introduction of new accounting regulations during the past few
years, companies have started expanding beyond stock options and offering
a different mix of equity and “synthetic” equity types. Each type has its own
advantages and disadvantages, both for the company and its employees.
As part of the decision process to grant equity to employees, companies
should evaluate whether other types of equity offer better overall benefits
to both audiences.

Regulatory Agencies Involved in Equity Compensation


There are four main U.S regulatory bodies that govern the use and financial
treatment for employee stock plans, which in turn affect how companies
design and administer their programs. These agencies include:
• Securities and Exchange Commission (SEC): Governs all corporate
and securities rules

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• Internal Revenue Services (IRS): Oversees all federal tax codes
and regulations
• Financial Accounting Standards Board (FASB): Mandates all corporate
accounting rules
• Department of Labor (DOL): Ensures compliance with the Fair Labor
Standards Act as it relates to granting stock options and stock
appreciation rights to hourly employees.
Some of the regulations controlled by these organizations and how they
translate into administrative practice will be covered throughout this book.
In addition, companies that are interested in introducing a new stock option
plan should also consider state laws (Blue Sky), International Accounting
Standards Board (IASB, similar to FASB) regulations and local country
laws that could affect granting equity to employees in specific geographic
locations.

Privately Held Companies


While the context of this discussion focuses on publicly held companies,
privately held businesses also can offer equity to employees. Many of the
administrative requirements are similar, with a few notable exceptions. In
particular, privately held companies usually are not subject to most SEC
reporting regulations, thereby simplifying much of the administrative process.
Communicating the value of stock options to employees may be more
challenging, as there usually is no immediate opportunity to realize financial
gain because the shares cannot be sold on the open market. However,
communicating the value of stock to employees is important to properly
maintain motivation. There are a few ways to consistently estimate stock
value, whether through a multiple of book value or by utilizing the expertise
of a business valuation firm. Finally, valuations estate planning and liquidity
(the ability to cash in) are key issues private companies have to deal with
when considering equity grants.

Internal Company Involvement


Equity compensation is unique because it brings together many disciplines,
from HR, legal and finance to tax, payroll and accounting. Each area usually
is responsible for overseeing various aspects of the company’s equity compen-
sation plans to ensure compliance with all regulations. The administration

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function itself can reside in any of these departments, depending on the
company’s preferences and objectives.
The groups that typically are involved with equity compensation and
administration are:
• Board of directors: Acts as overall manager for the plan; typically creates
a dedicated committee to address equity plan issues, such as approving
plan documents and terms, authorizing grants for specific employees,
and making any substantive changes to the plan or grant features.
• Executive management: Usually works with HR in thinking about
how to best utilize the equity they have as strategically and efficiently
as possible.
• HR: Responsible for plan design and implementation, employee
education and communications, new grant recommendations and
personnel data.
• Stock plan administration: May be a separate department or incorporated
into another department, such as HR or finance; responsible for coordi-
nating recordkeeping and administration activities, including managing
stock plan recordkeeping systems, transaction processing, reporting
to various internal and external entities, external service provider
management, and customer service to employees.
• Legal: Manages plan compliance, insider trading policies, shareholder
communications and SEC reporting.
• Finance, tax, accounting and treasury: Responsible for corporate financial
reporting related to stock option transactions and management of
share reserves.
• Payroll: Administers and reports income associated with equity-based
transactions, calculates and reports taxes withheld related to transactions,
and provides tax statements to employees and the IRS.
• Information technology (IT): Responsible for supporting internal
databases and stock plan recordkeeping systems, user security, and
internal and external system interfaces.
While each function has different goals, priorities and responsibilities,
all of these areas should communicate and work together to ensure a smooth
data flow, a consistent process and shared ownership of the equity programs.

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External Service Provider Involvement
In conjunction with internal departments, companies typically involve
external service providers to help manage these programs. These may include:
• Consultants: Provide expertise in particular areas of equity compensation,
such as plan design, implementation, grant guidelines, administration,
global tax requirements and strategy.
• Outsourcing provider: Acts as a third-party administrator responsible for
handling data recordkeeping and employee service to increase company
operating efficiency.
• Outside legal counsel: Devises the core plan document and terms;
provides more extensive expertise to ensure plan compliance; assists with
complex issues or interpretations of plans; addresses situations with legal
implications arising from the program.
• Accounting firm: Focuses on equity compensation financial reporting to
ensure finance and accounting regulations are properly met; advises on
accounting treatment for equity awards.
• Software provider: Develops and supports the stock plan recordkeeping
system that houses all data related to the equity compensation program,
including recipients of stock options, grants given to employees,
transactions and reports.
• Broker: Provides employee-facing assistance in processing stock option
exercises; offers additional transactional and compliance support
for executives subject to trading requirements; can supply employee
communications (e.g., online accounts, transaction statements, plan
education).
• Transfer agent: Tracks all outstanding plan reserves and shares; issues
shares to employees for stock option exercises; manages shareholder
communications and voting.
External service providers are a key part of an overall administration
solution and should be selected with appropriate diligence. They can
become a critical partner in an equity program’s success.

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2
Designing and
Implementing a
Stock Option Program

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Plan Design
Once a company elects to give stock options to employees, it usually does so
in the form of a specific number of shares (a “grant”) tied to a schedule that
makes the shares available over a period of time. A stock option offers the
ability for an employee to purchase company stock at a specified price during
a certain period of time. Typically, the shares are not immediately available
for purchase, requiring the employee to remain employed or meet specific
performance metrics to earn the right to purchase the shares. If the employee
leaves the company prior to earning that right, the shares are forfeited, thereby
motivating the employee to stay with the company in order to realize the
value of his/her stock awards.
The terms of a specific stock option offering to employees are defined as
the “plan.” In preparing the plan, there are basic parameters that should be
considered:
• Business reasons and objectives for the program: Identifies the corporate
goals for equity compensation (e.g., performance incentives and rewards,
recruiting and retention).
• Eligibility to receive stock options: Defines the group of people who
may receive stock options, subject to the plan (e.g., board of directors,
executives, management, key hires, broad-based employees).
• Program owner and administrator: Typically this is the board of directors
or a designated subcommittee of the board.
• Definitions: Explains key terms, such as fair market value.
• Shares allocated to the plan: Usually the company reserves a set number
of shares to be available under the terms of the program; in some cases,
the plan can designate an automatic increase of additional shares at
specified times of the year.
• General terms of grants: Typically these are minimum-level default terms
with flexibility to modify grant by grant, such as the vesting schedule or
expiration date.

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• Impact of corporate actions: Describes the impact to outstanding
stock options if the company experiences a corporate action
(e.g., merger or acquisition), a change in capitalization (e.g., a stock
split) or reorganization.
• Plan duration: The length of time the plan will be in effect, during which
stock options may be granted out of the reserve until either the plan’s
expiration date or the shares are exhausted.
If the company plans to grant equity to employees based outside the
United States, the plan document should include language to extend to
particular country regulations. For sizable non-U.S. populations, the company
may choose to create a “subplan” to specifically handle grants for that group.
It is important to note that each country will have different legal and tax
issues that should be addressed prior to granting equity. This often requires
outside help from specialists in global equity and administration.
Parties commonly involved in determining plan parameters include the
executive management team, legal counsel, HR, stock plan administration
and external consultants. Those responsible for or involved in managing the
stock option plan should be familiar with these terms once established.

Plan Documentation, Approval and Registration


Once the plan’s terms are designed and agreed upon, a plan document
detailing these terms is prepared, usually by the company’s legal counsel.
Most plans follow a standard template that addresses various items, many
of which have been noted in Chapter 1. The plan document serves as the
master authority on all terms governing the program, so it should be as
comprehensive and clearly written as possible.
The plan must be approved by the board of directors and, in most
cases, the company’s shareholders. There may be additional requirements in
terms of timing of shareholder approval once the board approves the plan.
Often a new plan will be approved at the time of the annual shareholders
meeting, or it can be managed as a special process at another time. Obtaining
shareholder approval can be a sensitive task, as the terms of a new plan and
potential share dilution may not appear favorable to the interests of outside
shareholders.
If the company is publicly held, the shares subject to the plan must be
registered with the SEC under the Securities Act of 1933. Generally, this
enables anyone receiving shares under the plan to dispose of them without

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resale restrictions, although they may be subject to other limitations, such
as trading blackouts. If the company is privately held, the plan must operate
under specific regulatory exemptions that allow the granting of equity to
employees without registration. However, there are likely to be additional
restrictions for employees to dispose of such shares until they can be
registered with the SEC and sold on a publicly traded market.
Once the plan has been properly approved and registered, copies of
the plan document and SEC registration statement are sent to the transfer
agent, who is responsible for tracking all of the company’s authorized and
outstanding shares. The transfer agent sets up the plan on his/her system
with a reserve of shares authorized under the stock option plan. As shares
are issued pursuant to exercises, the company notifies the transfer agent to
deliver the shares to the employee in certificate or electronic form to the
employee’s designated brokerage account, and deduct the shares from the
authorized reserve.

