4 Tips for Extending Your Share Reserve

Are you feeling the pinch when it comes to the number of shares that remain available for future grants in your long-term incentive plans? The session “Your Guide to Adding Shares to Your Plan” at the 29^th Annual NASPP Conference will help you determine your game plan when it comes to submitting a request for additional shares to shareholders.

I snagged a sneak peek at the panel’s slides and discovered that they have also included four ideas to extend the life of your share reserve if a new share allocation isn’t in the cards at the moment (or you aren’t able to obtain approval for as many shares as you’d like).

Inducement Grants

This is one of my favorite tips. Inducement grants are essentially a get-out-of-shareholder-approval-free card. Both the NYSE and Nasdaq do not require shareholder approval for equity awards that are granted for the purpose of encouraging individuals to accept an offer of employment.

This almost seems too good to be true, but there are some catches, which I’ve previously blogged about:

• The grants must be issued to newly hired employees. Inducement grants can’t be issued to existing employees (even if you are trying to induce them to stay) and can’t be issued to nonemployees.
• The terms of the award must be communicated prior to the individual’s acceptance of the employment offer or as part of the hiring process.
• The award must be approved by independent directors.
• There are some required disclosures that must be completed.
• There are securities law considerations to address (the Form S-8 filed for your shareholder-approved plan might not cover these awards).

But even with these considerations, inducement grants are a great ace to have up your sleeve when your plan is running low on shares.

Offer an ESPP

Another great idea to alleviate some of the pressure on your long-term incentive plans is to implement an employee stock purchase plan. ESPPs can offer a fantastic economic benefit to employees and share requests for ESPPs generally aren’t subject to the same level of investor scrutiny that requests for other equity plans are.

I am a big fan of using ESPPs to distribute equity broadly, especially if companies consider some of the innovative ideas that I am going to discuss during my conference panel, “Game Changers: 6 Ways Stock Compensation Can Drive Change,” such as plans that don’t require a cash investment from employees and plans that offer a match instead of a discount.

Share Withholding

When shares are withheld to cover taxes, it may be possible to recycle those shares back into the plan. Although this will result in cash outflow for the company, having the additional shares available in your plan may be an acceptable trade-off.

The panel notes that, since 2016, shares can be withheld to cover taxes at the applicable maximum individual tax rate without triggering liability treatment under ASC 718. Thus, where employees are interested in requesting additional tax withholding, amending your plan to allow this could enable more shares to be recycled into the plan.

Note, however, that the IRS has specific procedures for companies to follow when withholding taxes on supplemental payments in excess of the flat rate. See the NASPP Essential Article “Excess Tax Withholding: What You Need to Know” for more information.

Consider Cash Payments

An obvious way to extend your plan reserve is to pay employees in cash, rather than equity. Cash-settled awards and stock appreciation rights can mimic the economic benefit of equity awards without requiring the company to issue shares.

Of course, there are significant drawbacks to cash awards, most notably that they will be subject to liability treatment under ASC 718 and can result in significant cash outflow for the company.