5 Equity Plan Numbers You Need at
Your Fingertips
Sean Kelly, CEP – Morgan Stanley
Lisa Klevence, CEP – Plan Management Corp.
CJ Napolitano – Paradata
Don’t I just need numbers to complete my
reporting requirements?
 No! All of those equity plan numbers you’re tracking aren’t just
for your quarterly and annual filings
 There are many parties outside of FASB and the IRS who are
interested in your plan data, including your
–
–
–
–
–
Board of Directors/ Comp Committee
Investors
Plan participants (especially executives!)
Proxy advisory groups (i.e., ISS & Glass Lewis)
Auditors supporting your organization
And each of these groups has
its own interest and motive!
-2-
Can’t I just figure it out as I go along?
 We often hear from administrators that they DREAD the sound
of their phone ringing!
 No one wants to be caught off-guard by an ad hoc request
 Knowing where to quickly find the numbers below can help
you be prepared for some of the most common request
–
–
–
–
–
Shares available to issue
EPS Dilution/ Overhang
Run Rate/ Burn Rate
Weighted Average Remaining Period of Expense
Status of Executive Grants - Sec 16, (award info,
vesting, tax status, filing needs, etc.)
Today we will discuss each of these numbers:
who wants it, what it is, and how to get it
-3-
1
Shares available to issue
 What it means
The number of shares that are available
to issue from the equity plan before
shares authorized number is reached.
 Who’s asking
• Board of Directors
• Comp Committee
• CEO
 Why they ask
This number supports future planning by
identifying how many new shares can be
granted as incentives or to new hires. As
the number gets low, the company will
also need to plan to ask the Board or
shareholders for approval to authorize
additional shares.
-4-
1
Shares available to issue
 How do I find it?
 Basic shares available to issue =
Authorized shares
- Shares Granted
+ Shares Canceled
+ Shares Held for Taxes
Shares Available to Issue
-5-
For most plans
canceled shares will be
returned to the available
share pool. Some companies
may also allow for shares
held for taxes to be returned
to the plan. To confirm your
plan rules, check your SEC
plan registration or corporate
plan documents.
1
Shares available to issue
 In some cases, if a company has a fungible share pool, the
shares available to grant math will be impacted by the
fungibility ratios
– For example, if a company plan has a 1:1 ratio for stock options, and a 1:2
ratio for restricted (i.e., “full value”) awards, then the Shares Available to
Issue math becomes:
Authorized shares
- Options Granted
- (Restricted Award Shares Granted X 2)
+ Options Canceled
+ (Restricted Award Share Forfeits X 2)
+ Shares Held for Taxes
Shares Available to Issue
-6-
2
EPS Dilution/ Overhang
 What it means
 Who’s asking
 Why they ask
The extent to which shares authorized or
issued as part of an equity compensation
plan will dilute the earnings and voting
power of existing shareholders.
• Investors
• Proxy advisory groups
• Investors are concerned about plan
activity impact on the value of their
securities and voting rights.
• Higher EPS = greater return on
investment
• Dilution impacts ISS scorecard, and is
now calculated both with and without
overhang
-7-
2
EPS Dilution/ Overhang
 How do I find it?
 Basic overhang calculation =
A = Equity Plan Shares Authorized but Unissued
B = Outstanding Equity Plan Shares
C = Total Outstanding Common Shares
Dilution (Overhang) = (A + B) / (A + B + C)
Example:
Company X has 100 shares outstanding
J. Doe has 10 shares, or 10% ownership
Company approves a plan for 20 shares
If all plan shares are issued, there are now 120 shares of Common stock outstanding
Dilution impact/ overhang = (20)/(120) = 16.667%
-8-
2
EPS Dilution/ Overhang
 EPS Dilution – How do I find it?
– Diluted EPS = Net earnings divided by Common stock and potential
Common stock (equity awards, convertible securities, Warrants, etc.)
 The most common method for equity plan EPS dilution is to
use the Treasury Stock Method
 Key assumptions:
– Exclude underwater options
– Weighted outstanding either full period or based on grant date
– The “exercise proceeds” from theoretical exercises are assumed to be used
to buy back shares on the open market based on the average share price
during the period
– Weighed shares minus the shares repurchased with exercise proceeds are
the additional shares from the plan to include in the diluted EPS calc.
-9-
2
EPS Dilution/ Overhang
 Treasury Stock Method Steps
– Disregard underwater options
– Calculate weighted shares outstanding (WSO) in the period (weight by
the entire period unless shares were granted or settled in the period)
– Calculate the exercise proceeds used to repurchase buyback shares
 A – Exercise price: (Exercise Price * WSO)
 B – Tax benefit: ((((MV-Price) – Fair Value) * Tax Rate) * WSO)
 C – Avg. unamortized expense: (((Beg. Unamortized Expense + Ending
Unamortized Expense) / 2) * (WSO / Total Shares))
– Calculate the buyback shares = (A + B + C)/Avg Market Value
– If buyback shares > Weighted Shares Outstanding (anti-dilutive),
remove grant from dilutive share number
– Weighted shares minus buyback shares = dilutive shares to add to the
common stock number to get diluted EPS
-10-
3
Share plan run rate/ burn rate
 What it means
Used interchangeably, run/ burn rate
measures the annual usage of shares for
incentive purposes.
