Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals

PwC Presents Stock Compensation Surve...
Learning Objectives
After participating in this event you will be able to:
• Understand the impact of corporate restructur...
Welcome to Proformative
Proformative is the largest and fastest growing online
resource for senior level corporate finance...
Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals

PwC Presents Stock Compensation Surve...
Agenda
• Introductions
• Review of 2013 Stock Comp Survey Results
–
–
–
–

Overview
Key Points
Option Pricing Model and As...
Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals

PwC Review of 2013 Stock Comp Survey ...
Overview
• Analysis of 2012 stock compensation disclosures
– 46 High-Tech/Emerging companies
– 110 Mature companies (estab...
Key Points
High-Tech/Emerging Companies
• Stock options continue to be leading type of equity
award granted
– Trending to ...
Key Points
Mature Companies
• Stock options continue to trend downwards since 2010
– Nearly 50/50 split between stock opti...
Option-Pricing Model
• Pricing model of choice continues to be Black-Scholes
for Mature and High Tech/Emerging companies
–...
Option-Pricing Model Assumptions
Basis for Expected Term and Volatility
• High Tech/Emerging and Mature companies both
con...
Expected Term Assumption
High Tech/Emerging Companies
• Mean (average) increased from 5.16 years to 5.62 years
since 2008
...
Volatility Assumption
High Tech/Emerging Companies
• Mean (average) remain in relatively tight range since
2010 and is at ...
Risk-Free Rate and Dividend Yield
• Not as significant an impact as expected term and
volatility but still important facto...
Risk-Free Rate and Dividend Yield
Mature Companies
• Trended in same direction as High Tech/Emerging
• Average risk-free r...
Comparison to Year of Adoption
• Comparison of 2012 data to 2006 when stock
compensation rules adopted

• Equity awards mo...
Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals

Modification Accounting for Equity Pl...
Modification Accounting
Changes to option/award not in original terms of grant
• Option exchanges and repricings
• Equity ...
Modification Accounting
• Type I/II/III/IV (I and III most common)
– Type I - continue to account for original award, plus...
Equity Restructuring
• Equity restructurings include stock splits, spin-offs, large
non-recurring dividends
• Generally, a...
Equity Restructuring
Make whole adjustments may result in incremental value,
even with antidilution protection

• Example ...
Contact Details

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

Kevin Hassan
Managing Director, PwC
...
Please join us at www.proformative.com to ask any
additional questions you may have and to continue
this conversation with...
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PwC Presents Stock Compensation Survey Results, Trends, and Accounting Challenges

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Join Proformative and PwC for a one-hour webinar intended to keep you informed on hot topics and recent survey data specifically focused on equity compensation. By learning more about current issues and trends, you can assess the implications on your accounting and financial reporting today and plan for the impact tomorrow.

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

  1. 1. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals 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
  2. 2. 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 © 2013 Proformative. Proprietary and confidential
  3. 3. Welcome to Proformative Proformative is the largest and fastest growing online resource for senior level corporate finance, treasury, and accounting professionals. A resource where corporate finance and related professionals excel in their careers through: • Uniquely valuable, online Peer Network • Direct subject-matter-expert advice • Valuable Features and Resources All of it completely noise-free Check it out at www.proformative.com © 2013 Proformative. Proprietary and confidential
  4. 4. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals 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
  5. 5. 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 © 2013 Proformative. Proprietary and confidential
  6. 6. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals PwC Review of 2013 Stock Comp Survey Results Kevin Hassan, Managing Director, AmyLynn Flood, Partner Global Human Resource Services Group, Total Compensation Practice, PwC
  7. 7. 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 © 2013 Proformative. Proprietary and confidential
  8. 8. 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 © 2013 Proformative. Proprietary and confidential
  9. 9. 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 © 2013 Proformative. Proprietary and confidential
  10. 10. 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 © 2013 Proformative. Proprietary and confidential
  11. 11. 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 © 2013 Proformative. Proprietary and confidential
  12. 12. 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 © 2013 Proformative. Proprietary and confidential
  13. 13. Volatility Assumption High Tech/Emerging Companies • 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%) © 2013 Proformative. Proprietary and confidential
  14. 14. Risk-Free Rate and Dividend Yield • Not as significant an impact as expected term and volatility but still important factor in determining FMV High Tech/Emerging Companies • 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 © 2013 Proformative. Proprietary and confidential
  15. 15. 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 © 2013 Proformative. Proprietary and confidential
  16. 16. 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 © 2013 Proformative. Proprietary and confidential
  17. 17. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals Modification Accounting for Equity Plans Kevin Hassan, Managing Director, PwC AmyLynn Flood, Partner, Global Human Resource Services Group, Total Compensation Practice, PwC
  18. 18. 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 © 2013 Proformative. Proprietary and confidential
  19. 19. 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” © 2013 Proformative. Proprietary and confidential
  20. 20. 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 © 2013 Proformative. Proprietary and confidential
  21. 21. 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) © 2013 Proformative. Proprietary and confidential
  22. 22. 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. © 2013 Proformative. Proprietary and confidential
  23. 23. Please join us at www.proformative.com to ask any additional questions you may have and to continue this conversation with your peers and the experts you heard from today. If you have questions about CPE Credit, please send an email to cpe@proformative.com © 2013 Proformative. Proprietary and confidential
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