Setting Up an Administration Infrastructure


Developing the administrative framework to manage the plan on an ongoing
basis should be addressed at the time of plan design, as terms of the program
may affect or be affected by the company’s administrative capabilities. The
process of setting up the infrastructure can start before the plan is fully
adopted, but should be in place by that point. Companies typically administer
stock option programs in one of two ways:
• In-house administration: The majority of core stock plan recordkeeping
systems, key operational functions and administrative processes are
handled by internal staff, with limited external assistance as needed.
• Outsourced administration: Systems, routine functions and many
administrative processes are handled by a third-party administrator,
with the company responsible for employee and grant data integrity,
corporate and employee reporting, issue escalation and other plan
management tasks.

Deciding on the Right Type of


Administration Infrastructure
As with many other decisions related to equity compensation programs, there
are multiple factors to consider when selecting an administration arrangement.
These may include:

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• Corporate culture and goals: Does the company prefer having sensitive
data remain in-house or does it typically outsource similar functions
and expertise? How does the company expect to grow its equity plans
over time? Does the company prefer customized hand-holding or
self-service technology and automation for employees?
• Staffing: What kinds of in-house resources are available to manage
and administer the plan, ensuring expertise, efficiency, scalability
and adequate checks and balances?
• Technology infrastructure and capabilities: What type of technology
environment does the company support? What IT resources are
available to manage the stock plan recordkeeping system and
associated interfaces?
• Complexity of plans: How extensive is the recipient demographic?
• Availability of an outsourcer to handle the company’s requirements:
If the company would like to outsource, can a service provider handle
all of the plan’s needs?
• Features the company would like to provide to employees: What kinds
of services does the company want to offer employees (e.g., online
brokerage accounts and trading)?
• Budget for stock administration tasks: What is the company’s budget
to support stock plan administration?
When analyzing the cost versus benefits to outsourcing, note that
outsourcing does not necessarily reduce internal headcount. Company
employees still are required to verify and transfer data to the service provider,
handle issue escalation, manage the relationship with the administrator,
address strategic initiatives and special projects, and coordinate any activities
the outsourcer does not handle. A successful outsourcing relationship depends
largely on the company understanding the roles and responsibilities of each
player and maintaining proper ownership and oversight of the program.
If the company cannot decide which type of administration to implement,
bringing in an external consultant to evaluate the company’s situation may be
useful. Selecting a particular solution at any given time does not permanently
lock the company into that type of arrangement. The company can decide
later to change direction as its needs evolve.

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Selecting and Implementing Service Providers
If the company opts to outsource, the process of selecting a service provider
often involves several steps:
• Conduct due diligence: What does the company require the service
provider to support?
• Survey available service providers: Which service providers offer the
assistance required by the company? What features are provided? What
services are not supported?
• Match services/features against company requirements: How does the
service provider’s products and services align with the company’s needs?
• Evaluate advantages and disadvantages, pricing, timing of implemen-
tation, client experiences, and other differentiators: What are the major
differentiators between service providers? Which provider offers the
best contract terms? Which provider seems to be the best personality
fit for the company? Which vendor has the most positive and realistic
client references?
• Select the service provider: Based on information available, choose an
appropriate provider.
• Implement the service provider: Initiate implementation of the service
provider’s systems, features and/or processes.
This methodology also can be adapted to other service providers, such
as a transfer agent, as well as software vendors. Service provider selection is
another opportune time to bring in external consultants to advise throughout
the process and help objectively narrow down the most suitable contenders.
This additional expertise is especially useful if the company does not have the
requisite knowledge to evaluate vendors or has limited resource bandwidth
and time to effectively manage a comprehensive analysis.

Developing Processes That Work


In addition to selecting various service providers to focus on specific needs,
the company must develop positive policies and processes that enable
successful program management. As part of devising these procedures, the
company should consider:
• What should successful processes accomplish (e.g., efficiency, scalability,
accuracy, timeliness, controls and compliance)?

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• What are all of the equity cycle processes that need to be included, from
start to finish?
• Does the process need to be manual or can it be automated depending
on complexity, frequency or volume?
• Does the process, as designed, meet the goals of the plan and the specific
purpose of the procedure itself?
• Does the process, as designed, meet the needs of other internal and
external parties involved?
• What are the exception cases for each type of process?
• How is each type of process audited and controlled?
Once processes are defined, the company should document the steps
for each task. This documentation should be revisited regularly to ensure
processes are updated as they change. It is important to have current
documentation of all processes to enable consistency of practice and protect
the administrator and the company from any inadvertent errors, potential
fraud or liability from inaccurate reporting. Process documentation also is
the foundation for compliance with the Sarbanes-Oxley Act of 2002, which
requires senior management to attest to the validity and controls of all
financial data and reporting.

Understanding Timing of a New Program Rollout


Introducing a new stock option program takes time. Build in adequate
time to develop the plan, obtain proper approvals, file necessary regulatory
documents, select and implement service providers, develop and implement
processes, train corporate staff involved in administration, introduce the new
program, and educate employees. In many cases, this process can take up to
12 months or longer. Timing often is one of the most underestimated issues,
so companies should plan accordingly.

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3
Stock Option
Data Management

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Stock Plan Recordkeeping Systems
The foundation to a successful equity program is data management. Stock
plan administration consists of many data elements, from the recordkeeping
platform selected to the types of data that need to be tracked. Data integrity
is critical, as equity compensation information is a component of the
company’s financial reports. This chapter explains the basic structure of
data recordkeeping.
Data management provides the foundation for administering stock
option programs. The primary owner of the equity program is responsible for
managing (or overseeing through a third-party administrator) the stock plan
recordkeeping system, which tracks all data elements related to stock option
grants, contains transaction history and generates reports for various purposes.
Other departments may be involved in providing inputs to the system or
extracting data in the form of reports to accomplish peripheral tasks.
There are several commercially available systems on the market for
in-house administration. Outsourcing companies may use these systems or
develop their own platforms internally. Some companies manage stock plan
data on spreadsheets or other informal methods. This generally is not
advisable, as there are few (if any) controls on data integrity, data security,
compliance features, specialized reports and other risk management tools.
The scrutiny that equity data can receive may act as a natural motivation to
use an accepted stock plan recordkeeping system. With a stock plan record-
keeping system, data is securely stored and accessible only by the designated
plan administrator.
The stock plan recordkeeping system often interfaces with interdependent
systems, such as an HR database, payroll systems and broker platforms.
These interfaces may be automated with regular file feeds or require manual
imports/exports of data.

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Corporate Data, Plan Terms and General Information
A typical stock plan recordkeeping system contains basic information about
the company and its equity plans, whether active or inactive. Company data
usually includes the corporate address, tax identification number, ticker
symbol and CUSIP number, as well as accounting reference dates. Plan data
often incorporates details such as:
• Plan name
• Adoption date
• Expiration date
• Number of shares authorized for issuance
• Fair market value definition
• Termination conditions.
The system also may track information such as default tax rates, state and
country codes, vesting schedule templates and captive broker contacts. This
information needs to be entered when implementing a new database and as
new plans are introduced, or if changes occur to existing data.

Fair Market Values


The recordkeeping system should have a method for tracking the company’s
fair market value as defined in the plan document for each equity plan.
Commonly, the fair market value is treated as the closing price of the
company’s stock on the respective trading day. The source of fair market value
data (e.g., The Wall Street Journal) should be defined in the plan document.
The administrator for a publicly held company should update the fair market
value table in the system every trading day; for privately held companies, this
field can be entered when options are granted or exercised. If the adminis-
trator is using a business valuation firm for a privately held company, a
fair market value can be estimated and communicated on an annual or
semiannual basis.

Personnel Data
Stock plan recordkeeping systems securely store personnel data, so that
equity grants can be assigned to specific employees. This data can include
all employees eligible to receive stock options or just those receiving grants.
Personnel data includes (but is not limited to) full employee names,

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Social Security numbers, employee IDs, mailing addresses, titles, job codes or
other filtering criteria, hire and termination dates, leaves of absence and rehire
dates. In many cases, personnel data is required to ensure compliance with
securities, tax, accounting and other legal regulations. In other cases, some of
the detail input allows filtering of information to analyze activity trends or
isolate groups of data for reporting purposes.
Systems will have varying capabilities to track non-U.S.-based employees,
such as different formats for full names, multiline addresses and alternative
tax rates. Oftentimes these systems do not have advanced features to manage
specific types of non-U.S. equity plans or transactional tax treatment.
Additional data tracking methods for global requirements (e.g., employees
in multiple tax jurisdictions) may need to be addressed outside of the core
stock plan recordkeeping system.
In all situations, personnel data should be accurate and current. The
source data typically comes from the HR system. If the company decentralizes
HR personnel data across subsidiaries or geographic regions, multiple data
sources will need to be taken into account. This can affect how quickly certain
information is received and entered into the stock plan recordkeeping system,
which can then potentially affect critical grant data required for the company’s
financial reporting. A good example is employee termination dates, which can
affect outstanding stock option grants and exercisable shares. HR departments
should be actively involved in ensuring data is collected and transmitted to
stock plan administration in a timely manner.

