In the past several months, I have seen two companies (both large Fortune 100 companies in different industries) evaluate the merits of a choice program and it looks like both of these companies will move forward with such a program.
In both cases, the companies will let employee choose what type of awards they should be granted during the annual grant cycle, e.g., 100% RSUs or 100% options or 50% options/50% RSUs, and so forth. Usually, there is a default (e.g., 100% RSUs) if the employee fails to make a choice.
Choice programs are nothing new, but they are often limited to top executives or used only in special circumstances. Here, the choice will be offered to all employees who are eligible to receive equity grants during the annual cycle, for both companies a significant number.
So, is this a trend or just a coincidence? More importantly, is it a good idea to offer a choice program?
From a legal perspective, there are less issues than you might expect, provided the program is structured properly. In particular, the choice should be made before the actual grant occurs, and it is important to communicate to employees that making an election does not guarantee getting a grant (for example, if an employee terminates employment before the grant date, they would normally not be able to get a grant, regardless of any election).
The Remorse Risk
The most significant legal risk related to choice programs is what I call the “remorse risk” where an employee later regrets his/her choice and claims the company should compensate or put the employee in the financial position they would be in had they made the “right” choice. The argument would be that the company failed to properly educate the employee about the risks related to the different choices.
I am not aware of any lawsuits in this regard, but, in surveying our foreign offices, most of them identified the “remorse risk” as the most important and real risk. To mitigate this risk, companies will need to bite the bullet and ramp up the education they provide to employees regarding the different types of awards. A simple plan prospectus describing the awards is unlikely to be sufficient. Companies should prepare different examples showing how the awards fare depending on the development of the stock price and consider providing employees with calculation tools to run their own numbers.
In addition, it will be important to educate employees on the different tax treatment of the awards, especially in those countries where the treatment can be dramatically different (e.g., Canada, Brazil). In my experience, many companies do not provide tax information to foreign employees. And while I would argue that companies should always provide such information, I recognize that the risk of not doing so is currently low (at least for US companies).
However, the situation is different for choice programs, because the tax treatment can have a crucial impact on the value of the respective award. By not providing the employee with tax information, companies set themselves up for complaints that the employee was not able to make an informed choice regarding his/her awards, and the “remorse risk” looms large.
Another issue to consider is translation of the documents. Again, most companies do not translate their grant documents into local language. Translation is typically not legally required, so companies shy away from the costs associated with translations. However, if we really want to make sure that the employee understands the choices offered, a translation of at least the educational materials related to the choice program is advisable.
Additional Bumps in the Road
Aside from the risks outlined above, the other legal issues are mostly benign. In some countries (e.g., Australia, Malaysia), there is a risk that offering the choice will accelerate the securities filings which are normally due only when grant materials are distributed (after the grant), or create a second securities filing obligation (in addition to the after-grant filing). However, even though these accelerated or additional filings can be annoying, they are typically easy to complete and a concern only in very few countries.
Last but not least, companies should consider the additional administrative burden as well as the expense created by a choice program. In addition to preparing additional educational materials, as well as possibly translations, timing can also become a concern because the choice program should be offered at least 2-3 months before the grant date, which means companies will need to start preparing for their annual grants even earlier. Then, companies need to think about how to offer the choice: will they hire a third-party vendor to administer the elections, should they build an in-house election tool, etc.?
There is no doubt that a choice program raises some legal risks not typically seen with “regular” grants and creates a significant additional administrative burden for the company.
However, employees will appreciate the opportunity to take charge of their financial destiny and become more engaged in the grant process, thereby maximizing the value of the company’s equity programs and increasing employee satisfaction. Well, at least one can hope…