Planning for an Equity Compensation Pandemic
I hope this post finds you well and with three gallons of hand sanitizer stocked up in your pantry. Each time a potential pandemic raises its head we work to ensure that those we care about will be well in every possible scenario. At first, the unknowns throw us off-kilter. Then we put together plans for the worst and the best with the ability to execute on short notice.
This process creates some order, reduces some of the anxiety and prepares us to be among those who tend to weather any challenge. You may have noticed that as the news about the novel coronavirus, COVID-19, has made it to the headlines, stock prices have also made some news. While most of the recent volatility is due to the uncertainty of how the virus will impact the world, at least a little of it is due to years of a bull market that has given investors the ability to cash out with impressive gains.
Your employees may not have the luxury of cashing out their equity compensation. If awards and grants are unvested, your employees have no flexibility. Even if stock options are vested, many employees may not have the money to exercise them. Even if you are a public company, your stock price may have been battered enough that exercising options, is not a great option. It’s time to prepare for the next equity Compensation Pandemic.
Over my more than 25 years doing this stuff (dang, I am old!) I have seen many waves of these pandemics. The easy repricings of the mid-1990s, the vaporization of equity value at the end of the dot-com era, the stock option exchanges triggered by wars, financial collapses, and industry upheaval. The one commonality among the companies that navigated these the best was the fact that they were all able to make their decisions to act early and decisively.
Four years ago I wrote about my Equity Compensation Triage Assessment process. The rumor was that stock options were on their death bed. This tool is a starting point for determining your potential paths to success. In the years since that article, we haven’t had a wave of equity compensation correction programs. The market has been strong. Equity has been fairly stable. The biggest issues have been with pre-IPO companies challenged with long waits for a transaction and volatile stock prices. The time to get your ducks in a row is upon us.
Is an Option for RSU exchange a possible path for your future? How much would it cost to cash out equity for lower-level employees? Do your employees know the potential impact of a down-market on their ESPP shares? How about those RSUs that you so communicated as a “dollar value?” What will happen if that value is half, or even less? Where are your biggest risks? Who has the most concentrated positions of outstanding equity and should they be speaking to a financial advisor? What is the potential impact on your burn rate if your price drops?
So many questions. For many in the compensation world, this will be an entirely new experience. I hope to hear from some of you and perhaps I can follow this post with some specifically requested information. Let me know how you are preparing for the pandemic and what supplies may be useful.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.
Posted by DanFutureSense on 03/03/2020 at 09:02 AM in Compensation Communication, Executive Compensation, Incentives/Bonuses, Pay for Performance, Small Company Compensation, Stock/Equity Compensation, Total Rewards | Permalink | Comments (0)