Operational Efficiency in Equity Plans: Turning Chaos into Clarity

September 25, 2024

By improving operational efficiency, companies can reduce the time and resources needed to manage their equity compensation program, decrease costs, improve accuracy, and reduce risk.

To improve operational efficiency, companies can focus on automating processes wherever possible, tracking and reducing errors, ensuring compliance with regulations and accounting standards, and implementing a robust employee training and self-service portal.

Complex, Time-Consuming Administration

The new SEC T+1 requirement to release shares to employee brokerage accounts within one business day of vesting or exercising options has made operational efficiency in equity plan administration even more critical.

Equity plan professionals who focus on reducing operational inefficiencies typically can achieve significant long-term returns on investment with streamlined processes, reduced errors, and perhaps most importantly, increased employee satisfaction with their equity plan.

Below is an example of a high-level equity process diagram. It illustrates the numerous systems and connection points that interact with an equity recordkeeping system.

Each line represents a data exchange and therefore a risk of errors, such as inaccurate or incomplete records. Most equity administration teams dedicate valuable time to manually reconcile these data flows, which is a primary area for operational improvement. For example, reconciling transactions between the broker to payroll platforms is often manually performed in spreadsheets and takes significant time.

Certainly, managing equity compensation is a complex and time-consuming process, regardless of whether a company is private or public. As a company evolves and potentially grows, equity administration teams often find themselves struggling to keep up with workloads, leading to errors, delays, and costs.

Below, we explore the importance of operational efficiency in equity compensation and provide suggested tips for improving it.

Importance of Operational Efficiency in Equity Compensation

There are several reasons operational efficiency is critical for equity compensation. First, it helps the equity administration team to keep up with the workload and meet the company's needs. This includes managing equity grants, tracking vesting schedules, processing exercises and settlements, and ensuring compliance with regulations and accounting standards.

Second, operational efficiency helps to reduce costs. By improving operational efficiency, companies can decrease the time and resources needed to manage their equity plans, reducing costs, and improving the bottom line.

Finally, operational efficiency helps to improve accuracy and reduce the risk associated with errors. Equity compensation is subject to a variety of regulations and accounting standards, and errors can lead to fines and delays. Accurate and prompt settlement of shares and related reporting is also a key driver of employee satisfaction.

Tips for Improving Operational Efficiency in Equity Compensation

Here are four tips for boosting efficiency.

Automate Processes Wherever Possible

Automation can reduce the time and resources needed to manage equity compensation. This includes automating grant approvals, tracking vesting schedules, and processing exercises and settlements. By automating these processes, companies can reduce the risk of errors and improve accuracy. Some examples where automation can be achieved include:

Spreadsheet scripting. Use macros and software code to reduce the number of manual steps.

Advanced scripting tools. Set up robotic process automation tools, such as Alteryx, UI Path, R, and Python, to perform recurring processes.

Vendor platform integration. Work closely with vendors such as the broker and payroll platforms to fully use functionality.

Purpose-built applications. Leverage an equity management software platform specifically designed to work within a company’s equity compensation processing environment to streamline end-to-end processes, reducing the time and resources required to manage the plan.

Focus on Identifying and Tracking Processing Errors

Leading companies effectively log errors and consistently work to reduce the recurrence of those errors at the source.

A recommended practice is to develop monthly business reviews that track errors and the progress made to reduce them. Additionally, these companies are also investing in and using artificial intelligence (AI) and machine learning. They complement existing business rule functions such as a pre-vest checklist with added AI data quality analysis.

Interestingly, AI is now being used to identify new data quality errors that would not normally be detected by existing business rule functions. AI can find unusual data anomalies, like finding a needle in a haystack, and detect processing errors before they occur. AI-based efficiency gains in the equity world are real and powerful.

Improve Compliance With Regulations and Accounting Standards

Compliance is critical in equity compensation, and companies must know they’re following all relevant regulations and accounting standards. This includes properly approving equity grants, accurately tracking vesting schedules, and correctly processing exercises and settlements. By achieving compliance, companies can reduce the risk of errors and improve accuracy.

Implement Robust Employee Training and a Self-Service Portal

Leading companies provide training and support for employees. This often includes providing a self-service portal to view grant details, track vesting schedules, and process exercises and settlements, as well as helping employees to understand aspects of a qualified ESPP program.

These companies often work with either their broker or internally to develop the self-service portal to allow employees to manage their equity compensation benefits themselves. Self-service portals are also seeing significant enhancements with the rapid increase in generative AI tools that allow the employees to ask plan information, especially for basic help desk support. This reduces lost time to call centers and unnecessary help desk escalations because the generative AI answers employee questions accurately and efficiently.

Next Steps

Ultimately, companies that are operationally efficient provide their employees with a valuable benefit that aligns their interests with those of the company and its shareholders.

Conduct an Equity Process Assessment

To identify and resolve operational inefficiencies, leading companies consistently dedicate time and resources to assess their current processes and are willing to call out areas for improvement. They focus on specific opportunities such as recurring manual processes, errors, or process pain points, and areas that lead to recurring employee questions.

A well-formed assessment project will also prepare an executive report that presents a summary of challenges, the options for addressing the inefficiencies, and any planned return on investment as needed. Problem areas commonly exist in payroll, taxation, and the numerous system-to-system reconciliations, such as broker to payroll tax withholding, and are often a great place to start.

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Matthew McKittrick, CEP, CISA has provided consulting for business processes, applications, and data analytics solutions since 1995. He helps his clients address regulatory and compliance challenges and leads cross-functional teams comprised of human resources, accounting, tax, and data management professionals to solve the challenges created by regulation.

Assurance, tax, and consulting offered through Moss Adams LLP. ISO/IEC 27001 services offered by Moss Adams Certifications LLC. Wealth management offered through Moss Adams Wealth Advisors LLC.

By Matthew McKittrick
Partner

Moss Adams