Unlocking Hidden Value
The number of companies adopting mandatory holding periods after equity awards vest is on the rise. Holding periods require award recipients to maintain ownership of vested awards until additional requirements are achieved. While most companies adopt holding periods with governance aims in mind, holding periods carry significant additional value that most firms never fully realize. Our team works with clients to unlock the hidden value of holding periods in the following ways:
- Explicitly Define a Pathway for Meeting Ownership Guidelines
Most C-level executives are required to maintain corporate equity holdings valued at between 2x and 5x of their annual base salary. Mandatory post-vest holding requirements, when designed correctly, can directly contribute to and accelerate the achievement of required ownership levels.
- Improve Tax Positions for Executives
Mandatory post-vest holding requirements can also help executives improve their tax qualification status for Incentive Stock Options (ISOs) and Employee Stock Purchase Plans (ESPPs) under IRC Section 423. In both cases, the period of time that vested awards are held impacts tax treatments.
- Reduce Compensation Expense Under ASC718 or IFRS2
Current accounting requirements in the US and abroad require companies to reflect post-vesting conditions (i.e., mandatory holding periods) in the initial grant date valuation of awards. Applying a discount for the lack of marketability (DLOM) to award valuations is a common technique with both empirical and theoretical backing that firms can use to reduce compensation expense.
- Create a Pathway for the Recovery of Awards via a Clawback
In light of forthcoming Dodd-Frank requirements, the adoption of clawback policies, designed to recover compensation in the event of governance or financial failings, is on the rise. Mandatory post-vest holding requirements for vested equity awards provide one of the few practical mechanisms to recover incentive payouts in the event a clawback is triggered.
- Improve Your Governance Ratings with Proxy Advisory Firms
Institutional Shareholder Services (ISS) recently updated its equity plan evaluation methodology to include positive scoring for mandatory holding periods. Additionally, ISS views the use of holding periods as a risk mitigating pay practice for its say-on-pay evaluations. Similarly, Glass Lewis & Co. also rates the presence of equity holding periods positively in their equity plan evaluation framework.
Our technical equity experts work with human resources and finance leaders on a regular basis to assist them with the design and valuation of mandatory holding periods. To learn more about our work and approach, please explore our latest thinking below:
- VIDEO: A Guide to Valuing the Illiquidity Discounts Created by Holding Requirements
- Maximizing Your Investment in Equity Compensation with Holding Requirements
- The Many Governance Benefits of Mandatory Post-Vest Holding Requirements
- A New Approach for Mitigating Your Company's Equity Compensation Expense
- SEC and FASB Requirements for the Disclosure of Post-vesting Restrictions and Illiquidity Discount
- The Unexpected Tax Benefits of Post-Vest Holding Requirements in Canada
- Illiquidity Discounts for Mandatory Holding Periods: Separating Fact from Fiction
- Pros & Cons: Post Vest Holding Periods — A Developing Trend (Winston & Strawn LLP)
- The Many Governance & Cost-Savings Benefits of Mandatory Post-Vest Holding Requirements (Corporate Governance Advisor)
- The Non-U.S. Tax Consequences of Mandatory Holding Periods (Rutlen Associates)
- Agenda: Avoid Director-Pay Lawsuits With Longer Holding Periods
Often, our clients tell it best. See what some of our valuation services clients have to say about the work we've done to help them manage complex compensation programs and reduce plan costs.
"Aon Hewitt and Radford's design recommendations were critical for CareFusion when rolling out our first performance equity program with a market condition. The ideas they suggested were innovative and met our objectives of balancing compensation expense with employee perceived value. Further, the concept of adding mandatory holding restrictions not only helped achieve this goal, but also aligned with and bolstered our aim of promoting long-term employee ownership. In addition to introducing innovative concepts like this, Radford was able to ensure that our auditors supported and signed off on the accompanying valuations with confidence."
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"We chose to work with Aon Hewitt and Radford when we first adopted FAS 123(R) because we felt they would offer a combination of strong technical expertise and customer service. Terry and his team have not only provided timely quality information, they have also provided guidance on a variety of equity-based topics and given us access to other resources within their organization as specialty knowledge was needed."
Whether you'd like to learn more about designing mandatory post-vest holding requirements, calculating potential illiquidity discounts, or any other strategic approaches for mitigating your equity compensation expense, we're here to help.