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

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PwC Presents Stock Compensation Survey Results, Trends, and Accounting ChallengesKevin Hassan, Managing Director, AmyLynn Flood, PartnerGlobal Human Resource Services Group, Total Compensation Practice, PwC

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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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PwC Presents Stock Compensation Survey Results, Trends, and Accounting ChallengesKevin Hassan, Managing Director, AmyLynn Flood, PartnerGlobal Human Resource Services Group, Total Compensation Practice, PwC

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 ResultsKevin Hassan, Managing Director, AmyLynn Flood, PartnerGlobal Human Resource Services Group, Total Compensation Practice, PwC


• 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

Overview


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

Key Points


• 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

Black-Scholes 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


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

Option-Pricing Model Assumptions


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

Expected Term 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%)

Volatility Assumption


• 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

Risk-Free Rate and Dividend Yield


• 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

Comparison to Year of Adoption


Modification Accounting for Equity PlansKevin Hassan, Managing Director, PwCAmyLynn 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– 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


© 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.

AmyLynn FloodPartner, PwC(267) [email protected]

Kevin HassanManaging Director, PwC(203) [email protected]


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