Survey Says: 10 Dos & Don'ts of Stock Plan Administration
Highlights from the NASPP/Deloitte Consulting LLP 2017 Stock Plan Administration Survey
Wednesday, November 8, 2017
 
Leveraging data from the NASPP/Deloitte Consulting LLP 2017 Stock Plan Administration Survey and real-world case studies, this webcast will offer timely insight on key trends in administration and communication for stock plans, stock ownership programs, and insider trading compliance, as well as the latest data on ESPPs. The NASPP and Deloitte Consulting LLP (“Deloitte Consulting”) survey is the industry's most comprehensive survey on stock plan administration practices, covering stock plan administration, employee stock purchase plans, insider trading compliance, ownership guidelines and nonemployee directors.
 
Featured panelists:

• Barbara Baksa, CEP, NASPP
• Susan Miller, CEP, Lockheed Martin Corporation
• Joseph Rapanotti, Deloitte Consulting LLP
• Sara Spengler, CEP, Fitbit

 
Index
 
Overview
Staff Appropriately
Consider Outsourcing or Co-sourcing
Utilize the Domestic Mobility Data Being Collected
Leverage Third Parties and Web-Based Communications
Require and Enforce Grant Agreement Acceptance
Decide Whether to Keep or Implement an ESPP
Understand Whether or Not Your ESPP is Competitive
Consider Reviewing Adherence to Insider Trading Requirements
Consider Establishing 10b5-1 Guidelines
Compare Stock Ownership Guidelines to Industry Trends
 
 
Kathleen Cleary, NASPP:  Good afternoon everyone, welcome to “Survey Says: 10 Dos & Don’ts of Stock Plan Administration.”  Today, we're going to discuss highlights from our Stock Plan Administration survey that we conduct jointly with the NASPP and Deloitte Consulting.  First introductions, my name is Kathleen Cleary and I'm the Education Director for the NASPP.  Today we have four terrific panelists today, beginning with Barbara Baksa, CEP from the NASPP, Susan Miller, CEP, from Lockheed Martin Corporation, Joseph Rapanotti from Deloitte Consulting, and Sara Spengler, CEP, from Fitbit. 
 
The slide presentation for the webcast has been posted on Naspp.com and you can download or print the slides from there if you'd like.  We'll post an archive of today's program within the next day or two and a transcript will be posted in the next few weeks. 
 
All right, let's dive into the webcast and I'm going to turn it over to Barbara to get us started.
 
Return to Index

Overview

 
Barbara Baksa, CEP, NASPP:  Thanks, Kathleen.  First, we'll introduce our panelists for today.  I think you all know me, I'm Barbara Baksa, the Executive Director for the NASPP.  I'll have Joseph introduce himself and then Susan and Sara will introduce themselves and talk a little bit about their companies, so you have some background on them as we go through the survey results.  Joseph and I will be presenting the survey data; Susan and Sara will be providing some color commentary on the data.  Go ahead, Joseph.
 
Joseph Rapanotti, Deloitte Consulting LLP:  Thanks, Barbara.  Hi, everyone.  This is Joseph Rapanotti from Deloitte Consulting.  I'm a Senior Manager in our Deloitte Consulting Compensation Strategies practice.  I lead our equity administration consulting services focused on everything ranging from vendor evaluation and selection, global plan design, implementations, operational assessments, compliance, and pre-/post-M&A.  We also work with our tax group on global tax implication and global/domestic mobility in the world of equity.
 
I've been in compensation for about 12 years, having spent about half of my career sitting on your side of desk in a corporate setting and about half of that in the consulting space.  So I have a good perspective on what the market looks like, from owning the plan but also for optimizing them from a consulting perspective.  I'm glad to be here and looking forward to the session.  Susan? 
 
Susan Miller, CEP, Lockheed Martin Corporation:  Thanks, Joseph.  I'm Susan Miller and I'm the Equity Plan Manager for Lockheed Martin Corporation.  I manage all aspects of Lockheed Martin's long-term incentive program, from the administration all the way through to the communications about the awards.  Lockheed Martin is a global security and aerospace defense company, headquartered in Bethesda, Maryland.  Our annual equity awards are issued to a limited population; we issue approximately 2,200 awards annually.
 
We issue awards to all VPs and above—that's a little bit more than 300 executives, the middle management level (right below the VP level) that's the director level, and we also issue awards to key critical talent within the business.  Those [awards] are nominated by the individual business areas, and represent individuals that we determine are key to critical programs—if we lost their talent, it would affect that particular program. 
 
We issue various type of awards: PSUs, RSUs, performance based cash awards, and fixed cash awards.  We also have some outstanding stock option awards, but we did stop issuing stock options in 2012.  The majority of the individuals we issue to are U.S. tax payers, but in this last iteration we also issued to individuals in 13 additional countries.  And much like Joseph, I'm happy to be here today and now I'm going to turn it over to Sara.
 
Sara Spengler, CEP, FitBit:  Hi, everybody, I'm Sara Spengler.  I'm the Director of Global Equity Operations at Fitbit.  I have been on the issuer side almost exclusively for almost 20 years, mostly in Silicon Valley.  Fitbit is headquartered in San Francisco.  We have just about 2,000 employees in 20 countries around the world.  All employees are eligible for equity.  We have a global ESPP program and we grant RSUs to everybody.  We also grant non-qualified stock options to our executives.  Fitbit has only been public for a couple of years, so we still have some incentives stock options outstanding from our earlier days, but we don't grant those anymore.  And that's the landscape for me.
 
Baksa:  Thank you.  The next slide has our agenda for today.  We are presenting highlights from the results of our 2017 Domestic Stock Plan Administration Survey, which the NASPP co-sponsored with Deloitte Consulting.  As you can see, we've identified 10 practice areas from the survey where we have recommendations for your own stock plan, and we've also included a couple of appendices with the survey materials.
The survey includes data on equity that is offered to outside Directors but we didn't really have anything particularly noteworthy to say about that, so we aren't planning to cover it today.  We have included some of the data in Appendix A for you to review on your own.  We've also included Appendix B, which has data on the different types of companies that participated in the survey. If you're interested in that, you can read through that data on your own as well.
 
Moving to slide five, which includes some information about the survey before we get started. The data we are presenting today is preliminary.  We're fairly confident of it or we wouldn't be presenting it, but we are still completing some final reviews of the data; keep that in mind when you're using it to make decisions.  We hope to post the full survey results to the NASPP website in early December. 
 