Stock Option Details


Once a stock option has been approved for a specific individual by the board
or elected subcommittee, the grant can be entered into the stock plan record-
keeping system. There are several key details for each stock option that must
be addressed for the recordkeeping system, including (but not limited to):
• Who is receiving the stock option (optionee)?
• What date was the grant approved by the board or subcommittee
(grant date)?
• When does the grant expire (expiration date)?
• What is the type of stock option (incentive stock option or nonqualified
stock option)?

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• How many shares are subject to the option (shares granted)?
• What is the per-share price to purchase the shares underlying the option
(option price)?
• When do shares become available for the employee to purchase
(vesting schedule)?
This information should be communicated in a documented, auditable
manner to the administrator of the stock plan recordkeeping system for
data entry. This can be accomplished manually or by file import, which is
preferable for data integrity and audit purposes. Once the data has been
entered, a report from the system should be generated and audited against
the source data to ensure accuracy. The option terms entered into the system
will be communicated to the employee through a grant agreement package,
which is discussed in Chapter 6.

Types of Stock Options


Option type should be identified at the time a stock option is approved.
There are two main types of stock options: incentive stock options (ISOs) and
nonqualified stock options (NQSOs). The key difference in the types of grants
is tax treatment.
In order to grant an ISO, the option must meet specific requirements as
defined in Section 422(b) of the Internal Revenue Code (IRC). For example,
the optionee must be an employee of the company on the grant date, and the
price to purchase the shares underlying the grant must be at least equal to the
fair market value on the date of grant. ISOs have a further requirement in that
the company is limited in the number of ISOs that can be granted to a single
employee. If the stock option meets these requirements, it becomes qualified
for preferential tax treatment and can be treated as an ISO.
An NQSO is any type of grant that does not meet the requirements of
an ISO or any option the company specifically designates as an NQSO. For
example, a company can grant NQSOs to contractors and set the option
price at a discount to the fair market value on the date of grant. NQSOs can
be granted at fair market, at a discount and even at a premium, if desired.
There are no limits to the number of NQSOs that can be granted to a single
individual. Because ISOs are governed by U.S. tax regulations, any recipients
based in other countries should receive NQSOs, as long as they are legally
qualified to receive such awards.

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Option Price
In addition to the type of stock option, the price an employee pays for the
shares underlying the stock option is a critical component. This price is
commonly referred to as the option price, or alternatively the strike price or
exercise price. Typically this number is defined in the plan document as the
fair market value on the date of grant. For example, if the plan defines fair
market value as the closing price of the company’s stock, the option price for
a grant given on a specific day will be that day’s closing price.
The option price impacts numerous issues, such as the taxable gain
an employee might recognize upon purchasing the shares and corporate
accounting treatment of the option. The day on which the option is granted
is therefore very important, as it drives the option price for the grant.

Vesting
Another important detail for the recordkeeping system is the vesting
schedule. There are two common forms of vesting schedules: time-based and
performance-based. With time-based vesting, shares subject to the option
become available for the employee to purchase at a stated frequency after
the grant date. For example, 25 percent of shares granted will vest on the
anniversary of the grant date over four years, or 100 percent at the end of
year four. Shares subject to options with performance-based vesting become
purchasable when the performance metrics are met, such as when the
company reaches specific revenue or earnings-per-share targets.
In some cases, a stock option will have both time- and performance-based
criteria, with the vesting occurring at the earlier of the time-based schedule or
the performance goals being met.

Other Recordkeeping Data


The stock plan recordkeeping system should keep track of employees
designated as insiders. Insiders typically are senior executives who, as part of
their regular job duties, possess nonpublic information about the company’s
performance that may influence the company’s stock price. These employees
are subject to additional requirements, such as timing limitations as to when
they can exercise stock options or requirements to file notices of their stock
option transactions with the SEC.
Many systems offer user-defined fields that allow the administrator to
filter and sort data by different criteria. For example, the company may want

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to sort reports by salary or pay grade. This information should be collected
from an external source, such as the HR or payroll system, and entered into
the database on a regular basis.
The recordkeeping system also may track information such as employee
mobility (where an employee is located at the time his/her stock options are
granted, vested and exercised), brokerage accounts and beneficiaries.

Importance of Data Integrity


Keeping the stock plan recordkeeping system accurate and current is
absolutely critical. The company’s processes should be designed with data
integrity as a primary goal. Considerations should include sources of data
feeding into the stock plan recordkeeping system, timeliness of receipt of data,
audits and reconciliation processes to verify accuracy, checks and balances to
eliminate potential error or fraud, maintenance of audit records in perpetuity,
and documentation of all system inputs and exception cases.

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4
Stock Option Grants
and Exercises

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Grant Guidelines
This chapter explains the basic process for granting stock options and
processing exercises. Once a company is ready to grant stock options out of
an equity plan, the next step is deciding which employees should receive
grants. The purposes and frequencies of granting stock options will vary
from company to company. For example, stock options might be given to
employees when they are hired, promoted or for ongoing service (“focal”
grants). Or stock options might be awarded on an ad hoc basis or with regular
frequency, such as annually.
The process for determining who should receive grants and how many
shares are granted to each employee also will vary. Generally, companies have
a set of stock option guidelines integrated with their overall compensation
structures that define the ranges of stock option sizes that may be given to
employees of a specific title, job code, salary grade or other designated level.
Managers then can make recommendations for specific sizes of grants within
the specified range. This process tends to be controlled for companies that
want to closely manage their stock option pools.
Companies looking to develop grant guidelines often consult professional
compensation experts to collect peer-company data and devise specific ranges.
Compensation consultants not only have the resources to provide companies
with the data, but the benefit of industry-specific expertise and knowledge of
trends and best practices. Compensation consultants can assist companies in
planning strategic equity goals and objectives, selecting the suitable equity
vehicles and outlining the proper equity grant levels. Using an independent
compensation consultant as an outside adviser enables company management
to focus on the internal allocation of stock awards to employees.
Compensation surveys also may provide grant metrics that will help in
this process. While surveys may offer a basis for specific sizes of grants and
metrics, the plan administrator should use best judgment in evaluating the
data and do what is right for the company. In any case, companies should be

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careful to document their grant guidelines and approval process to ensure
a consistent, objective methodology.

Grant Approvals and Entry


Once stock option recommendations have been collected, the list of grants
is provided to the board of directors or an elected subcommittee to officially
approve the grants. The date the grants are approved is critical, as this point
in time becomes the grant date of the stock option which drives other dates,
such as expiration and vesting. In addition, the grant date usually establishes
the option price of the stock option—the price the employee will pay to
purchase the underlying shares. Because these grant terms affect accounting
treatment of the stock options, it is especially important for companies to be
scrupulous regarding grant dates to avoid any implication of manipulating
grant dates for favorable option prices.
The grant process should be designed to avoid these concerns and include
controls, such as specific authorized parties to approve grants for different
employee levels within the company, documented preset dates or frequencies
for approving and establishing grant dates, and consistent treatment of
exception cases. Many boards are approving formal stock grant policies
to specify the company’s grant procedures. Such policies typically include
detailed grant procedures for various grant types (e.g., annual or focal grants)
and criteria for grant timing.
Once the board or subcommittee has approved new grants, the adminis-
trator can enter the details into the stock plan recordkeeping system. The
company can then notify employees of their new equity awards by issuing
a grant agreement package. This type of communication is discussed in
Chapter 6.

Grant Data to Broker


Publicly held companies often establish relationships with specific brokerage
firms to assist employees in exercising their stock options. These service
providers often are referred to as “captive brokers” because the company
directs employees to do business with designated brokers in exchange for
discounted commissions, online access to their company stock option
portfolio and other benefits. Many brokers also offer outsourcing services,
so a company can consolidate both administration and trading with a
single vendor.

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Once stock option data has been entered into the stock plan record-
keeping system, the company transmits grant data to the broker. The
employee may then contact the broker for a summary of his/her stock
options, including how many shares are vested and available to exercise.
In many cases, brokers can provide online grant-agreement services to
communicate the terms of each option in detailed legal language.
For companies that do not utilize captive brokers, a designated company
contact with access to the stock plan recordkeeping system should be
assigned. Exercisable shares will need to be verified through this contact prior
to conducting any exercises.

