Sadly, due to Covid-19, it is now virtually certain we will enter a recession.  While the experts are arguing about the length and severity, everyone agrees the current circumstances will lead to many businesses failing and a spike in unemployment.  We are already seeing a significant decline of share prices across all industries and the accompanying volatility in the financial markets. 

I recognize that many of you are worrying about more pressing problems, such as your personal health and that of your loved ones.  But many of you are also already fielding questions from within your organization about the impact on compensation plans and suggested next steps, including cost-cutting and ideas to operate more efficiently. 

With helpful input from my colleagues, I have looked back at previous downturns (mainly the dot-com bust in 2000 and the 2008 recession brought on by the subprime mortgage crisis) to determine how they affected share plans and how companies reacted.  Certainly, the share plan landscape is different now, with many more companies granting full-value awards such as RSUs and restricted stock,[1] rather than stock options, but we expect that companies may take some of the same measures as taken during prior recessions.  What follows is a discussion of many of these measures, in no particular order.  If you would like more detailed information on any of these, please feel free to reach out. 

At the same time, we are anticipating various proposals for the federal government to support certain industries and these likely will contain very specialized rules impacting executive compensation and possibly corporate stock buyback programs.  We are planning to publish a separate blog post to address these issues soon. 

Option Repricing/Exchange


With stock prices tumbling, many options granted over the last few years will now be underwater (i.e., exercise price will be higher than the current market price) which means they do not currently hold any value for employees.  Unless employees believe in a quick recovery, these options will lose their retention effect.  In fact, they could be demotivating for employees, as they wonder if the options will ever come into the money.  Additionally, such options present a drag on a company’s overhang and require continued expensing over the vesting period. 

An option repricing/exchange would give employees an opportunity to exchange their underwater options for options with a strike price that reflects the current stock price or for another type of award (e.g., RSUs) that will have at least some guaranteed value for employees. 

What to Watch Out For

Companies will need to consider the accounting expense of an exchange which can be considerable depending on the structure.  Further, some plans may not permit a repricing without shareholder approval and, at least for public US companies, an offer to exchange options typically triggers onerous securities disclosure requirements.  For US employees, the exchange has to be structured to comply with the requirements of Section 409A.  Lastly, for employees in certain countries outside the US, the exchange can be taxable or result in the loss of tax-qualified treatment, diminishing the benefit of the offer in these countries. 

Refresh Grants


Again, because stock prices have tumbled, employees at almost every company are holding awards that are worth considerably less than just a few weeks ago.  When these awards were granted, the size of the grant was determined based on the then-applicable stock price, but as it stands now, these awards are unlikely to confer the intended benefits if prices do not rebound before the awards vest.  Refresh grants could make up for at least some of the value that has been wiped out.  Given the volatility of the market, it is likely that RSUs or restricted stock are the best bet for such refresh grants.  On the other hand, with prices down, now may also be the time to re-consider the grant of stock options.  With a 10-year term and a strike price that reflects current market prices, options have the potential to deliver enormous gains for employees in the future, and to be a powerful retention tool.

What to Watch Out For

Companies would need to have sufficient shares in their plans’ share reserve to make such grants.  Going to shareholders to approve additional shares may be challenging, as shareholders will hardly be in the mood for further dilution given their own losses.  If companies have sufficient shares, they will still need to be prepared to incur an additional accounting expense for the refresh grants, another hit to their already suffering bottom line. 

Cancel Grants Made in Q1 and Re-Grant


The main rationale for this measure is the same as for an option exchange/repricing as well as for refresh grants: to enable employees to receive new awards that reflect current market conditions.  Additionally, companies may be able to lower their accounting expense if awards are re-granted when the stock price is considerably lower. 

What to Watch Out For

Unless it can be argued the awards were made accidentally or in error (which presumably would be hard to do in most cases), it is likely there will still be some accounting expense for the “old” awards, and companies will need to expense any new awards.  Therefore, the accounting implications of any cancellation/re-grant will need to be examined as a first step.  However, if old awards can be cancelled, the accounting implications should be more favorable than in the case of a pure refresh grant (in which case both the old award and the refresh award will need to be expensed through the vesting period of each award). 