To encourage companies to respond to the survey, issuers must participate in the survey to have access to the full results. Service providers aren't eligible to participate, but if they are members of the NASPP, they receive access to the full survey results.
 
Moving to slide six. We've been conducting the survey since 1994, and we've been collaborating with Deloitte on it since 2004.  The survey is divided into three editions:  domestic design, domestic administration, and international. Today, we're going over the results from the domestic administration survey, which covers administration and communication of equity programs and administration of ESPPs, insider trading compliance, stock ownership guidelines, and also outside director plans.  We last conducted this survey in 2014.  We opened the survey for participation in March of this year and we accepted responses through April. 
 
To my knowledge, this is—by far—the industry's most comprehensive survey in terms of the substantive content and it also has one of the highest response rates. It's something we're very proud of and I think it's a great resource for our members.  It is easily worth more than the cost of membership.  The full survey consists of over 250 questions, and anyone who has completed the survey or reviewed past surveys, knows that the data we're presenting today is just a small fraction—probably less than 10 percent—of the full survey results. 
 
We had over 460 companies participate in the survey that we're reviewing today. Virtually all of the respondents to the survey are public companies.  In addition, a little over one-third are in the high-tech industries.  The respondents are headquartered throughout all regions of the U.S., with a very small percentage headquartered overseas.  We also have companies of all sizes participate in the survey, but a little under two-thirds have over 5,000 employees globally.  You can see the full breakdown of the types of companies that participated in the survey in appendix B of this presentation.  This brings us up to our first practice recommendation.  Joseph, you're up.
 
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Staff Appropriately

 
Rapanotti:  Thanks, Barb.  As Barb mentioned earlier, the approach we took for the presentation this year is our top “Dos and Don'ts”.  Our number one “do” is to staff appropriately and leverage shared resources where appropriate.  For the data that we're focused on in this section, we've touched on the questions asking who has responsibility for the administration of the plan(s) and the staffing level to deliver that plan.  This first data point looks primarily at where the ownership lies.
 
We can look at ownership, who has ultimate accountability and ownership of the plan, and then who is involved in successfully delivering the plan benefits.  Overwhelmingly, we see that human resources is responsible at 70 percent of our issuers that participated in the survey.  That is very similar to what we've seen in prior years and haven't seen that number fluctuate very much.  So 70 percent of the issuers who responded indicated that HR is the owner of the plan.
 
Shortly behind that we see legal, finance and accounting as being primary owners in the plan.  We've debated this internally while reviewing the data and one thing I think is an important takeaway for everyone listening in today is that this isn't necessarily what you should be doing.  This is just what we're seeing as the prevailing theme in the marketplace.  Most issuers have HR as the owner, but that doesn't mean it's the only way you can get equity done.
 
In working with clients, there are many compelling reasons why you would actually want finance to be owner, or legal or accounting.  There could be a size element to the plan but it also could be the way money is managed or the GL accounting processes to manage, so it makes more sense to be in finance.  Just food for thought, but overall, HR is our primary owner.
 
I think something that we all know is that as complicated and complex as equity administration is, there's no one group that gets this done on their own.  There needs to be cross-functional involvement.  Whoever owns the plan, they need involvement from other people to get the work done, so you see a high number of functions within an organization that are involved in managing equity plans.
 
We see a lot of involvement from legal, accounting, and payroll, and a few others that you can see here.  Most of our participants in this survey indicated there are many other functions critical to administering the program. 
 
Something new we've added for the 2017 survey, based on responses in prior surveys, is shared service and service centers.  The number is still fairly low compared to others, but just through discussions with members of the NASPP, and clients of ours, we are seeing shared service as a growing function being leveraged in the world of equity administration.
 
What's likely happening is processes are being moved to a service center model rather than sitting in a traditional HR, corporate HR, or corporate finance administration center.
 
Moving on to our next fact point under leveraging staff and resources is that we're looking at headcounts.  We know that HR is probably the owner and there's probably a lot of other functions involved, but how many people are actually working to help deliver these plan benefits?
 
What we've found is generally for organizations with around 5,000 participants, you're looking at one full time fully dedicated resource.  What do we mean by full time?  We mean someone who is focused entirely on equity or stock plans for the organization and managing the day-to-day processes – it’s typically one person.
 
A second data point we weave in is about shared resources.  There are a lot of functional areas that are involved, but maybe they work on benefits administration in addition to the stock plan administration.  How many people do we have that are split between more than program or plan in the organization?  What we found is up to about 5,000 participants, you typically see about two people.
 
Generally, you're looking at anywhere from one to two people working on stock plans for the issuers that responded to this survey and that's up to 5,000 employees.  We didn't include it in the chart, but what we did see was a very dramatic spike in the number of people supporting the program when you start to look at closer to 10,000 participants and on up to 100,000.
 
When you get to 10,000, you see anywhere from two full-time plus four or more shared resources, so around six to seven people.  When you get up to 100,000, you see that jump to anywhere from nine to 12 people supporting the program.
 
Another element that we added for 2017 was a question on work arrangements.  We ask our participants about the people working on the plan, but the general assumption is many of these employees are sitting in a corporate headquarters supporting the plan, alongside other corporate functions.  Is there anyone looking at alternative arrangements?  One, two or three people that are working on the plan, where are they sitting? 
 
What we found is that many do sit in the corporate center, but about 15 percent have a team member sitting in a non-headquarters domestic office.  That would be someone sitting in an office outside of where headquarters is located.  If you have a headquarters located in Los Angeles, but a regional office maybe in Dallas, that person may be sitting in the Dallas office instead of in headquarters. 
 
We're seeing about 24 percent of survey participants utilizing an overseas office.  If you have that headquarters in Los Angeles, but maybe you have a service center or a regional center in Manila, you may have some employees sitting in the Manila center.
 
And we asked if people are allowed to telecommunicate altogether.  They're not required to be sitting in a seat in an office at all.  We saw about 7 percent of our issuers responded they have people sitting in an entirely remote arrangement.  We thought we'd probably see more telecommuting, but nonetheless we did see that there's about 5 to 7 percent out there.
 
So changing gears just a little bit, I thought it would be helpful to ask Susan about staffing at Lockheed.  I know we've talked about the one full-time versus two shared resources and that can seem a little low, but how does that relate to what's being leveraged at Lockheed? 
 