Types of Exercises
An exercise is the act of purchasing shares underlying a stock option: The
employee is exercising his/her right to purchase the shares granted by the
company. The process of a stock option exercise is very basic: The employee
pays to the company the option price multiplied by the number of shares
exercised, plus applicable taxes; the company then delivers the shares to the
employee, either directly or through a transfer agent. In its simplest form, this
type of exercise often is referred to as a “cash exercise.”
As the usage of stock options has expanded throughout companies,
this basic process has shifted to enable greater trading efficiency and allow
the employee to fund the exercise without out-of-pocket cash. This type of
exercise commonly is called a “cashless” or “same-day-sale” exercise. Because
many employees opt to sell shares as soon as they are exercised, a captive
broker can facilitate that process by conducting the sale based on verification
from the company that the employee has the right to exercise those shares.
The company delivers the shares to the broker to cover the sale; the broker
remits the total option cost and taxes to the company and the resulting net
cash to the employee. This enables the employee to fund the exercise out of
the sale without direct handling of the shares. It is standard for these types
of transactions to finalize or “settle” within three business days.
Another variation is the “sell-to-cover” exercise, in which the employee
sells enough shares out of the shares exercised to fund the option cost,
plus applicable taxes, resulting in net shares that the employee can sell at
a later date.
A type of exercise that is gaining in popularity is the “net exercise.” In this
type of transaction, the company withholds shares equal to the amount owed

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for the option cost and applicable taxes and delivers the net shares to the
employee. This eliminates the impact of a brokerage transaction to cover these
costs and allows the company to manage share dilution. However, because
no money is received for these costs, companies should permit this type of
exercise only if they have adequate cash reserves to pay applicable taxes to
the appropriate authorities and are not dependent on the cash received for
option costs.
For privately held companies, the only type of exercise employees may
conduct is a cash exercise because there is no market to resell the shares. This
may affect employee exercise activity, as employees then are required to fund
the cost of the exercise out-of-pocket, with the potential of no future resale
value to recoup their cost and make a profit.
Note that some countries restrict ownership of U.S. stocks, which
may limit the types of exercises that can be offered to certain employees.
In addition, complex tax laws may make a stock option exercise very difficult
or costly. In countries where grant sizes may be very small relative to the
location’s economics, the cost of U.S. brokerage fees to conduct an exercise
may even exceed the proceeds made on a sale.
The decision to exercise stock options and in what manner should be
undertaken by the employee after carefully considering overall investment
strategies, the cash situation, the net outcome of an exercise (cash or shares)
and tax implications. Employees should always be advised to consult a profes-
sional tax adviser when making such decisions.

Exercise Process
If the company utilizes a captive broker, the employee contacts the broker to
initiate the exercise, often through the broker’s Web site or call center. The
broker confirms the employee’s stock options, including the number of shares
available to exercise. The employee selects the option to exercise, the number
of shares and the exercise type. If a sale of shares is involved, the broker sells
the shares according to the employee’s instructions. If no sale is involved,
the broker may collect the funds to pay for the shares directly from the
employee’s brokerage account.
The broker notifies the company of the exercise, with the company
determining the total amount owed and collecting the funds from the broker.
The company instructs the transfer agent to send the shares to the broker to
cover the exercise. The broker settles the transaction by releasing the total

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option cost and applicable taxes to the company, and the net shares or cash
to the employee.
If the broker does not provide an automated way for the employee to
exercise stock options, the employee may be required to complete and sign
a “notice of exercise” form, which is submitted with his/her payment.
For privately held companies, the employee typically contacts a
designated company representative to complete the exercise paperwork
and provides payment for the shares, usually by check or wire transfer.
The company or its external legal counsel issues out the shares in a stock
certificate for the employee to maintain in safekeeping. Publicly held
companies that do not have captive brokers also can follow this procedure;
however, they can authorize the transfer agent to deliver the shares to the
employee’s designated brokerage account rather than by stock certificate.
When possible, it is highly advisable for the transfer agent to electronically
deliver shares to a brokerage account, as stock certificates can be lost or stolen
and are costly to replace.

Tax Withholding and Reporting


For U.S.-based employees, there is no taxable event associated with the
granting or vesting of stock options. Depending on the type of option, the
key taxable event is at the time of exercise or the sale of resulting shares.
If the stock option being exercised is an ISO, income taxes are not
required to be withheld at the time of exercise, regardless of exercise type.
ISOs are taxable in the year in which the resulting shares are sold. The tax
treatment depends on how long the shares were held between the dates of
exercise and sale. If the shares are sold within two years of the ISO’s grant
date or one year from date of exercise, the exercise is considered to be a
“disqualifying disposition.” If the shares are sold after these two criteria are
met, the exercise is a “qualifying disposition.”
In either case, the company that granted the ISO is responsible for
reporting an amount of ordinary income related to the sale on the employee’s
Form W-2 for the year, even if the employee is no longer with the company at
the time reporting is required. The specific calculation of the ordinary income
amount to be reported is outside of the scope of this discussion.
Due to this tax reporting obligation, companies are required to collect
disposition information in a timely and accurate manner. This may be
difficult if the employee is no longer with the company at the time of sale

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or has sold the shares through a noncaptive brokerage account. The
company should implement a process to demonstrate reasonable effort to
gather this information and report it correctly. Any resulting tax payment
due from a sale usually is paid directly by the employee to the IRS, rather than
through the company. It is important to note that exercising ISOs can create
“tax preference income” that may be subject to the alternative minimum tax
(AMT) in addition to regular ordinary income taxes; employee tax reporting
for ISO exercises can be very complex and therefore is also outside of this
discussion.
If the stock option is an NQSO, the taxable event is the date of exercise,
regardless of exercise type. The taxable income is computed on the net gain,
the difference between the fair market value on exercise date and the option
price. Taxes due usually include federal, state (if applicable) and payroll
taxes (Social Security, Medicare), and local taxes (e.g., state disability). If
the employee conducts a cash exercise, he/she must pay the associated taxes
up front in addition to the total option price at the time of exercise. If the
employee conducts a cashless exercise through a broker, the amount due on
taxes can be withheld from the sale proceeds and remitted to the company
with the total option price. The taxable income and taxes withheld by the
company are reported on the employee’s Form W-2 for the year in which
the exercise occurs, even if the employee is no longer with the company.
The employee may experience further tax consequences if he/she holds shares
from the exercise and sells at a different price on a later date, resulting in
short- or long-term capital gains or losses.
Ordinary income associated with stock option exercises typically is taxed
at the minimum statutory rates for supplemental income. Some companies
allow employees at their discretion to increase tax withholding above the
minimum rates or withhold taxes when no tax is due at exercise; legal and
accounting advice on this practice should be obtained before offering the
capability to employees, as there may be corporate accounting reasons to not
allow such elections.
Stock options for employees located in non-U.S. countries may be subject
to different taxation requirements, possibly at the time of grant, vesting or
exercise. Reporting requirements, reporting periods and holding periods also
may vary. It always is advisable for any company granting equity awards in
non-U.S. countries to consult experts in global equity compensation and
taxation prior to granting the awards and throughout the life cycle, so the
requirements are clearly understood and followed.

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Audit and Reconciliation
A key responsibility of any stock plan administration function is audit and
reconciliation. Because stock plan data feeds into the company’s financial
reporting and is subject to controls mandated by the Sarbanes-Oxley Act,
it is critical that data integrity be verified properly and in a timely manner.
Adequate audit procedures also help protect the administrator from potential
liability for data entry errors if an issue arises, and provide checks and
balances to deter fraud by anyone handling stock plan data.
The company should set up a standard audit process, documenting all
tasks, timing and ownership of responsibility. The types of data that should
be audited include (but are not limited to):
• Plan parameters: Audit against the plan document and SEC registration
statement at the time a plan is set up in the stock plan recordkeeping
system and any time a change is made, such as an increase in shares
authorized.
• Personnel data: Audit against the source of data, such as the HR system;
should be performed any time new data is supplied and entered into the
stock plan recordkeeping system.
• Grant data: Audit against the board of directors minutes documenting the
approvals; should be conducted any time new grants are approved and
entered into the stock plan recordkeeping system.
• Grant agreements: Audit against grant data in the stock plan record-
keeping system to ensure optionee names, grant numbers, share numbers
and other details are accurate.
• Exercises: Audit exercises against exercisable shares showing in the stock
plan recordkeeping system.
• Option receivables: Audit total option cost and taxes due associated with
each exercise against accounts receivables records that ensure correct
amounts were remitted by employees or their designated brokers.
• Payroll data: Audit ordinary income and taxes withheld against payroll
reports prior to issuance of Form W-2s.
• Plan reserves: Audit plan reserves and balances on a regular basis by
comparing plan summaries in the stock plan recordkeeping system with
transfer agent records.

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Documentation to support each audit task performed and the outcome
should be maintained by stock plan administration in perpetuity. In many
cases, companies add checks and balances to their process by having a
different person or department, other than the employee conducting the
audit, approve the results. Well-structured audit and reconciliation practices
will help ensure that the company’s process for reporting equity plan data
is producing accurate numbers and disperse the responsibility across the
organization.