 Who’s asking
• Board/ Comp Committee
• Investors
• Proxy advisory groups
 Why they ask
•The share pool will be used more
quickly with a higher run rate, and mid
to long-term, a high run rate may lead to
high dilution (overhang) levels.
•ISS scorecard plan evaluation includes
the 3-year average burn rate
-11-
3
Share plan run rate/ burn rate
 Where do I find it?
 Gross run rate calculation
A – Total shares issued in fiscal year for incentives (option, RSU,
restricted share grants)
B – Total Common shares outstanding at year end
Run rate = A / B
– “Net” run/ burn rate subtracts canceled and forfeited equity awards from “A”
– Performance awards may be included as earned, rather than at grant
– Run rate calculation Run rate also becomes the denominator if trying to
calculate how long the current share plan reserve will last:
– Estimated Plan Duration = (sum of new shares requested + shares
remaining available for issuance) / average annual burn rate shares
 Investors may consider a run rate that is consistently higher
than peer companies to be a sign
of poor governance
-12-
3
Share plan run rate/ burn rate
 The ISS Perspective
– ISS uses a 3-year average burn rate, as percentage of market cap
– Burn rate is compared to benchmark for peers in the same industry
– ISS burn rate calculation also applies a factor to full-value awards to give
them extra weight (factor varies based on company stock price volatility)
– ISS does not calculate burn rate for companies with less than 3 years of
history (i.e., IPO or companies recently out of bankruptcy)
– ISS scorecard also looks at Plan Duration
A – Total options issues + full value shares awarded * multiplier
B – Weighted Average Common Shares Outstanding
Run rate = A / B
As long as performance awards are clearly and
consistently disclosed, ISS will also include
performance awards in the burn rate calculation
when earned, rather than granted
-13-
4
Weighted Average Remaining Period of
Expense (WARP)
 What it means
 Who’s asking
 Why they ask
Provides an estimate of the amount of
time it will take to fully expense the
remaining amount of unrecognized
equity compensation expense.
• CFO/ finance team
• Audit teams
WARP is a disclosure requirement under
ASC718, and also gives the finance team
a weighted average estimate of the
remaining periods during which the
company will carry stock comp expense
for the plan.
-14-
4
Weighted Average Remaining Period of
Expense (WARP)
 Where do I find it?
 WARP Calculation
– Calculated by grant or tranche
A – Expiration date – current reporting period end date for a grant/ tranche
B – Total unamortized expense for the grant/ tranche
C – Total unamortized expense for all grants/ tranches
N – Represents number of tranches or grants being evaluated
WARP = SUMN(A*B for each grant or tranche)/ C
-15-
4
Weighted Average Remaining Period of
Expense (WARP)
 Example calculation
– Report date 12/31/2015
Grant
Expiration
Date
A Days
B Unamortized
remaining at
12/31/2015
expense at
12/31/2015
A xB
1/1/2009
1/1/2019
1,097
$1,200 1,316,400
6/1/2011
6/1/2021
1,979
$1,800 3,562,200
1/1/2013
1/1/2023
2,558
$2,400 6,139,200
C
Total:
$5,400 11,017,800
WARP = 11,017,800/ $5,400 = 2,040 days
2,040/365.25 = 5.59 Years
-16-
5
Executive Grant Status
 What it means
 Who’s asking
 Why they ask
•
•
•
•
How many awards are held by Executives?
What portion are vested vs. unvested?
Are all Executive filings up to date?
Are there any special provisions (e.g.,
holding period or clawback)?
•
•
•
•
Executives
HR
Investors
Proxy advisory groups
• Executives want to understand their own
award positions
• HR is often tasked with supporting
Executives in managing their awards
• Both investors and proxy groups look at
CEO grant amounts & features
-17-
5
Executive Grant Status
 What do Executives and HR need to know?
– What do Executives and HR want to know?
 Exercisable shares
 10b5-1 enrollment status
 Corporate insider filing rules must file with the SEC a statement of ownership
regarding those securities
• Form 3 - insiders must file a Form 3 within ten days of becoming an officer,
director, or beneficial owner.
• Form 4 – changes in ownership must be reported on Form 4 to the SEC
within two business days of the transaction
• Form 5 – Insiders must file a Form 5 to report any transactions that should
have been reported earlier on a Form 4 or were eligible for deferred
reporting. If a Form must be filed, it is due 45 days after the end of the
company's fiscal year.
-18-
5
Executive Grant Status
 What investors and proxy advisors want to know about
Executive awards?
– Proxy advisors and ISS scorecard look for the following
 CEO’s grant vesting period for all awards received in last 3 years
 CEO's proportion of Performance-Conditioned awards (conditioned on
achievement of a disclosed goal)
 Whether or not awards are subject to clawback in the event of certain financial
restatements
 Holding period – whether or not company requires shares received from grants
under the plan to be held for a specified period following their vesting/exercise
-19-
Phew, that’s a lot, now what?
 You don’t have to memorize everything!
– Update numbers each period (or as needed for
executive filings)
– Stay organized and know where to find key figures
– Consider a system or provider to automate calculations
and facilitate ad hoc reporting
In no time you’ll be accepting those
calls with confidence!
-20-
QUESTIONS?
-21-