Miller: Yes, Sara and I both found this slide just slightly shocking that some companies are using one person to try and do all of this work.  For Lockheed Martin, I can tell you right now I have an open requisition and I'm single threaded, which makes it very hard because there's no backup, there's nobody else that could really do some of the “in the weeds” work that needs to be done.
 
One of the other things I thought of as I was sitting here and listening to what you were saying is, “Where is the peer review process?”  I know when I've had other direct reports, we peer reviewed each other's work before it went into, say, a Board deck or even proxy work.  There are major concerns about risk right now, with me being single threaded.  I know Sara, you also have some thoughts on this.
 
Spengler:  Yes.  First of all, I agree with exactly what you said and I have to say that every time I see this slide, I get surprised all over again.  And I hope that my boss never sees this slide, because I just can't imagine how companies with 5,000—I'm assuming this is 5,000 participants and not employees that are not eligible to participate in the plan—but I don't know how one and a third people could manage a plan of that size. 
 
It could be that maybe it depends on how many different types of plans you have and how complicated they are.  But in my opinion or in my experience, in addition to the things that Susan mentioned like having no backup or not having a second set of eyes to review your work, things like employee education program suffer.  You can't really be proactive about things like mobility compliance or international compliance.  You're in a mode where you are reacting to things more than you are getting ahead of them, which is its own business cycle, because there is risk inherent in that.  Then you have more risk by having one person to address it and if you have 10 things blowing up at the same time, one person can only do so much. 
 
Having said all of that, Fitbit did have one person in this position leading up to the time of going public and for the first couple of years after being public.  The person did an amazing job and now I'm here, with being in 20 countries and having essentially three different programs, and I think we've grown past that point.  It's beyond what one person can effectively manage and provide good service to the plan participants too.
 
So we hired someone who actually just started on Monday and now we're dividing it up so we can handle the day-to-day operations smoothly but also look forward to working those areas that maybe were neglected and expand some of the service level to become a little less self-service oriented and more proactive about compliance and education, which I think is really big.  You spend a lot of money on these programs and if employees don't understand them, are you really getting the benefit you want from them? 
 
Rapanotti:  These are really great points, and that's why it goes back to what I mentioned previously – this isn't necessarily the right answer for everyone.  The data is just the trend in the market.  I think another element is to look at your global presence.  The more countries you're in creates a more complex plan to manage, which is in turn, more work.  Oftentimes you need more people to get that done and to be able to stay compliant.
 
That leads into another related topic, over time.  We've seen these functions growing, because of the awareness of equity in the global space.  In order to be effective and compliant in all of the countries you are in, it requires more people to get that done.  So generally, the trends in the data show that we're looking at that one full-time and probably two shared resources to get it done.
 
But, that number of people may be slightly different and there would also be more in the detailed survey, if you'd like to take a look, once those results are published later this month or early in December.
 
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Consider Outsourcing or Co-sourcing

 
Rapanotti:  All right, topic number two, do consider outsourcing or co-sourcing.  This topic focuses on how much administration you're retaining in-house versus how much you're pushing out to a vendor.  On the next slide, we see that 87 percent of issuers are outsourcing a portion of their administration with 58 percent that are outsourcing more than ha
 
If we're looking at 87 percent of our respondents outsourcing administration, 58 percent are outsourcing more than half of their administration.  This includes work across the the equity administration lifecycle—not the plan design—but granting of the award all the way through to the record keeping, or the recording of that award through payroll once it's been issued or exercised.  A lot of issuers are leveraging their vendors to complete these processes.
 
Over time, we have seen more and more issuers looking at their vendors to support their equity administration work.  I think we all know, working with our vendors, the vendors have really done a great job upping their game across the industry to better support issuers’ needs and get the work done in the most efficient and compliant way possible.
 
We do see a lot of progress happening in the market.  Issuers have been moving to utilizing some sort of outsource model, maybe not across all activities, but through many of them.  But some issuers have held out – we see about 13 percent are not outsourcing their program.
 
One underlying assumption for all issuers not outsourcing is they are likely not trading their own shares.  So they have a minimum of activity being outsourced to a broker or third party, but manage all of the other activities such as the record keeping and reporting.
 
The 13 percent who are not currently outsourcing their plans’ administration feel that they have the capability and have been able to figure out how to administer in-house.  They're managing the program in-house, and that's working for them, so they have kept it there. 
 
There's also a good number of issuers who think it's not cost-effective for them to outsource or maybe it doesn't make sense for them given their plan size.
 
On this item, Sara, I know you and I have talked about the notion of outsourcing, and given the size of Fitbit's plan and the type of awards, I think a typical assumption is that Fitbit is onboard with the fully outsourced model, right?  That's not necessarily the case but what are some of the comparison or contrasting points to this data point that make sense for Fitbit?
 
Spengler:  I don't know that Fitbit has considered outsourcing at this point in time, I think we’re still a small enough and new enough plan that we prefer to manage it in-house.  I have sort of gone back and forth with outsourcing in my career at different companies and I think one thing that would be a challenge for Fitbit, potentially, is that we're on the west coast and things sometimes happen at the end of the day.  Most of the outsource providers are on the east coast and so you can't move quickly.
 
Oftentimes, you'll get things like a last-minute termination request and you can't enter the termination or run the report yourself, you have to rely on somebody else.  So you have to have discipline about planning ahead for certain events.  Fitbit is relatively young and agile and I'm not sure we fit into that box.  Other companies sometimes have unique features like double trigger vesting or other things that just fall outside of the standard offering so we've had to run the program ourselves.
 
That's my take on outsourcing over the years, I think it can work great if you have that discipline.  It's certainly good for SOX, the providers will have the controls in place and it can be great—especially if you only have one person running the department—it is great to have the additional help.
 
What has worked really well for Fitbit and for other companies where I've worked is this idea of co-sourcing where you outsource a part of administration.  You don't outsource all of the record keeping and all of the transaction processing, but you outsource some of it.  You outsource things like grant acceptance and notifications of new grants, and ESPP enrollment.  We do that online through our broker, as well as ESPP and incentive stock option disposition tracking and 6039 reporting. All of that are things that you can find someone who can do it better than you do it in-house and probably has the infrastructure to reach a larger population of people on a broader scale, rather than just sending emails or mass-producing documents.  I think that's been a really great partnership for Fitbit with our broker and stock administration service provider.
 