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5
Reporting

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M
anaging a successful equity compensation program requires
knowledge of myriad reporting requirements, both at the
corporate and employee level. For financial reporting of publicly
held companies, senior management must attest to the validity of all financial
data and controls subject to the Sarbanes-Oxley Act. As a result, many
companies have instituted stringent policies and practices to ensure the flow
of information is tightly managed.
Some of the reporting requirements for stock option plans include:
• IRS: Employee taxable earnings and taxes withheld, corporate tax
deductions
• SEC: Form 3 (Initial Statement of Beneficial Ownership of Securities),
Form 4 (Statement of Changes in Beneficial Ownership), Form 5
(Annual Statement of Changes in Beneficial Ownership of Securities),
Forms 10-Q and 10-K (quarterly and annual reports of public company
financials), Forms S-1 and S-8 (statements of share registration)
• Shareholders: Annual report (disclosure of corporate information),
proxy statement (solicitation of voting measures).
Figure 1 on page 39 and Figure 2 on page 40 provide lists of sample
reports and disclosures required for internal and external purposes that
can be generated through the stock plan recordkeeping system.

Payroll
Communication with the payroll system is very important, as it drives tax
reporting for employees. Typically the payroll department provides certain
types of basic data about the employee, so at the time of exercise, the correct
tax withholding can be calculated. For example, this may include state rates
based on the employee’s location at the time of exercise and whether the
employee has exceeded the Social Security cap for the current year. Many
companies create an automatic, regular data feed from the payroll system to
the stock plan recordkeeping system to ensure this information is updated
frequently; the information can then be sent to the captive broker to speed

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FIGURE 1: Internal Departmental Reports

Department Data Received Time Frame Use of Data


Payroll Taxable compensation Monthly Update of pay stub
realized by optionee at and W-2
exercise
Taxes paid by optionee Monthly Update of pay stub
at exercise and W-2
Tax Total taxable compensation Quarterly Corporate tax
realized by all optionees deduction
Accounting Total amount paid to Monthly Adjust capital
exercise options accounts based on
money remitted for
option exercises
Grants, exercises and Monthly Track options
cancellations outstanding
Earnings per share Monthly Footnote to earnings
dilution report release
Legal Notification of restricted- As appropriate Reminder of insider-
person exercise trading and window-
period rules
Treasury Notification of any As appropriate SEC filing
executive officer activity
(e.g., grant, exercise)
Total number of Monthly Track shares
shares issued from issuances and decide
option exercises how to fund shares

the tax calculation process when an exercise occurs. An automated interface


eliminates the need for the stock plan administrator or broker to verify tax
status at the time of every transaction for every employee.
Once transactions take place, data must feed back to the payroll system.
This includes exercises and disqualifying and qualifying dispositions.
The payroll department records the associated income and applicable tax
withholding for the employee, remits taxes to agencies as necessary, and
generates an accurate Form W-2 for the employee at the end of the year.
There are additional tax requirements that can affect equity transactions,
such as increased tax rates or expedited deadlines to remit taxes when income
from exercises exceeds a certain level. To manage compliance, it is especially
vital for communications to be strong, accurate and timely between stock
plan administration and payroll.

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FIGURE 2: External Disclosures

Department Data Disclosure


Accounting The earnings-per-share dilution is a complex Quarterly and annual
calculation performed by the software. earnings releases
Overall plan balances and activity for a given Stock plan section of
year are summarized in the annual report annual report
statistics report.
Legal Stock option grant table Proxy statement

Option exercise/holdings table Proxy statement


Option grant column for summary Proxy statement
compensation table
Awards and strategy for the compensation Proxy statement
committee on executive compensation
Optionee statements for director and officer Proxy statement
beneficial ownership table
Executive officer stock activity SEC Form 3, 4 or 5
Plan share authorizations SEC Form S-8,
stock exchanges

Corporate Tax
At the corporate level, companies receive a tax deduction for all taxable
income reported on employee Form W-2s, either from ISO disqualifying
dispositions or NQSO exercises, so the company should ensure all
transactions have been captured and recorded in a timely and accurate
fashion. Usually the company’s tax department requests reports on
transactions to record the associated tax deductions.
There are other particularly complex tax rules companies need to be aware
of and, in some cases, track and administer. Stock plan administration and
the stock plan recordkeeping system are keys to providing accurate transaction
and tax-related data and reports to support these efforts.

Accounting
Under the Statement of Financial Accounting Standards (SFAS) No. 123 and
123(R), companies must calculate the fair value of all stock options at the
time the options are granted. The calculation requires various inputs into
a valuation model. The fair value, or expense, of the option must then be
taken as an actual cost to the company’s bottom line on its financial reports.

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Usually the expense is amortized over a period of time, such as the vesting
schedule, so the company does not have to take the negative impact on its
financial reports at one time. For companies that rely heavily on equity as
part of the total rewards package, such as technology firms, this cost can be
very significant.
Stock plan recordkeeping systems usually can calculate, amortize and
track accounting expense related to stock options, as well as generate some of
the data required for the valuation model inputs. Stock plan administration
commonly is required to generate supporting data on a regular basis and is
a vital contributor to the financial reporting process.
Due to the manner in which companies must report stock option expense
in their financial reports, there is increased scrutiny on the types of equity
being granted, which employees are receiving equity, and whether the equity
awards are meeting the program’s overall goals as defined at the initiation
of the plan. Since the introduction of SFAS 123(R), many companies have
considered cutting back on the extent of their stock options, including
decreasing typical award sizes, limiting which employees receive grants, and
changing some of the terms of the grants. Even private companies that are not
subject to periodic reporting to the SEC must comply with these regulations.
As these accounting rules are complex and often vaguely defined,
companies typically involve accounting experts and consultants to determine
the most appropriate way to treat their stock options. It is very important
for companies to look closely at the accounting cost of granting equity and
balance those obligations with the program’s incentive goals.

Insider Reporting and Trading Policies


There are three main categories to consider in relation to insider trading
policies and practices: Section 16 insiders, insiders and all employees.

Section 16 Insiders
For publicly held companies, transactions performed by certain employees
and affiliates must be reported directly to the SEC subject to Section 16 of
the Securities Exchange Act of 1934. Typically the persons subject to these
rules are the board of directors, executive officers and any employee or
affiliate deemed to possess a consistently high degree of nonpublic material
knowledge about the company. For example, a senior vice president of sales
or the corporate controller may be included in this group. These regulations

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ensure such insiders do not conduct inappropriate transactions that take
advantage of their inside knowledge.
When an employee or affiliate is first designated as a Section 16 insider,
the insider must file a Form 3 report with the SEC within 10 calendar days
of the effective date of his/her designation. The Form 3 must indicate the
insider’s company holdings as of the effective date, including stock options.
In the case of an initial public offering (IPO), the filing must be made by the
effective date of the IPO. When an insider receives a new grant or conducts a
transaction related to his/her company holdings, he/she usually is required to
report the transaction on a Form 4 within two business days of the transaction
date. An additional Form 5 may be filed within 45 calendar days of the end
of the company’s fiscal year to report any transactions that were not reported
on a Form 4. All forms must be filed electronically with the SEC through an
online system called the Electronic Data Gathering Analysis and Retrieval
system (EDGAR).
Stock plan recordkeeping systems typically can administer insider
transaction information and generate the required forms for EDGAR filing.
It is reasonable to keep this data centralized because stock options often are
a key transaction being reported.

Insiders
Section 16 insiders usually are part of a larger group of designated insiders
who are subject to “trading windows,” or specific times of the year when
these employees are allowed to conduct company stock transactions,
including stock option exercises. The period during which a trading window
is closed is called a “blackout.” Regular insiders may include employees
down to the manager level, and those in finance or sales with confidential
access to company performance information. The company’s legal counsel
will be in charge of defining persons subject to these policies and pre-
clearance procedures to ensure all transactions conform to the company’s
trading controls.

All Employees
Both privately and publicly held companies should have formal insider
trading policies that prevent all employees from distributing or misusing
nonpublic material knowledge outside of the company. Companies may
require employees to sign an acknowledgement of receipt and understanding
of the policy.

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Other Corporate and Financial Reporting
For companies granting equity in non-U.S. countries, there may be additional
corporate reporting requirements and deadlines to manage. The costs for
meeting these obligations can be very significant. It is highly advisable that
such companies work with external advisers particularly knowledgeable about
global requirements before granting equity in other countries.
Publicly held companies must also report other financial metrics that
factor in employee equity (e.g., earnings per share) and disclose certain
information about equity awards in the annual proxy statement. The stock
plan recordkeeping system can be very useful for tracking and providing
information to support these types of calculations and disclosures.