From a legal perspective, it will make a significant difference whether or not awards have already been communicated to employees.  If not, it should be possible to cancel the awards unilaterally and make a new grant.  However, the plan would have to be reviewed to determine if such steps can be taken without shareholder approval, and to determine if the shares from the cancelled grants can be returned to the pool.

If the awards have already been communicated, a unilateral cancellation and re-grant generally will be possible only if the re-grant puts the employees in exactly the same (or a better) position as they were in with the old grant.  At a minimum, this means the new awards would need to be subject to the same vesting schedule and (at least) the same number of shares.  However, to the extent the awards are tax-qualified and subject to minimum vesting period or holding period requirements (e.g., ISOs or French-qualified awards), it would not be possible to put the employee in exactly the same position as the holding periods typically are calculated from the date of grant. Again, the plan would have to be reviewed to determine shareholder approval requirements and the ability to return shares from cancelled awards to the pool.

If employee consent is required, things get more complicated, both logistically and from a legal perspective.  Most notably, for US companies, an offer to cancel awards in exchange for new awards likely will be viewed as a tender offer subject to onerous disclosure requirements (as described above for an option repricing).  Further, in some countries, an exchange of awards can be taxable and/or trigger compliance obligations. 

Resetting Performance Conditions


Awards subject to absolute performance conditions (e.g., certain levels of TSR) will now be much less likely to reach performance goals and vest.  This again erodes the retentive value and will be demotivating to employees, while requiring companies to continue to expense potentially worthless awards.  Adjusting the performance goals based on the new market conditions could alleviate these issues. 

Separately, going forward, companies may consider relying more on relative performance conditions which are less likely to need adjustment even in a downturn, as most peer companies will be equally affected. 

What to Watch Out For

As a first step, the accounting implications will need to be examined to determine whether they support such a decision.  Companies that need to take their plan back to shareholders in the near future should also consider their standing with ISS or other proxy advisors after taking such a decision.

From a legal perspective, if no other changes are made to the award, it is unlikely that employee consent will be required for the adjustment.  In this case, it should be possible to argue the adjustment is not a cancellation and re-grant of the award, avoiding the issues discussed in the immediately preceding section.  However, care will need to be taken to ensure the adjustment complies with Section 409A requirements. 

Prior to the The Tax Cuts and Jobs Act of 2017 (TCJA), adjusting performance criteria for awards subject to Section 162(m) limitations generally jeopardized the corporate tax deduction for such awards where the company was relying on the performance-based exception to Section 162(m).  These exceptions generally no longer apply after adoption of TCJA, making this concern moot.  However, companies should review the awards that are under consideration for adjustment to confirm that those awards were not intended to be grandfathered under the old Section 162(m) rules.  In this case, changes to the performance metrics would preclude the grandfathered treatment.

Cash is King


If a company has lost faith (at least temporarily) in the value delivered by share-based awards, it could consider switching to a cash plan, where payment is not based on the value of shares.  Or, companies that would like to continue to grant share-based awards, but do not have sufficient share reserves to make the larger grants required now to offset the lower stock price, may want to grant cash-settled awards where the payment is based on the value of the company’s shares.  Since cash-based plans do not require shareholder approval and also trigger less compliance issues (e.g., no securities registration requirement), they are easier to implement. 

What to Watch Out For

Obviously, the biggest concern will be to have enough cash on hand to settle these awards.  In particular for cash-settled awards based on share price/performance, it will be difficult to predict the liability.  Additionally, such awards (but not pure cash awards not tied to stock price) will require liability accounting which introduces volatility for the balance sheet.  At least outside the US, we also caution against using cash awards because they may not confer the same beneficial tax treatment as share-based awards and because they carry higher labor law risks.[2]  In the US, unlike certain share-based awards (such as options), cash awards are not exempt from Section 409A so Section 409A considerations need to be factored in as well when structuring the awards. 

Step Up Implementation of Recharge Arrangements


A recharge arrangement could offer corporate tax savings.  In a nutshell, if awards are granted to employees of foreign subsidiaries, local tax deductions for the cost of the shares delivered to employees (minus any price paid by employees for the shares) can be available, but usually only if the local subsidiary is charged for the cost of the shares pursuant to a written recharge agreement.  An added benefit is that such arrangements offer the opportunity for easy repatriation of cash to the parent.  There are a few countries in which local tax deductions for award costs are available even without a recharge arrangement (most notably the UK) so companies should make sure to take advantage of such deductions. 