Rapanotti:  Yes, that’s a great example.  Again, if you notice, the nice thing about the co-coursing arrangement is it's leveraging the most value add services available by your vendors, rather than losing control over those things that may be really important to you as an issuer.  Maybe it's the data management that the issuer organization may not be ready to let go of.
 
But having that ability to leverage a vendor for the grant acceptance feature or the enrollment, is a really great way to reference a strong value add services.  So great example, thank you, Sara.  All right, so we'll move on to topic number three.  Barb, I'll hand it back to you.
 
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Utilize the Domestic Mobility Data Being Collected

 
Baksa:  Thanks, Joseph.  Our next recommendation is to collect domestic mobility data and utilize that data.  This is a new area of the survey that we added this year.  We know that domestic mobility is becoming an increasingly important part of stock plan administration and we wanted to start tracking company practices in this area. 
 
What we found is that 60 percent of respondents are tracking employees’ movement throughout the U.S. during the life of their awards. For the 40 percent that aren't tracking this yet, some of them say that their population of domestically mobile employees is just too small for tracking moves to be worth the cost.  Some don't have the data necessary to track mobility and a good portion are in the process of finding a solution.  Of those respondents that are tracking domestic mobility, the majority are taking the next step and using that data in their tax calculation.
 
For our survey results, about 90 percent are using the mobility data for tax calculations: 20 percent use it for just some employees or jurisdictions and 70 percent use the data in all cases.  That leaves 10 percent of respondents that are collecting the data, but haven't really gotten to the point of using it yet.
 
For the companies using mobility data to calculate tax withholding, those calculations are most frequently being done by payroll, but you can see that’s just 43 percent of the respondents, so there's a fair amount of variation in practice here.  I think, Susan, this is an area where Lockheed has started to make some strides. 
 
Miller:  Yes, thanks, Barbara.  We have done an analysis on our share based awards and looked at those areas that pose the most risk for us, then cobbled together a process to do mobility tracking and to add a blended tax rate at the award level.
 
I chose my words very carefully because I'm going to tell you, quite frankly, it's very onerous and very difficult to do; it requires an awful lot of manual work by our payroll department as well as on my part because I have to figure out the associated awards and, with the help of payroll, create the special tax codes to come up with these blended rates.  There's nothing easy about it at all.
 
However, when we implemented this a couple of years ago, we did note that we significantly decreased our risk in those areas where we had faced some audit challenges in the past.  Trying to do this process does require an awful lot of communication.  We have to educate our payroll vendor and send out annual letters, then periodically I get communications from the participants themselves saying, “I just really don't understand.”  All in all, just trying to be compliant in those jurisdictions that pose the most risk is very difficult but we're muddling through the best we can.
 
Baksa:  All right, thanks.  Joseph, I think we're back to you for grant notices and agreements.
 
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Leverage Third Parties and Web-Based Communications

 
Rapanotti:  Thank you, Barb.  “Do” number four is leverage your third party and web based communications for participant communications.  There are two areas we'll focus on in this presentation – delivering grant agreements/notices and expiration alerts.  The primary theme is to leverage your vendors and their web-based platform for these communications.
 
On slide 16, issuers are using third parties and their websites for both grant agreements and notices most often.  For the grant notices specifically—that's the notification of the award being granted—we see there's a close second with issuers sending out an email.
Looking at the top two utilized methods—third-party website and email—a shift over the last several years is issuers have moved to electronic over manual/hardcopy delivery methods.  Looking back quickly at grant agreements, leveraging third parties for that process prevails over sending email.
 
Moving to the next slide, let’s change gears to stock expiration alerts.  When an award is nearing expiration, what are issuers doing to make their option holders aware of the coming expiration?  What action is being taken?  
 
89 percent of companies are notifying participants of the upcoming expiration and that's most often completed through a third party. 
 
Our survey polled who is responsible for this process and there is a high number of issuers taking a somewhat hands-off approach to notifying employees of option expirations.  Forty-one percent of the respondents indicated the third party is taking full ownership of notifying participants of expiration.  Vendors know when options are about to expire and are informed on when to notify, what communications, and how to send expiration notices.
 
There's an equal amount, or very close to an equal number of issuers that say, "We have a shared responsibility to notify our population of pending expirations."  So they're sharing that responsibility with the third party; they're taking ownership of it at some point along the process or it’s fully collaborative throughout the expiration notification process.
 
If we combine these first two categories, 81 percent of issuers are working with their third-party vendor in some ways to get through this expiration notification process whereas only 19 percent are doing this entirely in-house.  This industry trend indicates leveraging your third-party vendor notify participants of expirations is more than a common practice. 
 
Separately, but very related, is when does this process occur?  The data to the right of the slide is very specific to when that first notification goes out.  We think about when the best time is to notify participants of upcoming expirations could be and 68 percent of respondents said they are first notifying their participants in the last 90 days of grant life.
 
For context, the survey does poll for reminder notification and most organizations that send one notification also send a reminder notified.  And we have more data in the detailed results about reminders.  Again, from a first notification standpoint, 68 percent are notifying within the first 90 days from expiration, and that 60 to 90-day window is really where we see a lot of activity.
 
18 percent of respondents use six months as their first notification ramping up to the three-month period.  Sara, I thought we could switch to you for some thoughts on grant option expiration notices and what's happening at Fitbit.
 
Spengler:  Yes, this is always an interesting question, because you never want your participants to miss out on benefit because it expires.  That is counterproductive to making the grant in the first place.  At the same time, you want to make sure that you're not assuming the responsibility for reminding someone that they have grants expiring in case you miss somebody.
 
In the past, Fitbit has erred on the side of being super cautious about it.  We've taken sort of a belt and suspenders approach.  The online portal—where employees can see all of their stock information, trade it and accept their grants—does give notifications when grants expire.  And I should clarify that in Fitbit's case, we don't have any options that are reaching the end of their 10-year term, this mostly comes into play around terminations.
 
So, you are alerted when you have options that are about to expire, you can also see the picture of your equity and when your last date to exercise is after you terminate.  Then Fitbit was taking the additional step of running sort of a closing statement that would be given to the employee with their exit documents, letting them know their last date to exercise.
 
This, I think, didn't hurt the employees, it was helpful to them.  But as the company was getting bigger and had increased the rate of turnover, it was becoming harder to support—giving everybody their individualized statement—because terminations aren't always predictable.  You can't always plan in advance for them.  Sometimes they happen in places outside of the time zone you're in and I think there is a little bit of concern that you don't want to be in a position where someone could say, “You notified everybody else that their grant was expiring, but you didn't tell me when I left the company.”
 