Employee Tax Reporting


Most companies provide a statement to employees when an exercise occurs.
This statement usually contains details of the transaction, such as the grant
number of the option being exercised, the number of shares exercised, the
date of exercise, the option price, the sale price if applicable, and any related
taxes the company withheld at the time of exercise. If the company uses a
captive broker, the broker may issue this statement directly to the employee.
Companies often supply a year-end statement summarizing all trans-
actions that occurred during the year to aid the employee’s tax return process.
This is useful for verifying the company’s records before a Form W-2 is issued.
If the employee exercised an ISO in that year, the company also must provide
a statement providing details of the transaction, subject to Section 6039 of the
IRC. This statement must be prepared for each ISO exercise conducted and
sent out to the employee by Jan. 31 of the following year.
As noted in Chapter 4, companies are required to report certain types of
stock option income on the employee’s Form W-2 at the end of the year.
Such entries include ordinary income gained from NQSO exercises and
recognized by the employee for ISO disqualifying or qualifying dispositions.
The stock plan recordkeeping system must be accurate and up-to-date by
year-end to ensure reporting on the Form W-2 is correct. Form W-2s are
required for transactions not only of current employees but also of former
employees, even if they received no other compensation from the company
during the tax year. Note that contractors and outside board members who
receive and exercise stock options are treated differently in terms of tax
withholding and reporting.

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Employees always should be advised to consult a professional tax adviser
when filing tax returns for a year in which stock option transactions occurred.

Using Data to Analyze Optionee Trends


One of the best resources for HR professionals to monitor employee
behaviors is stock option activity data. By generating reports related to
employee transactions and reviewing key elements, the company can use
this information to evolve its equity compensation programs to increase
effectiveness for employees. For example, if employees are not exercising
vested, “in-the-money” stock options with immediate value before the
options expire, the company may look at whether employees are receiving
adequate education to understand the value of their stock options and how
to exercise them. HR has an important relationship with stock plan adminis-
tration for this reason, and both groups should work closely together in
examining activity to monitor employee trends.

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6
Communicating
with Employees

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H
R professionals commonly are involved in driving employee
communications and education policies. A well-designed employee
communications strategy is critical to the success of a stock option
program, yet this area often is neglected or underdeveloped. Although
equity plans have become more prevalent, a large percentage of recipients
remain limited in their knowledge of these benefits. Lack of education
also can result in litigation. As the extent of equity compensation grows,
so do the number of lawsuits focusing on stock ownership and what has
(or has not) been communicated properly to employees. Figure 3 examines
survey data indicating the extent to which employees understand the value
of stock options.
The HR department plays a key role in working with stock plan
administration to communicate regularly with employees and reinforce
the importance of equity in the total rewards package.

FIGURE 3: Extent to Which Employees Understand the Value of Stock Options

Thorough General Limited Not at all


Cos. %[1] Cos. %[1] Cos. %[1] Cos. %[1]

CEO and other senior


management 290 84.1% 48 13.9% 4 1.2% 0 0.0%
Middle management 87 25.2% 222 64.3% 29 8.4% 0 0.0%
Other exempt 13 3.8% 125 36.2% 133 38.6% 13 3.8%
Nonexempt 4 1.2% 33 9.6% 133 38.6% 59 17.1%
[1]
Based on 345 companies that currently grant stock options

Reprinted with permission from the 2000 Stock Plan Design and Administration Survey, presented by the
National Association of Stock Plan Professionals (NASPP) and PricewaterhouseCoopers LLO, published by the
NASPP (www.naspp.com), Copyright 2000.

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Benefits of a Strong Communications Program
By placing appropriate importance on communicating with employees
through a variety of channels and means, the company can increase the value
perception of the program in employees’ eyes and encourage the behaviors
the program was designed to motivate. Such behaviors may include: long-term
commitment to company performance, improved recruiting and retention and
overall employee satisfaction with wealth generation derived from employment
with the company. Given that stock options must be recorded as a real cost to
the company’s bottom line, it makes sense for companies to invest in proper
communications and training to increase their return on investment in these
programs. If the program is not achieving its ultimate goals, the company may
want to consider offering another type of compensation.

Avoiding Advice
As a form of equity ownership, stock options are an investment and must be
treated as such. While communicating the value of stock options, companies
should avoid giving tax and financial management advice to employees. They
should be advised of both the risks and benefits in order to make proper
decisions based on their own situation, such as whether to exercise, when to
exercise, what kind of exercise to conduct and how many shares to exercise.
The company may choose to recommend a network of professional tax and
financial management advisers knowledgeable of stock options for employees
to contact on their own. It is helpful to provide a list of suggested questions to
qualify an adviser regarding personal circumstances.

Developing a Communications Program


Several groups should work closely together when developing a communi-
cations program: HR, stock plan administration, legal, executive management
and external consultants to advise and support deployment. There are several
aspects to look at:
• Program goals: Why is the company offering equity? What does it hope
to achieve by doing so?
• Audiences: Who are potential recipients of the program? What does
each type of recipient need to know? How diverse is the audience
(i.e., geographic location, knowledge of equity vehicles, job level within
the company)?

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• Timing: Are there key opportunity points for communicating with
employees, such as at the time of hire, termination, transaction or a
milestone event? How frequently should ongoing education be offered?
What is the timing for rollout of a program?
• Methods: What resources are available to communicate with employees?
What resources are most accessible? What resources resonate most with
employees?
• Channels: What is needed to communicate through each method
identified?
• Feedback: Are there ways to solicit feedback from employees to ensure
the communications program is meeting its goals?
• Resources: Who is involved in supporting ongoing communications
and education? Are there adequate resources to do so? Does the budget
support the time and effort required to service employees adequately?
Figure 4 provides a list of practical communication tips to aid in the
development of a training program. Figure 5 on page 49 is a list of sample
forms and communications that should be used to inform participants.
Sample documents are provided in the Appendix.

FIGURE 4: Communication Tips


• Convey a consistent message.
• Align communications with the corporate mission, vision, strategic business plans and
organizational objectives.
• Use caution to avoid inadvertently creating conflict between stock option program
communications and any other equity-based rewards programs and messages sent
to employees.
• Recognize the difference between giving “advice” and meeting a standard communications
requirement.
• Maintain confidentiality and communicate the organization’s sensitivity and policy on
the issue.
• Encourage feedback by providing a way to receive employee feedback and questions.
• Communicate frequently about the plan rather than limiting communications to milestones,
such as when grants are made or when options vest.

At the Time of Hire


The time of hire may be the first opportunity the employee learns of the
company’s stock option program. When a new employee receives stock
options, brief details of the grant often are included in the offer letter, such as

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FIGURE 5: Internal Departmental Reports

Form Name Description/Purpose Timing

Optionee Provides optionee with overall Annually. Can be sent to optionee


statement stock option account balances as with other communications, such
of certain date as the vesting notification.

Grant letter, Drafted by the legal department At grant


plan document or outside counsel. Gives
and prospectus optionee terms and features of
the option award.

Vesting Notifies optionee that options At vesting


notification are available for exercise

Exercise form Used by optionee to exercise At exercise


option

Tax schedule Drafted by payroll department. At exercise


Gives optionee the rates for
tax withholdings due on exercise
of options.

Confirmation of Notifies optionee of date of Soon after exercise


exercise form exercise, taxable compensation
and basis of cost shares

Termination Notifies optionee of date of At severance of employment,


grace period postemployment exercise period if appropriate
notice

Expiration Warns optionee of pending Before the expiration date


notice form expiration of option

the number of shares to be granted. It should be noted in the offer letter that
the grant is subject to approval by the board of directors and will be governed
by the terms of the plan under which it is granted. In other words, the grant
offer is conditional until the board approves the option.
When the employee begins work, he/she may attend a new-hire
orientation and receive a new-hire packet. Some educational information can
be provided at that time, such as when to expect a stock option agreement
package. It is advisable to keep this discussion to a minimum, as not all
employees attending the orientation may be eligible to receive stock options.
Stock options also usually do not vest for some time, so new-hire orientation
may be premature for any detailed discussion.

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At the Time of Grant
When a new stock option has been approved by the board of directors and
entered into the stock plan recordkeeping system, the company should
immediately notify the employee of the terms of the grant in the form of
a grant agreement package. Usually companies provide a customized set
of materials, including a congratulatory letter from the CEO, a notice of
grant with details of the specific stock option terms and signature acknowl-
edgement, a boilerplate agreement document with standard terms, the plan
document and the company prospectus, if available. The employee should
acknowledge receipt and understanding of the option terms by signing
the grant agreement and returning it to stock plan administration within a
specified time period. Although this is not a legal requirement, obtaining
employee acknowledgement of the grant terms is very useful in case of
dispute at a later point. In many cases, companies do not permit employees
to exercise vested options if the grant has not been accepted.
To increase efficiency and timeliness of grant agreement distribution,
many companies use an online system, whereby the employee is notified
by e-mail when a new agreement is available for review and acceptance.
The employee can click a hyperlink that takes him/her to a grant agreement
Web site to view the documents and acknowledge the grant via electronic
signature. The company then can collect the grant acceptance data and import
it to the stock plan recordkeeping system for tracking purposes. Online grant
acceptance has become increasingly popular, as an electronic signature is
widely accepted from a legal perspective, information can reach employees in
a more efficient and inexpensive manner, and data tends to be more accurate
and auditable. Captive brokers often can provide online grant agreement
distribution and acceptance capabilities at little or no cost to the company.
Note that some countries may not permit electronic acceptance of stock
option documents, thereby requiring the company to issue grant agreement
packages on paper.