What to Watch Out For

A country-by-country analysis is required to determine if/under what conditions a local tax deduction is available and whether a recharge arrangement can have any undesirable consequences.  One possible “collateral damage” is the imposition of an employer social tax obligation on award income (which would not exist absent recharge).  In addition, labor law risks can be increased on the theory that, if the local employer pays for the cost of the awards/shares, the awards are considered part of local employment compensation (triggering translation requirements, increased entitlement risks, increased severance pay liability, etc.). 

Consider ESPP


As is evident from the discussion so far, options and RSUs tend to fare poorly if granted before a recession hits.  An ESPP, on the other hand, usually provides for a built-in adjustment if shares are purchased at a discount based on the market value of the shares at purchase.  In other words, even though the stock price may have decreased, employees are still purchasing at a discount.  This means employees continue to realize a guaranteed benefit and the plan retains its incentivizing value.  And while some employees may decide that now is not the time to invest in a volatile stock market and take all of their compensation in cash, others may want to do precisely that on the basis that share prices will eventually recover and they have the ability to purchase more shares than before. 

Some companies may decide to start offering an ESPP (perhaps instead of another broad-based option or RSU program), do more to promote an existing ESPP and/or enhance an existing ESPP (e.g., increase the amount of the discount or the percentage of contributions). 

Either way, as a side note, now may be a good time to remind participants of the ESPP rules, including withdrawal and suspension deadlines and procedures, and the calculation of the purchase price so that participants can make a knowledgeable decision based upon their own risk factors and expectation of future share prices.

What to Watch Out For

From an accounting perspective, unless the ESPP has a look-back feature with a long offering period, the expense should be relatively manageable, especially compared to options and RSUs.  Also, shareholders are typically more inclined to approve a broad-based ESPP that offers a relatively measured benefit to employees (again, compared to options and RSUs). 

From a tax perspective, a Section 423 ESPP offers favorable tax treatment to US employees (although such treatment does not extend to employees outside the US). 

If the ESPP is offered globally, companies need to be aware there are typically more compliance obligations than for options and RSUs.  This is because the ESPP represents an offer of securities in most countries (while options and RSUs are granted for “free” and, therefore, are not considered an offer of securities in many countries), and because the ESPP requires a flow of currency from and to the other country, which can raise currency control issues.  Finally, if payroll deductions are taken from employees to contribute to an ESPP, these can be restricted in some countries. 

Shutting Down ESPP


Despite all of the arguments above in favor of an ESPP, it is likely that some companies will seek to more aggressively curb compensation expenses and consider shutting down broad-based share-based programs, such as an ESPP, or at least reducing the accounting expense by eliminating look-back pricing or shortening the offering period. 

Another compelling argument for shut-down can exist if the ESPP requires significant legal compliance. Companies with a large global footprint and significant headcount in many countries will often have to complete filings in multiple jurisdictions in advance of an offering or to report share purchases.  If legal budgets need to be cut and/or in-house resources dwindle due to lay-offs, it can be difficult to keep up with these filings or justify the expense. 

What to Watch Out For

Most plans will not permit a company to terminate an ESPP during an ongoing offering, because this would represent a modification of an outstanding award to the participant’s detriment.  But almost every plan allows termination of the ESPP after an offering has concluded.  Of course, companies will still need to track holding periods for US employees to determine if a disqualifying disposition has occurred, even after the ESPP has been shut down. 

Especially for ESPPs offered globally, one significant concern will be whether employment laws entitle employees to continued participation in the ESPP or, at a minimum, to receive equivalent benefits after the ESPP is shut down.  This argument could be made in countries where employers may not unilaterally reduce employees’ compensation, provided employees can successfully argue ESPP benefits have become part of their compensation package.  Whether such arguments are successful will depend on the country and on the steps the company has taken to keep the ESPP separate from the local employment relationship.  Further, to mitigate the risk of such claims, it is recommended for companies to give notice of termination of the ESPP to participants as far as possible in advance of the termination date.  Lastly, if filings have been completed, it may be necessary to notify the applicable government authority of the termination of the plan. 