With that being part of the equation, the other part of the equation for Fitbit is that we stopped granting options on a broad basis and switched to RSUs.  With RSUs, when you leave the company, you keep what you've earned at that point and everything else is cancelled.  A lot of people were getting closing statements just showing them, "Here's a bunch of stock that was cancelled," and it wasn't helpful or worth the effort it was taking to give them that.
 
We recently switched over to just relying on the service provider to manage expiration alerts, although we do give a general instructions paper that reminds people where they can access their information, how they can check on their last date to exercise if they have a stock option, and reminds them who to contact when and for what information.
 
Internally, I can tell you from the administrative side that it has sort of lightened the burden on a couple of different groups.  Not just stock administration, but also HR.  And I haven't really heard from any employees anything negative about it, so I think it's going over well, especially in light of the fact that most people have RSUs now.
 
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Require and Enforce Grant Agreement Acceptance

 
Rapanotti:  Yes, it definitely makes the expiration topic easier when you're moving to RSUs.  So, thanks for those examples, I appreciate it.  All right, and we're going to move on to number five which is a related topic, grant agreement and acceptance.  Do consider requiring and enforcing grant acceptance.  And when you're doing that, skip the paper. 
 
We touched on the electronic communication features a little bit earlier.  This is similar to tip number four, but we dig a little bit deeper on the grant acceptance topic.  If you are sending out grant agreements or posting them somewhere online, which issuers are really requiring some sort of acceptance?
 
We see 80 percent of issuers requiring grant acceptance from their participants in the plan but there are some not requiring the acceptance process to be completed.  There are firm preventative measures in place at many issuers with actual practices varying slightly from issuer to issuer.  Bottom line, many are taking action to enforce grant acceptance.  More than two-thirds of the 80 percent are taking action to enforce the grant acceptance process.  Very few are requiring and then do nothing about it letting equity vest normally. 
 
Of those not requiring acceptance, are a few variations exist within the 20 percent.  Some presume acceptance, acceptance is presumed at exercise, or it's just not required at all.  It's just an added form or an added document to the granting process. 
 
So interesting data here on the grant agreement acceptance. 
 
Moving on, if you're requiring grant agreements and you're looking to attain a signature for that grant agreement acceptance, how are you doing that?  We found that 81 percent are utilizing a digital or electronic signature for the grant process.
 
There’s a mix of who within the organization is permitted to use electronic signatures, but it's required for most issuers.  For our survey results, 57 percent of issuers are requiring a signature as part of the grant acceptance process, whereas 24 is saying, "We're doing it, but it's not for everyone.”  Maybe these are insiders or section 16 officers, but it's not required everywhere.  Twenty percent are not permitting digital or electronic signatures, which would indicate that some other method rather than using an on-line or for a digital signature. 
 
Baksa:  This is an area where we've seen significant change over the past decade.  If we go back to the 2004 survey, 76 percent of respondents did not permit a digital signature at all.  That trend has completely reversed now, with 81 percent of respondents either requiring it or at least permitting it.
 
 
Rapanotti:  Yes, great point.  This has changed quite a bit and the new normal is allowing some sort of online tool.  The security and the reliability of technology available through the third-party applications are great.  Leveraging the tools available from your third-party service provider is definitely an option.  
 
All right, moving to our next slide, what tools are we using to capture those signatures?  Eighty-nine percent are using a third party to capture agreements.  And our participants could select more than one choice for this question indicating they allow more than one method to accept grants.  The majority are using a third-party website, but there are other channels out there, email, fax, etc.
 
One interesting take-away here is there aren't a lot of manual grant acceptance measures out there in use that use hard-copy printouts or manual signatures.  That said, the 21 percent of printed agreements in use would align with the 20 percent we saw in the prior slide that aren't allowing digital signatures.
 
These results are what we expected and it does, again, align to Barbara's point a few minute ago.  This has changed quite bit over the years as the technology has been more available. 
 
All right, Susan, I know you are going to walk us through some samples of what you're doing for grant acceptance, what's working, and not working, and how maybe you're utilizing other tools or channels available to you for the from the grant acceptance process perspective.
 
Miller:  Yes, we actually fall right into the “third-party website, 89 percent” category.  We heavily utilize our third-party provider's functionality for online award acceptance, and we're fairly stringent about it because we require the awards to be accepted by May 31st from the date of grant, (we issue the awards annually.)  Within roughly three months of receiving the communication on the grant, you need to have accepted that grant, because if you don't accept it by May 31st, the grant is actually forfeited.
 
We have some reasoning behind that, because the award agreements that are issued to our middle management (directors and above) all of those award agreements contain post-employment conduct agreements.  Having an e-signature which provides the date and the timestamp just helps us to remind people and reinforce that part of the terms and conditions of their award agreement with a post-employment conduct agreement.
 
Grant acceptance is considered simply part of their duties as middle managers and above.  The award agreements contain post-employment conduct agreements, but we do have other actions within the corporation that would also require acknowledgement of post-employment conduct.  It's normal within our culture for them to simply accept their award agreements by May 31st and I'm happy to say in the five plus years that we've been doing this, we haven't had anybody forfeit their awards due to non-acceptance at that mid-management and above level.
 
Rapanotti:  Susan, do you feel that adding in the acceptance requirement five years ago created a significant amount of work to chase down the acceptances?  I imagine there was an adoption period there, but where are you now five years earlier? 
 
Miller:  Actually, I don't because here's one of the keys (I appreciate that question) - one of the key things that was done is senior management set the tone and the expectation that their management tiers were expected to complete this action.  So it's an expectation by senior management.
 
Rapanotti:  Right, if you want the award, you need to accept it.  It sounds like for any issuers considering implementing a more stringent requirement, a top down messaging on the importance of completing the process is probably going to be helpful in keeping it from being a burdensome process.
 
Miller:  Yes, I would agree with that 100 percent. 
 
Rapanotti:  All right, thank you, Susan.  Barb, we'll switch back to you for number six. 
 
