PwC Presents Stock Compensation Survey Results, Trends, and Accounting Challenges

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PwC Presents Stock Compensation Survey Results,
Trends, and Accounting Challenges
Kevin Hassan, Managing Director, AmyLynn Flood, Partner
Global Human Resource Services Group, Total Compensation Practice, PwC

Learning Objectives
After participating in this event you will be able to:
• Understand the impact of corporate restructurings on equity
accounting
• Determine the accounting consequence of common termination
provisions

• Clarify how modifications of performance awards drive changes
in equity accounting

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Agenda
• Introductions
• Review of 2013 Stock Comp Survey Results
–
–
–
–

Overview
Key Points
Option Pricing Model and Assumptions
Comparison to Year of Adoption

• Modification Accounting for Equity Plans
– Common termination-related modifications
– Modifications of performance awards and ESPP
– Equity restructurings

• Closing/Questions


PwC Review of 2013 Stock Comp Survey Results
Kevin Hassan, Managing Director, AmyLynn Flood, Partner
Global Human Resource Services Group, Total Compensation Practice, PwC

Overview
• Analysis of 2012 stock compensation disclosures
– 46 High-Tech/Emerging companies
– 110 Mature companies (established for at least 15 years)

• Information based on published annual reports and other
publically available information

• Included 2008-2011 data as well as 2006 (when stock
compensation rules were adopted) for comparison
• Useful in benchmarking company’s assumptions and
other data points associated with stock comp plans


Key Points
High-Tech/Emerging Companies
• Stock options continue to be leading type of equity
award granted
– Trending to increasing percentage of restricted stock (nearly
60/40 stock options to restricted stock in 2012 compared to
70/30 split in 2010)

• Value of restricted stock granted ($2.5 billion) far
outpaced stock options ($733 million) in 2012
• Option-pricing model assumptions at 12/31/12 changed
modestly from last survey
• Continue to rely heavily on Black-Scholes option-pricing
model

Key Points
Mature Companies
• Stock options continue to trend downwards since 2010
– Nearly 50/50 split between stock options and restricted stock in
2012 compared to nearly 30/70 split in 2010

• Value of restricted stock granted ($13 billion) far
outpaced stock options ($3 billion) in 2012
• Option-pricing model assumptions at 12/31/12 remained
fairly consistent with last survey
• Continue to rely heavily on Black-Scholes option-pricing
model


Option-Pricing Model
• Pricing model of choice continues to be Black-Scholes
for Mature and High Tech/Emerging companies
– 85% of Mature and 83% of High Tech/Emerging used BlackScholes only in 2012

• Lattice model used by 20% of Mature companies in 2012
– Modest reduction in last years from a high of 20% in 2008

• Lattice model used by 17% of High Tech/Emerging
companies in 2012
– Perhaps due to uptick in awards with market conditions


Option-Pricing Model Assumptions
Basis for Expected Term and Volatility
• High Tech/Emerging and Mature companies both
continue to rely heavily on historical experience
• Expected Term
– 90% of High Tech/Emerging and 77% of Mature companies rely
solely on historical experience

• Volatility
– 90% of High Tech/Emerging and 94% of Mature companies rely
solely on historical experience


Expected Term Assumption
High Tech/Emerging Companies
• Mean (average) increased from 5.16 years to 5.62 years
since 2008
– Inference is employees are choosing to hold stock options longer

• 57% of companies used expected term assumption
falling within a range of 4 to 6 years in 2012
Mature Companies
• Mean (average) increased from 5.30 years to 5.73 years
since 2008
• 60% of companies used expected term assumption
falling within a range of 4 to 6 years in 2012

Volatility Assumption
• Mean (average) remain in relatively tight range since
2010 and is at 50% in 2012
• Most companies are in the range of 40% to 50%
Mature Companies
• Mean (average) still exceeds historical levels (2008 and
earlier) at 37% in 2012
• Most companies are not in any one range (e.g. spread
across 20% to 50%)


Risk-Free Rate and Dividend Yield
• Not as significant an impact as expected term and
volatility but still important factor in determining FMV
• Decrease in average risk-free rate from 2008 to 2012 is
nearly 200 basis points to 1.04% in 2012
– Mirrors change in market interest rates

• Modest decrease in average dividend yield from 1.64%
in 2011 to 1.58% in 2012


Risk-Free Rate and Dividend Yield
Mature Companies
• Trended in same direction as High Tech/Emerging
• Average risk-free rate is about a third of what it was in
2008 at 1.09% in 2012
– Mirrors change in market interest rates

• Small increase in average dividend yield from 2.35% in
2011 to 2.55% in 2012


Comparison to Year of Adoption
• Comparison of 2012 data to 2006 when stock
compensation rules adopted

• Equity awards moving more towards balance between
stock options and restricted stock for High Tech/Emerging
companies
• Nearly 50/50 split between stock options and restricted
stock compared to 75/25 split in 2006 for Mature
companies
• Dramatic increase in assumed volatility for Mature
companies (26% in 2006 vs. 35% in 2012)
– Assumed volatility for High Tech/Emerging companies remains in
same range


Modification Accounting for Equity Plans
Kevin Hassan, Managing Director, PwC
AmyLynn Flood, Partner, Global Human Resource Services Group, Total Compensation Practice, PwC

Modification Accounting
Changes to option/award not in original terms of grant
• Option exchanges and repricings
• Equity restructurings (e.g., spin-off, stock-split, large
non-recurring dividend)
• Acquisitions
• Other changes to original terms of grant
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–
–
–

Extension of exercise period
Acceleration of vesting
Adjustments of performance targets
Equity to liability or vice-versa

Modification Accounting
• Type I/II/III/IV (I and III most common)
– Type I - continue to account for original award, plus “incremental
cost” of replacement award
– Type III – reverse prior expense. New measurement.
Recognize prospectively.

• Modification of service period
– Recognize remaining expense prospectively
– Pool vs bifurcated approach

• Equity to liability modification
– Mark-to-market with grant date “floor”


Equity Restructuring
• Equity restructurings include stock splits, spin-offs, large
non-recurring dividends
• Generally, adjustments made to awards to preserve
value
• Follow modification accounting
– Antidilution provision?
– If yes, generally little or no incremental expense
– If no, likely significant incremental expense

• Make whole adjustments
– Exercise price adjustment, quantity adjustment, cash


Equity Restructuring
Make whole adjustments may result in incremental value,
even with antidilution protection

• Example – special $7 dividend declared
• Option - $30 strike
• Stock price - $40 pre-dividend, $33 after

• No adjustment to option. Instead pay $7 on each option.
• Black Scholes value before = $15.79
• Black Scholes value after = $10.49
– Add cash payment of $7, total value after = $17.49

• Incremental expense = $1.70 ($17.49 – 15.79)

Contact Details

AmyLynn Flood
Partner, PwC
(267) 330-6274
Amy.lynn.flood@us.pwc.com

Kevin Hassan
Managing Director, PwC
(203) 539-4049
Kevin.hassan@us.pwc.com

© 2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States
member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal
entity. Please see www.pwc. com/structure for further details.


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PwC Presents Stock Compensation Survey Results, Trends, and Accounting Challenges

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