Implement Retention Plans


As existing awards confer less retentive value and everything is more uncertain, companies need to prepare for aggressive poaching from their competitors and an exodus of their talent.  The idea is similar to that for refresh grants laid out above, but for their key talent, companies may consider going further and implementing even more generous retention plans.  Retention plans can entail more than just share-based compensation, but share awards are often a big component and may be more palatable to companies as they try to preserve cash. 

Retention plans can be structured as severance plans or Change in Control plans, or as a free-standing plan. 

What to Watch Out For

Companies need to evaluate if share awards granted as part of a retention plan can be granted under an existing equity plan or require a new plan (subject to shareholder approval).  As always, the accounting expense of such awards will need to be considered.  Further, if structured as a severance plan that is offered globally, it may be necessary to prepare country-specific plans or sub-plans, to reflect that most countries outside the US provide for statutory severance benefits that likely should reduce the benefits received under the company severance plan.  If structured as a Change in Control plan, companies will need to consider the impact of Section 280G to avoid any payments being characterized as an excess parachute payment subject to excise tax.  

Other Things To Be Prepared For

Aside from the measures described above which are meant to be proactive, companies will also need to be prepared to react to various issues that could potentially affect share awards, as follows.

Treatment of Share Awards in Lay-Offs

If your company is considering (or has already announced) lay-offs, familiarize yourself with the termination provisions of your share awards.  Do they provide for beneficial treatment in case of involuntary termination, such as accelerated vesting or extended exercisability?  Most involuntary terminated employees will have a notice period (which can be quite long in some countries, depending on the employee’s tenure with the company), and it will need to be determined if vesting will cease only at the end of the notice period or when the employee stops to actively provide services.  If the award agreement provides for the latter, should your company consider extending vesting through the end of the notice period to provide employees with an additional benefit?  If beneficial treatment is available or implemented for terminating employees, consider whether this gives you the opportunity to obtain a release from the employees, to eliminate (or at least mitigate) the risk of future claims. 

Going Back to Shareholders For Additional Shares

As discussed above, if the stock price has taken a beating, it is likely companies will need to grant more shares to make up for the loss in value.  Similarly, employees will be able to purchase more shares under an ESPP with the same amount of contributions.  Even though performance-based awards are less likely to pay out or require fewer shares from the reserve, the overall impact of the downturn likely will be faster depletion of the share reserve.  This means companies may need to take the plan back to shareholders sooner than expected.  Consider the best strategy for your proxy disclosures and engage with ISS and other proxy advisors to ensure you get the shares you need.  If this is going to be challenging, as discussed above, consider cash-based awards, at least for an interim period. 

Delay of IPO

Privately held companies that may have been on track to go public later this year or next year may be shelving these plans in light of current market conditions.  This can be difficult to message to employees who have been waiting to liquidate at least some of their shareholdings on IPO and prompt companies to find ways to provide employees with some liquidity prior to IPO (e.g., through a tender offer).  Separately, if double-trigger RSUs have been granted, they typically are set to expire a certain number of years after the grant date.  If companies are not able to go public (and thereby triggering the second vesting condition) before the expiration date, these RSUs would have to be cancelled on the expiration date.  Companies may need to think about ways to extend the expiration date or to otherwise compensate employees (including former employees who have met the time-vesting condition) for these cancelled RSUs.  For US employees, many of these alternatives will be curtailed by Section 409A considerations. 

Cost-Cutting Measures May Affect Your Department

Most companies are likely to consider lay-offs in the near future.  Certainly, they will be conservative when it comes to hiring.  Budgets are likely to be decreased and scrutinized.  If you are a share plan professional, you may be asked to minimize the help of outside advisors.  Consider whether your share plans can be simplified and push back against design features that require a lot of administration (e.g., monthly vesting of RSUs). 


There is a lot to think about as we navigate these very uncertain times.  In the last two downturns, if properly structured, share plans have been instrumental in keeping employees incentivized and compensated.  We believe this downturn will be no different, and it will be interesting to see what other measures companies conceive of to keep their businesses going.  Most importantly, however, I hope everyone stays healthy and safe.

[1] However, RSUs are much more prevalent for global companies, as restricted stock is taxed at grant in many countries outside US, which makes this award type undesirable in most cases. 

[2] For more information on these issues, please see our white paper on Cash-Based Awards