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Decide Whether to Keep or Implement an ESPP

 
Baksa:  We're going to switch gears now and talk about ESPP for a couple of topics.  Our first recommendation is to decide whether or not to implement an ESPP. Slide 22 has data on the percentage of respondents that have ESPPs.  That percentage has been stable since our 2011 survey, at 52 percent of respondents.  If I look back further than that to when ASC 718 was adopted, ESPPs were more prevalent.  In 2004, 64 percent of respondents had an ESPP.  So, we've seen some decline, but we saw that decline level out in around 2011.
 
Of those respondents that have an ESPP, around 80 percent have a qualified plan, which has also been very consistent over the past several survey cycles.  Interestingly, we found that, of those companies that don't an ESPP, about one-fifth are considering implementing one.  Maybe there is some hope that we'll see an increase in ESPPs when we conduct the survey again in three years.
 
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Understand Whether or Not Your ESPP is Competitive

 
Baksa:  Our next recommendation is to understand whether your ESPP is competitive.  We're going to start this section off with some data on participation rates for ESPPs, which are always lower than I would like.  We found that, for qualified plans, close to two-thirds, or 62 percent, of respondents report participation of less than 40 percent.  For non-qualified plans, participation is even lower, with almost 90 percent of respondents reporting participation of less than 40 percent.  Exactly half report participation of less than 20 percent.
 
I think that's indicative of the fact that non-qualified plans tend to be less generous and the generosity of the plan has a direct impact on your participation rate.  We do know that there are some Silicon Valley companies that have very generous plans and manage to achieve participation of over 80 percent.  Joseph had Deloitte run an analysis of what correlates to higher participation rates and came up with six factors.  One factor was having a longer offering period; plans with the 24-month offering period tend to have greater participation.  Also allowing contribution reductions during offering period correlates with higher participation. If employees feel like they can't get out of the plan if there's an emergency, they're going to be less likely to participate.  Offering a lookback also correlates to higher participation. Offering a quick sale program also correlates with higher participation. I’m not a fan of quick sale programs and because I feel like once people are in a program, with the power of momentum, they're just going to stay in that quick sale program.  I'd really rather employees make a thoughtful decision about selling their stock, but quick sale programs do correlate with higher participation. 
 
Offering a greater discount correlates with higher participation; plans with 15 percent discount had greater participation. And finally, allowing automatic payroll contributions, which is fairly standard, also correlates with greater participation.
 
Slide 25 looks at how quickly participants sell their shares.  I frequently hear detractors of ESPPs say that participants almost always flip their shares, but our data shows that this just simply isn't true.  Two-thirds of respondents to the survey report that, on average, their participants are holding their shares for one year or longer.  I think that this shows that ESPPs can be a great vehicle for stock ownership and it's worth looking at your plan to see if you can do more to increase participation.
 
You can see here that 94 percent of companies don't offer a quick sale program. 
 
Next we're going to look at data around the types of features companies offer in their plans, starting with the discount on slide 26.  For qualified plans, 72 percent of respondents offer a 15 percent discount.  That's very consistent with the results from the 2014 and the 2011 survey; it's down from 87 percent in 2004.  For non-qualified plans, we see almost a three-way tie between the 15 percent discount (31 percent), no discount (27 percent), and offering a match instead of a discount (25%).  Fifteen percent discount has a little bit of a lead there but respondents are fairly evenly distributed between these three practices.
 
On slide 27, we have data on how many plans offer a lookback period.  Lookbacks remains very common for ESPPs, with 63 percent of qualified ESPPs offering a lookback.  That's consistent with our 2014 and our 2011 surveys; it's down from 82 percent in 2004.  Among non-qualified plans, just over half or about 54 percent are calculating their price using a lookback; it's also very common for these plans to base the price on the ending value only—that's 39 percent of respondents.
 
On slide 28, we look at the length of the offering periods in an ESPP.  In terms of offering period, the most common practice for qualified plans is a six-month offering period.  You can see that's been consistent over the past four survey cycles, at about half of the respondents.
 
We aws a decline in respondents that have a 24-month offering period; that's down to 6 percent from 16 percent back in 2007.  During that same time period, we’ve seen an increase of plans with three-month offering periods.  Interestingly, the incident of 24-month offerings is higher for tech companies, where about 14 percent of respondents have this feature.
 
Slide 29 interim purchase period.  This is for plans that have an offering period that is longer than the purchase period, so there are at least a couple of purchases throughout the offering period.  For those plans, the most common interim purchase period is six months. 
 
Sara, you are our issuer with an ESPP on the panel; do you want to talk a little bit how Fitbit's ESPP works?
 
Spengler:  Yes, and we fit probably right in line with this data.  Fitbit has a six-month offering period that is equal to the six-month purchase period.  The price is a 15 percent discount, the lesser of the price on the first date of the offering period—which is also called the enrollment date or the subscription date—or the price on the last date of the offering period, which is the purchase date.  So whether the stock goes up or down, you always get at least 15 percent off, and it can be greater if the stock price goes up.
 
With this plan design, our participation, I guess, is high compared to the data.  It just anecdotally feels lower because—in my mind I see it as—if you always get 15 percent discount, why aren't we having 100 percent participation?  But our participation rate is around 62 percent on the average which, I think, is pretty good, compared to what we're seeing.  We do talk about the program and pitch it a little bit during orientation.  We spend about 15 minutes on it during an employee's first day here. 
 
We also have open enrollment periods, during the two-week period prior to when the enrollment date is.  During that period, we send out announcements and we do some education.  I just did three presentations in three different time zones yesterday and we had decent attendance at those.  And I think that sort of captures the plan design.  The one other thing I will note, which wasn't really captured in the survey data, but I thought it was interesting, I did a little informal polling.  It was about the timing of when you're hired versus when you can enroll in the plan.
 
Initially, when I got here, you could start on the enrollment date and Fitbit would scramble to get you enrolled in the plan.  That seemed to me sort administratively challenging.  It was leading to all kinds of problems with payroll and employee disconnects on being enrolled versus not enrolled or contributions being at the level employees expected.
 
I started to ask around a little bit to some of our peer companies and evaluate to see if everybody allowed that.  I found that a lot of people did have a waiting period, so that you could get the employees data into the online enrollment system rather than doing manual enrollment.
 
Fitbit recently implemented that as well for this offering period and it's really making a difference as far as the ease of getting people enrolled into the plan.
 
Baksa:  Thanks!  That concludes our ESPP topics; Joseph, back to you for insider trading.
 