At the Time of Vest


Although not required to do so, companies may provide a notification of
impending vest dates to employees. This offers a good opportunity for the
company to remind the employee of specific vesting dates, the number of
shares vesting and how to exercise the shares once they are vested. If a large

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number of stock options are vesting on the same date, this notification may
be highly beneficial to increase employee awareness of this event and reduce
the number of inquiries to stock plan administration.

At the Time of Exercise


When an employee exercises his/her stock options, the company should
provide a statement with details of the transaction to assist in their tax
reporting. Captive brokers usually are able to provide this type of document,
either on paper or through the employee’s online brokerage account. The
employee should keep a copy of these statements to assist in filing his/her
tax forms.

At the Time of Option Expiration


Once an option expires, any shares that are vested and unexercised as
of the expiration date are forfeited. While the company is not required to
provide employees with a notification of expiring options, this is common
courtesy, as employees may not realize they are losing valuable income. Some
companies set up periodic reminders to notify employees as the countdown
to expiration occurs. Captive brokers also may be able to send e-mail notifi-
cations and set up alerts on the employee’s online brokerage account.

At the Time of Termination


When an employee terminates with the company, typically any unvested
shares in his/her outstanding stock options are canceled because the shares
are tied to continued performance and employment. Any vested, unexercised
shares may be exercisable by the employee for a certain period of time after
termination, such as 30 or 90 days; these terms are specified in the plan
document. If the employee has stock options available to exercise after
termination, the company may provide a statement at that time to indicate
the number of shares available to exercise and the final date by which the
shares must be exercised. If the employee does not exercise these shares
within the allotted time, the shares are forfeited. No exceptions should be
made to extend exercisability beyond the time period allowed without full
consideration of the corporate accounting impact of such an extension.
The stock plan recordkeeping system should be able to generate a termination
or closing statement to distribute to the employee.

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Methods of Communication
There are numerous ways to reach employees:
• In-person: Direct meetings, presentations, one-on-one consultation
• Web: Live or prerecorded webcasts, video conferences, an intranet, e-mail,
custom Web sites
• Telephonic: Conference calls, call centers
• Written: Frequently asked questions (FAQs), plan summaries or
prospectuses, letters, statements
• Third-party: Vendor-supported materials, online accounts.
Companies should take a look at what methods are most accessible to
employees, thereby enabling greater responsiveness and receptiveness to the
company’s communications efforts.

Focused Audiences
In most cases, companies will have different types of employees requiring
education. These may include: senior executives and/or Section 16 insiders,
managers, rank-and-file employees, specific departments or divisions, or
employees in non-U.S. countries or geographic regions. Communications and
methods of information sharing should be tailored to these groups, as their
motivations, responses and behaviors may be different.
Note that some countries require the company to translate documents
into an employee’s local language.

Data Privacy
There are regulations that protect the privacy of data transmitted outside the
United States. If the company wishes to transmit any sensitive stock option
information to non-U.S. employees, it should obtain legal counsel
on what can be provided and in what format. In some cases, employees must
authorize the company to transmit this information electronically. Data
privacy laws also cover external service providers who may outsource certain
functions requiring the transmittal of client data.

Ongoing Communication and Education


In addition to providing communications at key opportunity points,
companies should make consistent educational support available on an
ongoing basis. This may include e-mail and call center assistance when

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employees have questions, regularly scheduled educational meetings and a
dedicated Intranet site where employees can find information about the plan,
locate contacts and links, and download forms. Educational support should
be built into every administrative program in terms of costs, resources
and timing.

Measuring Employee Satisfaction


Offering a method for employees to provide feedback about the stock option
program is highly recommended. This can be accomplished through point-of-
contact surveys (such as after a transaction is conducted), annual surveys, and
real and virtual suggestion boxes. Employees should be encouraged to provide
input anonymously; this data can then be analyzed to determine needed
enhancements to the program, changes to education strategies, and overall
effectiveness and productivity of equity compensation within the company’s
total rewards offerings.

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7
Getting It Right

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E
mployee stock options are among the most comprehensively regulated
forms of equity compensation. A multitude of tax, corporate and
securities laws affect their adoption, implementation, operation and
administration. An array of legal provisions and conditions affect stock
option plans. A well-designed and well-managed stock option recordkeeping
and reporting system can help a company deal with the complications. If
strategically implemented, the system minimizes costs and time associated
with the administrative requirements. It will reduce the potential exposure of
the company to liabilities, while maximizing the impact of the equity-based
incentive compensation plan.
Stock option programs must continually react to the changing economic,
demographic, regulatory and technological environments. The installation of
a flexible stock option recordkeeping and reporting system will make the plan
implementation a seamless transition and prepare the company for future rule
and practice changes.
A well-designed administrative operation will help support the goal
of the stock option plan, achieving continuing performance improvement,
greater efficiencies and increased productivity from employees and the
overall company.

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Appendix:
Sample Documents

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Sample Stock Option Notice of Grant
Provided as part of the grant agreement package notifying the employee of
the stock option’s terms.

ABC COMPANY INC. LONG-TERM INCENTIVE PLAN


INCENTIVE STOCK OPTION AGREEMENT

THIS INCENTIVE STOCK OPTION AGREEMENT (this “Option Agreement”) by and


between ABC COMPANY INC., a Delaware corporation (the “Corporation”), and JOHN
DOE (the “Participant”) evidences the incentive stock option (the “Option”) granted by
the Corporation to the Participant as to the number of shares of the Corporation’s
Common Stock, $0.01 par value per share, first set forth below.

Number of Shares of Common Stock:1 400 Award Date: XX/XX/XX

Exercise Price per Share:1 $28.66 Expiration Date:1,2


Ten years from Award Date

% of Vesting Date of Vesting


25% XX/XX/XX
50% XX/XX/XX
75% XX/XX/XX
100% XX/XX/XX

The Option is granted under the ABC Company 20XX Long-Term Incentive Plan (the
“Plan”) and subject to the Terms and Conditions of the Option (the “Terms”) attached to
this Option Agreement (incorporated herein by this reference) and to the Plan. The Option
has been granted to the Participant in addition to, and not in lieu of, any other form of
compensation otherwise payable or to be paid to the Participant. The Option is intended
as an incentive stock option within the meaning of Section 422 of the Code (an “ISO”).
Capitalized terms are defined in the Plan if not defined herein. The parties agree to the
terms of the Option set forth herein, and the Participant acknowledges receipt of a copy
of the Terms and the Plan.

“PARTICIPANT” ABC COMPANY INC.


a Delaware corporation
______________________
JOHN DOE
1234 AMERICA AVENUE
UNITED STATES, 12345 By: Jane Doe
Its: Corporate Representative

CONSENT OF SPOUSE
In consideration of the Corporation’s execution of this Option Agreement, the undersigned
spouse of the Participant agrees to be bound by all of the terms and provisions hereof
and of the Plan.

_________________________ _______________________
Signature of Spouse Date

1. Subject to adjustment under Section 6.3 of the Plan.


2. Subject of early termination under Section 6.2 or 6.3 of the Plan.

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Sample Stock Option Vesting Notification
Provided to notify employees of impending vest dates.

ABC COMPANY INC.


Stock Option Vesting Notification
SS No. XXx-XX-XXXX

John Doe
Address 1
Address 2
Address 3

Your stock options have become exercisable as follows:

Number of Options Vest Date Exercise Price


400 XX/XX/XX $ XX.XX

Enclosed are:
1. An optionee statement which summarizes your stock option account
2. Exercise forms which can be used with the above-mentioned vesting

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Sample Stock Option Exercise Form
To be completed by the employee at the time of exercise.

ABC COMPANY INC.


Stock Option Exercise Form

I elect to purchase _____________ (company name) common shares at $ _____ per share
under my stock option date_______. I understand that I must pay the Company
not only the purchase price of these shares, but any additional withholding necessary
for federal income, Social Security, and state and local tax, where applicable. Enclosed
is a check payable to (company name) for $_______.

Mail to: Company name


Address
City, State, Zip Code

Following is my name and address as I wish it to appear on the registration of the stock:

Name Joint Tenant (if any)

Address City, State, Zip Code

Daytime Phone No. Signature SSN Date


Mailing Instructions (if different than above address)
Please mail my certificates to:

Employee/Broker Name ___________________


Address: ___________________
City, State, Zip Code ___________________

Note: Your name must appear in the registration of any stock you purchase pursuant to
the exercise of a stock option. If permitted by the laws of your state, you may have your
stock issued in joint tenancy, such as “John Doe and Mary Doe, Jt. Ten.” In such case,
the word “and” must be used, not “or.” If you have any questions concerning the legal or
tax implication of joint ownership of your shares, you may wish to consult your attorney
or tax advisor.

