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10.4 Plan design process: An expanded set of constituents
Publication date: 30 Nov 2022
us Stock-based compensation guide
To address the requirements of ASC 718, tax planning, and other considerations on plan design, most companies need to draw on an array of subject matter experts. The cross-function plan design teams have the responsibility for creating, documenting, and benchmarking alternative plan designs and presenting those alternatives for management and compensation committee approval.
Prior to the adoption of the guidance in ASC 718, most companies' planning teams consisted primarily of human resources staff, who were responsible for overseeing executive compensation, with separate involvement by the legal department and limited involvement by members of the finance and tax departments. Subsequent to the adoption of the guidance in ASC 718, companies have needed to expand the role that members of the legal and finance departments play on the plan design team and encourage a greater degree of participation and coordination among team members. If business-performance metrics are to be used in future stock-plan awards (e.g., for vesting), the team probably needs to also include operations and business unit managers.
Figure SC 10-2 summarizes the roles of the members of a company's plan design team.
Figure SC 10-2
Typical roles of corporate departments in designing long-term incentives
Typical roles of corporate departments in designing long-term incentives
Department | Typical roles |
Stock plan administrator/ human resources | Chairs the team; develops competitive stock plan and benchmarking data for long-term incentives; recommends eligibility rules; recommends the types and amounts of long-term incentive awards; advises on the general competitiveness of the company's plan in the market; coordinates with business units on correlating stock plans to business strategy, selecting the metrics, and targeting performance levels; coordinates employee surveys and communications |
Finance | Determines the financial feasibility and impact of implementing, modifying, and using long-term incentive compensation plans (considers a range of issues from accounting costs to shareholder dilution to cash flow implications); provides (through payroll department) compensation information that is to be included in the proxy statement; involved in the valuation and reporting of awards |
Tax | Determines the tax liabilities and benefits of long-term incentive compensation for the employer and employees (for both US and foreign employees); assists with the design, modification, implementation, and use of the various types of long-term incentive compensation awards; coordinates compliance with income tax accounting rules under ASC 718 and 740; advises on IRC Section 409A deferred compensation rules; advises on IRC Section 162(m) rules |
Investor relations | Assesses major investors' views on plan design and share-allocation requirements; coordinates (with the human resources and legal departments) necessary shareholder approvals |
Legal/corporate secretary | Ensures compliance with laws and regulations during the design, modification, implementation, and use of long-term incentive compensation plans; drafts the plan; coordinates (with the human resources department) proxy disclosure requirements; prepares compensation committee resolutions |
Boards of directors' compensation committees are also becoming more involved in the overall design process, which culminates in the plans being approved by the committee and the full board of directors. Compensation committees are often engaging independent compensation consultants to review proposed plans and provide guidance to the committee as it makes its final decision. Many companies will become more proactive in considering the views of their key shareholders and shareholder advisers when designing stock-based-compensation plans and are advised to disclose sufficient information about newly designed plans to ensure that shareholders understand the plan's objectives and operation. In addition, the board's audit committee should oversee the financial reporting, disclosure, and valuation issues related to ASC 718. Finally, CD&A and SEC executive compensation proxy disclosure rules require extensive reference to ASC 718 calculations, including reference to the assumptions used to estimate fair value.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, 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. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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