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Consider Reviewing Adherence to Insider Trading Requirements

 
Rapanotti:  Thanks, Barb.  All right…number eight “Do”, consider reviewing adherence to insider trading requirements.  In this section, we’re going to focus on our latest trends for insider trading requirements.  This is not a new topic in the survey, and it's also not a new topic for most of us in the world of equity administration or stock administration.
 
There are many elements of managing insider trading compliance and we will focus on a few—pre-clearance, blackouts, and blocked transactions.
 
First up is Pre-clearance process.  Eighty-five percent of companies are requiring some sort of pre-clearance process to be followed before trades can be submitted.  This is a slight drop from the 2014 survey but not material, so 85 percent is still a majority of issuers requiring a pre-clearance process.
 
If we think about those 85 percent of respondents requiring the pre-clearance process, who's actually giving the authorization to move forward?  Predominantly the General Counsel role is the first authority on providing that clearance to move forward on trade activity.  Moving down from there, we see the Corporate Secretary, Deputy General Counsel, a Chief Financial Officer or Chief Legal Executive that are weighing in on the clearance process.
 
Generally, a few people have the right to authorize, but the overall majority of issuers say it's the General Counsel's authority to provide that pre-clearance.
 
The next slide summarizes insider populations subject to quarterly blackouts.  About 90 percent of all senior management, the outside non-employee directors, and regular employees with material non-public information are included in the blackout window.  There are some issuers that do flag middle management, other exempted and non-exempted employees, or even contractors but those are all well under the 90% threshold. 
 
This is consistent with what we've seen in prior surveys.
 
Next up, what sort of transactions are permitted and what transactions are restricted during the blackout period?  About 90 percent of issuers indicate broker assisted cashless option exercises are prohibited with about 50 to 65 percent of issuers indicating other stock transactions being prohibited.
 
Again, not a material change from 2014, these numbers are similar to what we saw three years ago in the 2014 survey.
 
Overall, it looks like organizations have figured out what works from an insider trading compliance policy perspective.  Their policies have been implemented and many are following the guidelines which we have seen little change over the last several years.  Susan, I thought we could talk a little bit about what policy Lockheed is following and whether it is working or any changes may be coming.
 
Miller:  Thanks, Joseph.  Actually, we align perfectly with the numbers here.  We are in the top tier of the information that's presented on these slides.  Not surprising, our Section 16(b) officers always require pre-clearance.  It's generally done through the General Counsel or Corporate Secretary's office.
 
We have quarterly trading blackouts that last about six weeks and we also may have other trading blackouts.  We had some extensive blackouts when we were going through an acquisition, as well as the divestiture, and then when we were going through some of the actions that we went through when we decided to stop our pension plan.
 
The individuals who are subject to the trading blackout and the trading blackout transactions on the current slide align with the top three that were in the prior slide, Section 16(b) officers, senior management, and the outside directors, but also any employee with non-public material information.  We can affect a formal blackout period, but I'm aware that we have senior leaders in the business area who right before they start doing their quarterly earnings discussion, bring in their team and just remind them verbally that they are subject to our insider trading policy.  So [our insider trading policy] is fairly well disclosed within Lockheed Martin both formally and informally.
 
Rapanotti:  Great, it sounds like you guys are pretty closely aligned to the market.  These programs have been around a long time and here to stay.  Barb is going to cover the next topic which will contrast insider trading policy.  Barb, over to you for number nine.
 
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Consider Establishing 10b5-1 Guidelines

 
Baksa:  Our ninth tip is to consider establishing guidelines for your Rule 10b5-1 plans that support your insider trading policy.  Over the past decade we've seen a lot of growth in the use of Rule 10b5-1 plans, which is great.  But there are academics looking at 10b5-1 plans with suspicion.  I think Rule 10b5-1 plans may be the next big scandal in compensation; it's worth establishing some controls in this area.
 
Slide 35 notes that 77 percent of respondents utilize 10b5-1 plans.  In most companies, these trading plans are optional; 92 percent of respondents make 10b5-1 plans optional for either their insiders only, or for all of their employees.  But there are very few companies that take the next step of requiring insiders or employees to trade under 10b5-1 plans.  This is consistent with what we saw in 2014.
 
Slide 36 shows the types of transactions that 10b5-1 plans are used for.  It’s no surprise here that the most common transactions these plans are used for are open market sales and same-day sale exercises. 
 
Slide 37 looks at some of the parameters that companies have set up around their 10b5-1 trading plans. This is an area of the survey that we added this year. You can see that some companies have started adopting guidelines that govern how employees can set up their 10b5-1 plans, but I think there's still room for progress here. Sixty-nine percent of respondents have no minimum on how long the plan must be in effect for and 56 percent don't impose a maximum time limit on the plan.  I'm particularly concerned about not imposing a maximum, because I feel like the longer these plans are, the more likely employees are going to want to terminate them early or modify them.  I think both of those actions can be problematic. Setting a maximum how long a plan will be in effect provides a predetermined end to trades under the plan. At that point, the employee can adopt a new plan to continue the trades or can choose not to do so. This provides the employee with flexibility to change how trades occur without calling into question the validity of a plan by modifying it or terminating it early.
 
We can also see that 35 percent of companies allow for overlapping plans and 51 percent allow individuals that have these plans to trade outside of the plan.  Another 65 percent allow for plan termination and 57 percent allow for plan modification.  Both actions—if done at a time when the employee has material non-public information—could call into question the employee's intent when the plan was set up.  Thus, modifying and terminating plans can be somewhat dangerous.
 
We found that 27 percent of respondents still don't require a waiting period for trades to begin once a plan is established, but ninety-three percent do require plans to be entered into in an open window period.  
 
Sara, I think Fitbit has a great 10b5-1 program, do you want to talk about how your program works?
 
Spengler:  Yes, Barb, and I am happy to say that Fitbit is a company that does take the extra step to require some employees to trade under 10b5-1 plans.  Fitbit's landscape is that all employees have access to material non-public information on a regular basis and so all employees are subject to no-trade periods every quarter.  Additionally, there is a population of employees who we feel are more likely to be have material non-public information and so we have a layer where those employees are required to be pre-cleared before they trade, as we discussed earlier.
 
Then there's a higher tier of employees, like executives and certain VPs, who are only allowed to sell shares under a 10b5-1 plan—they can't do any sales outside of their 10b5-1 plan.  They can do purchases outside of their 10b5-1 plan, but sales can only be done in a plan.  The minimum duration for a plan is one year, the maximum duration is two years, and you have to enter into a plan during an open trading window.  Then you have to wait until the next open trading window before any of the trades under your plan can take effect. 
 