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Alternative Sample Stock Option Exercise Form

ABC Company Inc.


LONG-TERM INCENTIVE PLAN
OPTION EXERCISE AGREEMENT

The undersigned (the “Purchaser”) hereby irrevocably elects to exercise his/her right,
evidenced by that certain Incentive Stock Option Agreement dated as of
____________________ (the “Option Agreement”) under the ABC Company Inc.
Long-Term Incentive Plan (the “Plan”), as follows:
the Purchaser hereby irrevocably elects to purchase __________________ shares of
Common Stock, par value $0.01 per share (the “Shares”), of Resources Connection Inc.
(the “Corporation”), and such purchase shall be at the price of $__________________ per
share, for an aggregate amount of $__________________ (subject to applicable
withholding taxes pursuant to Section 6.5 of the Plan).
Capitalized terms are defined in the Plan if not defined herein.

Delivery of Share Certificate. The Purchaser requests that a certificate representing


the Shares be registered to Purchaser and delivered to:

_______________________________________________________________________

_______________________________________________________________________

Plan and Option Agreement. The Purchaser acknowledges that all of his/her rights are
subject to, and the Purchaser agrees to be bound by, all of the terms and conditions of
the Plan and the Option Agreement, both of which are incorporated herein by this
reference. If a conflict or inconsistency between the terms and conditions of this
Exercise Agreement and of the Plan or the Option Agreement shall arise, the terms and
conditions of the Plan and/or the Option Agreement shall govern. The Purchaser
acknowledges receipt of a copy of all documents referenced herein and acknowledges
reading and understanding these documents and having an opportunity to ask any
questions that he/she may have had about them.

Notice of Sale. Upon any sale or other transfer of the Shares within either one year of
the date that they are acquired by the Purchaser or two years after the Award Date set
forth in the Option Agreement, the Purchaser agrees to provide the notice required
under Section 2.4.3 of the Plan.
ACCEPTED BY:
ABC Company Inc.
“PURCHASER”
a Delaware corporation
_________________________________ By: ________________________________
Signature
Print Name: ________________________
_________________________________
Print Name Title:________________________________
(To be completed by the Corporation
_________________________________
after the price [including applicable
Address
withholding taxes], value [if applicable]
_________________________________ and receipt of funds is verified.)
City, State, Zip Code

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Sample Stock Issuance Authorization
Provided by the company to the transfer agent to authorize the delivery of
shares in certificate form to the employee.

PREPARE ON COMPANY LETTERHEAD

July 8, XXXX

TA Contact Person VIA FACSIMILE: (XXX) XXX-XXXX


Transfer Agent
Street Address
City, State, Zip Code

Re: Declaration of Stock Option Exercise

Dear Contact Person:

You are hereby authorized to prepare and issue stock certificate(s) and deliver the
shares of Common Stock as indicated below. The shares are being issued to cover
the exercise of stock options under ABC’s Stock Option Plan.

Control Number Exercise Date No. of Shares Issued Registration Address


ABCD 0002 XX/XX/XX 2,500 Employee Name Street Address
City, State, Zip

Please deliver the certificate(s) to the address(es) as set forth above.

If you have questions, please call me at (XXX) XXX-XXXX.

Best regards,

XXXXXXX
Manager, Stock Plan Administration

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Alternative Sample Stock Issuance Authorization
Provided by the company to the transfer agent to authorize the electronic
delivery of shares to the employee’s brokerage account.

PREPARE ON COMPANY LETTERHEAD

July 7, XXXX

TA Contact Person VIA FACSIMILE: (XXX) XXX-XXXX


Transfer Agent
Street Address
City, State, Zip Code

Re: Declaration of Stock Option Exercise

Dear Contact Person:

You are hereby authorized to issue and deliver the shares of Common Stock as indicated
below via DWAC. The shares are being issued to cover the exercise of stock options under
ABC’s Stock Option Plan.

DWAC Issuance Control #: ABCD 0001

Date of Exercise: XX/XX/XX

Total Number of Shares: 3,875

XXXX Plan Total: 3,875

Broker: Brokerage Firm


Contact: Broker Contact (XXX) XXX-XXXX
Broker DTC #:
Operations Contact:

The broker will initiate the DWAC transaction on XX/XX/XX.

If you have questions, please call me at (XXX) XXX-XXXX.

Best regards,

XXXXXXXXX
Manager, Stock Plan Administration

cc: Broker Contact Person (w/attachment)


Fax No. (XXX) XXX-XXXX

Administering Stock Option Plans | 65

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Sample Confirmation of Exercise
Provided by the company or captive broker to the employee upon completion
of a stock option exercise.

ABC COMPANY INC.


Confirmation of Exercise
***Retain for your Tax Records ***
SS No XXX-XX-XXXX

John Doe
Address 1
Address 2
Address 3

Plan: XXXX Stock Option Plan


Exercise Date XX/XX/XX
Options Exercised XXX
Market Value $XX,XXX
Option Cost $XX,XXX
Taxable Compensation $XX,XXX
Taxes Paid $XX,XXX
Market Price $XX.XX
Exercise Price $XX.XX
Grant Type Nonqualified

Note: For nonqualified stock options, the market price is your per-share basis price.

66 | Administering Stock Option Plans

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Sample Closing Statement
Provided to notify a terminating employee of his/her outstanding exercisable
stock options.

ABC COMPANY INC.


Termination Grace Period Notice
SS No. XXX-XX-XXXX

John Doe
Address 1
Address 2
Address 3

Date of Date of Type of Option Options Options Due Cost to


Grant Expiration Option Price Granted to Expire Buy Share
XX/XX/XX XX/XX/XX Nonqual. $XX.XX 1,000 1,000 $XXX.XX

Enclosed are the forms to exercise these options.


Note: For nonqualified options, the “cost to buy shares” does not include withholding
taxes.

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Sample Optionee Statement
Provided on a regular or by-request basis to notify employees of their current
stock option holdings.

ABC COMPANY INC.


Optionee Statement
SS No. XXX-XX-XXXX

John Doe
Address 1
Address 2
Address 3
As of XX/XX/XX

Date of Type of Options Options Option Date of Options Available for


Grant Grant Granted Outstanding Price Expiration Vested Exercise
XX/XX/XX Nonqual. 1,000 1,000 $ XX.XX XX/XX/XX 500 500
(current)
500 on
XX/XX/XX
XX/XX/XX Nonqual. 1,200 1,200 $ XX.XX XX/XX/XX 0
(current)
400 on
XX/XX/XX
400 on
XX/XX/XX
400 on
XX/XX/XX
Total 2,200 2,200 500

68 | Administering Stock Option Plans

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Administering Stock Option Plans
The entire discussion of stock options has changed in just the past few years. Now that
stock options are being required to be charged to earnings, companies are being more
thoughtful than ever in their use and administration. In addition to this shifting land-
scape, grantees have become more sophisticated—they are more educated than ever
before, and they want to understand the details of the programs and processes involved.
At the same time, government regulators are increasingly checking into how options are
being used, thus making accurate administration more important than ever.
This update of the 2005 publication addresses each of these issues, and seeks to explain
many of the core aspects of stock plan administration. HR professionals and stock plan
administrators interested in learning more about equity plan administration will find this
book extremely valuable.

Brent Longnecker, CCP, CBP, CCC, is Chairman and CEO of


Longnecker & Associates, a large core management team of dedicated
professionals who work on corporate governance, board of director
compensation and executive pay solutions. He has more than 25 years
of experience in the analysis, design and implementation of innovative
performance, productivity-enhancement and cost-savings programs,
and was selected by Consulting Magazine as one of the Top 25 con-
sultants in the United States—a first for any executive compensation
consultant. His consulting engagements for numerous CEOs, boards of directors, invest-
ment bankers, attorneys and certified public accountants for all major industries have
embraced a wide range of operational, organizational, strategic and ethical business
issues. The firm’s thought leadership and impact on ethics, human resources and pay
is well-known across the United States, with 10 books and more than 350 articles
authored, along with frequent seminars, television interviews and quotes in the
national press.

Pamela Van Gordon, CEP, is the Chief Operating Officer of Stock &
Option Solutions (SOS), a leader in providing expert stock plan
management consulting and administration to companies nationwide.
In this role, she manages strategic consultative divisions and internal
functions, including human resources. Her experience covers compen-
sation and benefits programs, shareholder relations, private/pre-IPO
and global enterprise companies, and corporate services business
development with a major brokerage firm. She is a Certified Equity
Professional and a member of the Certification Council of the Certified Equity Profes-
sional Institute. She also is the Western region liaison for the National Association
of Stock Plan Professionals. She has spoken on issues in equity compensation
administration at a national level.

14040 N. Northsight Blvd.


Scottsdale, AZ 85260
www.worldatwork.org

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