Acronyms Commonly Used in Equity Compensation

Like many areas of specialization, equity compensation has many of its own terms of art and lots and lots of acronyms. For today’s blog entry, I’ve compiled a list of some of the most commonly used acronyms.

Regulators

FASB: Financial Accounting Standards Board. The FASB establishes accounting principles that US companies must adhere to.

IASB: International Accounting Standards Board. The IASB seeks to promote uniformity in worldwide accounting standards. Standards promulgated by the IASB are not effective until adopted by the accounting standards setters of its member countries.

IRS: Internal Revenue Service.

SEC: Securities Exchange Commission.

NYSE: The NY Stock Exchange.

Nasdaq: Another major stock exchange in the United States. Pronounced (naz-dack). Its listing standards are generally a little easier to meet and more company-friendly than the NYSE’s standards.

Types of Equity Awards

DEUs/DERs: Dividend equivalent units or rights. This is a right attached to a restricted stock unit award that provides the award holder with payments equal to any dividends paid on the underlying stock. DEUs/DERs may be paid in cash or stock.

ESPP: Employee stock purchase plan. A broad-based stock plan that enables employees to buy company stock. Most ESPPs offer a discounted price, require employees to fund their purchases through payroll contributions, and qualify for preferential tax treatment under Section 423.

ESOP: In the United States, this acronym refers to an employee stock ownership plan, which is a type of tax-qualified retirement plan. But, just to keep things confusing, outside the United States, this acronym is sometimes used to refer to employee stock option plans.

ISO: Incentive stock option. A type of stock option that qualifies for preferential tax treatment under Section 422.

NQ/NQSO/NSO: Nonqualified or nonstatutory stock option. All these terms refer to the same type of equity vehicle, which is any stock option that isn’t an ISO.

RS/RSA: Restricted stock or restricted stock award. An arrangement in which employees receive stock for free, subject to vesting requirements. Less common than RSUs.

RSU: A restricted stock unit. An arrangement in which employees receive stock for free, subject to vesting requirements.

PSA/PSU: An award (typically an RSU) in which vesting is conditioned on meeting performance goals.

SAR: Stock appreciation right. An arrangement that gives an employee the right to the amount that a company’s stock price appreciates over time. SARs provide a similar economic benefit as stock options but are much less common. SARs may be cash-settled (CSARs) or stock-settled (SSARs).

SOP: A stock option plan.

Tax Terminology

DD: Disqualifying disposition. Dispositions of shares acquired under an ISO or ESPP that do not meet the statutory holding period necessary to receive preferential tax treatment.

FICA: The Federal Insurance Contributions Act, which established the Social Security and Medicare taxes. Both taxes consist of company and employee-paid portions.

FIT: Federal income tax.

FUTA: Federal Unemployment Tax Act, which established a fully company-paid tax used to fund the federal unemployment benefits program.

LTCG: Long-term capital gain. Gains on capital assets that are held for longer than a year are taxed at long-term capital gains rates, which are currently lower than ordinary income tax rates.

QD: Qualifying disposition. Dispositions of shares acquired under an ISO or ESPP that meet the statutory holding period necessary to receive preferential tax treatment.

SECA: Self-Employed Contributions Act. This is a tax that nonemployees are subject to. It is similar to FICA, except that nonemployees must pay both the company and individual portions.

STCG: Short-term capital gain. Gains on capital assets that are held for a year or less are taxed at short-term capital gains rates, which are currently the same as ordinary income tax rates.

Accounting Terminology

APIC: Additional paid-in-capital. Any amount paid for a company’s stock in excess of par value (which is the minimum amount that must be paid for the company’s stock).

BSM: The Black-Scholes model. This is an option pricing model that is commonly used to value employee stock options.

DTA: Deferred tax asset. When companies recognize expense for nonqualified equity arrangements, they also record a deferred tax asset that represents the tax deduction they may eventually be entitled to with respect to that expense.

EPS: Earnings per share, which is determined by dividing a company’s earnings for a fiscal period by the number of shares of common stock and equivalents outstanding during the period. EPS is divided by the company’s current stock price to determine the company’s P/E ratio, which represents the amount investors are currently paying for $1 worth of earnings in the company.

FV: Fair value. The value of an option or award for accounting purposes. For time and performance-based full value awards (such as restricted stock and units), the fair value is typically the fair market value of the underlying stock. The fair value of stock options and market-conditioned awards is determined using an option pricing model.

GAAP: Generally accepted accounting principles. The accounting principles that public companies must adhere to when preparing financial statements. Private companies also often must prepare financial statements in accordance with GAAP if they are seeking outside financing, such as loans or investment capital. The FASB promulgates GAAP for US companies.

GL: The general ledger, which is where all financial activity for a company is recorded.

P&L: The profits and loss statement or income statement. This financial statement indicates how profitable a company is.

Other Acronyms

BOD: Board of directors.

CIC: A change in control. The term refers to any change in ownership of a company, such as a merger, acquisition, or spin-off.

EE: Employees.

EDGAR: The Electronic Data Gathering, Analysis, and Retrieval system. This is the system that companies and individuals use to file reports electronically with the SEC and that investors and others use to access these reports.

ESG: Environmental, social, and governance. In the context of stock compensation, the term ESG refers to types of goals a company might establish for executives/employees that relate to improving the company’s impact on society/the world.

FMV: Fair market value. The value of a share of a company’s stock. In a public company, fair market value is generally determined with reference to its daily trading prices, usually the closing price of each day. In a privately held company, fair market value is determined by the corporation’s board of directors.

ISS: Institutional Shareholder Services. Advises institutional investors (pension plans, mutual funds, investment firms) on how to vote on matters that public companies submit for shareholder approval. One such matter is stock compensation plans.

LOA: Leave of absence.

NEOs: Named executive officers. The CEO, CFO, and top three highest paid executives of a public company.

SPA: Stock plan administrator. Someone who oversees stock plans. This acronym can be used to refer to in-house or third-party administrators.

STC: Sell-to-cover. This term refers to an equity award transaction in which just enough shares are sold to cover the purchase price and or tax withholding.

SDS: Same-day sale. This is a type of option exercise in which all the shares acquired upon exercise are sold and the sale proceeds are used to pay the option price and any tax withholding. Any proceeds remaining after these amounts and the transaction fees have been paid are disbursed to the option holder.

T+1: The period of time in which open-market trades have to be settled.  “T” refers to the trade date.

New to Stock Compensation? Learn More!

If you are new to stock compensation, the NASPP’s Stock Plan Fundamentals course is a great introduction to both the regulatory framework and day-to-day procedures necessary to manage a stock plan. This online course includes six learning modules that are available on demand.