You can't modify your plan, but you can cancel it.  If you want to modify your plan, you need to cancel the current one and enter into a new one with the modifications that you want to make, and it's subject to the same cooling off period.
 
It seems like we fall into the more conservative end of the spectrum around 10b5-1 plans, especially given the trading restrictions that happen quarterly.  it seems to work well for us. 
 
Baksa:  Thanks!  Back to you, Joseph, for our 10th practice tip.
 
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Compare Stock Ownership Guidelines to Industry Trends

 
Rapanotti:  Yes, last topic for today is number 10 “Do”, compare your stock ownership guidelines to industry trends.  Similar to the insider trading practices we talked about just a little bit ago, stock ownership guidelines often times fall into the equity administration world of responsibility.  While we have quite a lot of questions on the topic, our data for 2017 hasn't changed much since the 2014 edition.
 
As you can see back in 2007, the number of organizations imposing stock ownership guidelines on their executive employees was only around 50 percent.  We're up to 84 percent as of this run of the survey, which is surprisingly higher than it was in the last edition three years ago in 2014.
 
Generally, the numbers that you find in this year’s survey were similar if we look at the non-employee population.  Eighty-four percent of issuers are requiring stock ownership guidelines on employees and executives, the non-employee population is just a little bit behind at about 73 percent of issuers requiring or imposing that policy on their non-employee directors.
 
On the next slide, we're looking at what multiples are being used to calculate the threshold for stock ownership guidelines.  Generally, these numbers were all very similar to what we saw in 2014, if not exactly the same.  The one key difference is for the CEO—in 2014 we saw five as being the multiple used for that level and we did see a pretty big jump anywhere from six to nine.  We did leave that in as a range, and it's a pretty wide spread—a lot of people were well within the range of six to nine with the CEO.
 
Up next, about 86 percent of issuers are using that multiple as a percentage of compensation.  There's other methods that we can use to figure out what basis for stock ownership is required, but predominantly that is going to be compensation and that's what we've seen in prior years with the survey.  If you're trying to figure out what to use, compensation is the prevailing item there.
 
Next, what sort of stock counts towards meeting your stock ownership guideline?  For anyone trying to vet what you could include, we see a lot more favorability to the unvested restricted stock awards, vested shares in the 401(k) area, ESPP purchases, and of course shares purchased. 
 
You see the numbers drop a bit and even get pretty low when looking at some of the unvested awards or unvested share plans.  This is likely due to some of the volatility or uncertainty of those awards actually being paid out.  So as organizations, what’s the likelihood that you're going to earn those shares or they're going to be paid out in the future. 
 
All right, next slide, how are issuers treating stock options for the purpose of stock ownership?  About half of the companies who responded to the survey do count stock options towards stock ownership guidelines and the other half don't.  Of the half that do, 75 percent of them are counting all exercised options or vested in-the-money option options towards the guidelines.  As we mentioned a moment ago, the unvested options aren't typically included.
 
Next up, what length of time does a participant or an employee who is subject to the stock ownership rules have to meet the requirement?  How long do they have to meet the initial threshold?  Seventy-eight percent of the issuers are saying, "Please meet that requirement within five years of being notified of the program." 
 
If they have five years to meet the requirement, the next slide summarizes what happens if they're falling short.  We see that 81 percent of companies are imposing some sort of penalty for failing to meet stock ownership guidelines and that's most recently requiring holding and exercise of vested shares and prohibiting the sale of shares on future transactions.  With our last couple of minutes, Susan, do you want to talk us through a little bit of what Lockheed is doing in the world of stock ownership?
 
Miller:  Sure, I'd be glad to.  We do have stock ownership requirements for key employees and surprisingly enough, it is for all VPs and above.  The stock ownership requirements are posted to our external website, so if anybody is interested, then go out to our external website, look under corporate governance, and the document is posted out there.  It aligns with the survey, as it is [based on ] a multiple of base salary, with the CEO at six, CFO at four, the EVPs are three times their base salary, and then other officers are two times base salary.  Below that, it's just one times salary.
 
Most of them meet this easily with their unvested RSU awards, but much like the other companies in the survey, they can also include shares owned directly, shares owned by a spouse or a trust, or shares held in their 401(k) plans.  The Lockheed Martin stock fund in the 401(k) plan also has a deferred compensation plan with a Lockheed Martin stock fund and they can also include those shares. 
 
Every January, prior to our annual vesting event, we ask VPs to attest to their current ownership level.  We have created a tool on our internal website and the tool opens on the first business day in January and closes on January 31st.  We try to make it as easy as possible for them to just go in there, click a button, hit save, and [the tool] will send [the VP] a confirmation email; it also adds a line item in our report that is used to report back to senior management.
 
They do have five years from their movement into a new role to achieve their ownership level and we're at the five-year mark; we put this in place in 2012.  For the current iteration, we hit our five-year mark in the beginning of 2017 and I'm happy to report that we don't have anybody that's lagging behind.
 
Baksa:  This concludes our webcast for today.  My contact information and Joseph's contact information is included in the slides; you're welcome to contact either one of us.  We'd be happy to answer any additional questions you might have.
 
A project like this survey involves a huge team effort, so I have a few thank-yous before we conclude.  The survey is not something that the NASPP has the resources to do on our own, so I'm very grateful for all of Deloitte's contributions to this project.  As I mentioned earlier in the webcast, we're really very proud of what we've accomplished with the survey and we absolutely could not do it without Deloitte.  Tara Tays is not on the webcast today, but I especially want to thank her for all of her work on the survey.  She shepherds this project and is involved in every phase of it, from developing the survey, monitoring participation, and analyzing the results.
 
I want to thank Joseph, who presented on today’s webcast with me, as well as Meghan Cole and Shane Griffee at Deloitte for all of the work they put in to helping us develop the questionnaire, manage the survey, and analyze the results.  And Berni Toy, on the NASPP staff, also gets a big thank-you for project managing the survey. 
 
I want to thank Joseph and the Deloitte staff for preparing our slide presentation for us today.  They did all of heavy lifting in terms of preparing the slide deck and did a great job of calling out the data that would be of most interest to our members.
 
Thank you for joining us today.  I hope you enjoyed our presentation and I hope you'll join us next month for our webcast on tax reporting.  Thank you everyone!
 
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