Times change. No matter how detailed and well thought out your executive equity compensation strategy is there will always be room for some improvement or alteration as different needs and scenarios arise.
A key factor in the retention of executives and those in the C-suite is often the nature of the benefits you can offer, with the equity compensation component of any package often a central piece of the jigsaw and a unique point on which employers can set themselves apart from the competition.
When looking at enhancing your existing plans, or introducing a new offering, it’s not always about trying to reinvent the wheel, but rather consciously examining your plan design, watching for trends and looking at what other companies are doing well, which could end up shining a light on what may be lacking.
Trading Plan (10b5-1)
In line with Securities and Exchange Commission (SEC) regulations, a Rule 10b5-1 trading plan is designed to provide an affirmative defense for employees, officers, and directors of publicly traded companies in the event of their being accused of insider trading on the basis of material non-public information (MNPI). If the specifics of the plan abide by the terms set out by the SEC in Rule 105b-1, then individuals can fall back on that defense if questions about the legality of any transactions are raised.
In practice, it is not unusual for large stockholders in a public company to want to buy or sell shares in that business at any given time. Rule 10b5-1 allows them to do so with a measure of security. As long as the conditions specified by the SEC are adhered to, then those individuals can feel confident that no laws on MNPI have been broken. 10b5-1 plans help you adhere to Securities and Exchange Commission guidelines while providing flexibility to achieve your broader financial goals
Automatic exercise
When in-the-money stock options are allowed to expire, that represents a negative outcome for both the company and relevant executives. The company may experience tax consequences, while the executive may fail to profit as they would have done had they exercised the vested options before they expired.
Automatic exercise is where the company automatically exercises options on behalf of plan participants. Incorporating this into the design of your stock options plan could help avoid the outcome above. Typically, any such transaction will take place on the final trading day during which the option is exercisable.
Be prepared to adapt and change
Regularly review your long-term incentive offerings, with a view towards ensuring that they are achieving the desired outcomes and no unforeseen issues or complications are arising.
It’s difficult to anticipate what blind spots may become apparent over time – if we knew about them in advance then they wouldn’t be blind spots. So, the point here isn’t to go into specifics, but more to emphasize the need to remain vigilant, with a view towards being in a position to act quickly in the event of potential problems arising and allowing you to make the necessary adjustments.
Greater choice
If you can offer executives more flexibility and control over their equity-related choices this could then lead to favorable outcomes. Irrespective of whatever choices are actually made, giving plan participants the power to choose can in of itself build positive sentiment between the company and executives, with this then linked to greater employee satisfaction and retention.
As for how greater choice might be incorporated into plan design, some companies offer what are specifically billed as equity choice programs. In one such scenario, executives might be presented with the ability to choose a ratio combination of stock options and restricted stock, e.g., 100/0, 75/25, 50/50 etc. In some instances, a company might insist on a minimum level of options but leave participants free to choose beyond that.
Charity & tax-efficiency
Making financial donations to worthy causes enables executives to contribute to charities they are interested in supporting while also availing of tax deductions. This is a win-win scenario, in that the relevant charities receive a much-needed financial injection, while the contributing executives get to maximize the tax-efficiency of their bonus/stock plan-related windfall, while also getting to actively help organizations whose mission and work they believe in.
Executives may well be able to explore this area independently, but when the company takes the time to research what can be done and makes participants aware of the possibilities, that too can have the effect of generating further goodwill between the two parties.
What next?
Executives play a vital role in the leadership, strategy, and operations of both public and private companies which is why for HR and Comps & Benefits teams, attracting and retaining these key players is a top priority.
Whether you are looking to introduce an executive equity share plan or are looking to switch from an existing provider who is no longer meeting all of your needs get in touch and find out how we could help.
Please Note: This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
