Top Questions to Ask Your Team for Year-End Stock Compensation Reporting

As year-end reporting gets underway for many companies, we wanted to provide a list of important stock compensation questions that come up only once each year (or at least undergo more scrutiny than normal). We’ve organized our questions into five main topics. By reviewing this list, you and your team can be better prepared to handle the trickiest reporting elements during the busiest time of the year.

Footnote Disclosures

1. How will performance awards be disclosed in the roll-forward tables?

If you’re paying out performance awards above or below target for the first time, think it through. This is not explicitly covered in ASC 718-10-5-2, the stock compensation disclosure guidance.

Many companies initially disclose performance awards based on the target units, then adjust based on the final payout. When the final payout occurs, we often see the shares paid above target represented as an additional line in the share roll-forward (as opposed to additional shares “granted” in the period). For awards paying out below target, this is often represented in one of two ways:

1. Add an additional line in the share roll-forward for target shares not paid out due to under performance, similar to the common approach for above-target payout.
2. Include the shares not paid out due to under-performance in the “shares canceled” line of the roll-forward. In this case, it may also be helpful to add a footnote detailing this combination.

The benefit of the first approach is congruency in both above-target and below-target scenarios. However, the second approach is common and may be simpler to incorporate, as many stock administration systems will cancel target shares due to underperformance in the same manner as other awards are canceled.

For a thorough discussion of approaches we see in practice, read our article on 10-K disclosures.

2. Did you have any modifications this year?

For any significant modifications made to your awards during the year, you must disclose the terms of the modification, the number of employees impacted, and the total incremental cost.

Interestingly, although the fair value for expensing purposes may have changed due to the modification, the grant-date fair value is generally what ASC 718-10-50-2 requires to be disclosed in the share roll-forward. Tracking different fair values for expense and footnote disclosure purposes may not be possible in all financial reporting tools, so be sure to review your system’s capabilities.

3. Did you assume any shares through an acquisition this year?

The number of shares assumed through acquisitions should be included in the share roll-forward. A separate line in the roll-forward for these assumed shares will help keep the table clean and clearly disclose them. However, if the shares aren’t material, you can consider including them in the shares granted line along with a footnote. For more on assumed awards, please see our checklist of key considerations.

4. Were there any new award types or award designs issued?

If a new award type or a new type of performance award was granted in the year, a best practice is to add a new section to your footnote disclosures describing the new awards issued. The disclosure guidance also calls for a separate roll-forward table when the instrument types are sufficiently distinct.

We suggest drafting the verbiage and updating the footnote disclosures template for these awards before the close. This way, it can be reviewed internally and with auditors as appropriate.

Tax

5. Does your data cutoff need to be later than other reporting periods?

At year-end, there is typically a reconciliation performed between employees’ W-2 income and the actual tax benefit recognized by the company on shares exercised/released. Due to this, we typically see a later data cutoff in order to ensure all material activity has been captured. A later data cutoff requires increased coordination and planning among various teams to ensure all reporting requirements can be completed within tighter timeframes.

6. Is there a process in place to ensure FICA taxes are withheld by the end of the year?

FICA taxes must be withheld as soon as a material risk of forfeiture no longer exists. Particularly with awards with retirement eligibility provisions, this can mean FICA taxes may be due before shares are delivered.

Fortunately, there is a “rule of administrative convenience” that allows withholding to be batch-processed in the year of the triggering event. This typically occurs in mid-December to capture the vast majority of affected awards, though all transactions must be processed by December 31. We suggest working with payroll to set up a process for FICA taxes to be withheld and potentially selling shares to cover the taxes as requested by employees.

For an in-depth look on the impact of FICA taxes on equity compensation, please refer to our issue brief.

7. Have you reviewed your 162(m) list, especially in light of recent legislation?

In evaluating your list of 162(m) covered employees, remember that under the Tax Cuts and Jobs Act of 2017, once an employee is covered by this rule, he or she is always covered.

Also, a lesser-known piece of the American Rescue Plan Act of 2021 expanded the list of covered employees to include an additional five of the most highly compensated employees, effective for tax years beginning after December 31, 2026. These additional five employees won’t be subject to the same “once covered, always covered” provision. Since legislation surrounding Section 162(m) is constantly evolving, we suggest reviewing your 162(m) process at least annually.

Dilution

8. How is year-to-date dilution being calculated?

These calculations should be based on an average of the amounts included in each quarterly computation, rather than an independent full-year calculation, as required by ASU 260-10-55-3.

9. Do performance awards now need to be included in the dilution calculations?

As continently issuable shares, performance-based shares are included in the dilution calculations based on how many shares, if any, would be issued if the end of the financial reporting period were the end of the performance period. Since many performance periods end on December 31, there’s a good chance that some of these will switch to a non-zero amount in Q4 if the actual performance is known and estimable. This quantity of shares should be included in the dilution calculation for the entire reporting period.

Our white paper on dilution for market- and performance-based awards covers further nuances of such awards.

10. Are you in a net loss situation for the quarter or year?

In cases of a net operating loss, there should be zero incremental shares included in diluted EPS because including them would be antidilutive. Using an example where a company has basic EPS of -$1/share, increasing the number of shares for diluted EPS would decrease the negative per-share loss.

Audit and SOC 1 Considerations

11. Have you reevaluated controls specific to year-end, with special consideration for new circumstances this year?

Year-end is a good time to ensure adequate controls are in place and functioning as expected. As you complete the year-end reporting procedures, we suggest taking a look at any new types of activity or awards issued and evaluating if extra controls are needed.

We also suggest taking some time here to review procedures related to human capital management and other non-financial disclosures. These areas tend to evolve more frequently and they carry risk associated with being less quantitative than traditional financial disclosures.

12. Have you compiled information for the annual valuation disclosures?

Valuations are often completed in the first quarter of the year when annual grants are commonly issued. If not already done, you’ll need to gather supporting documentation around the inputs and methodology used for those valuations.

13. Do you work with any outside vendors in preparing your financial statements?

Be sure that any vendors you work with are covered by a SOC 1 report. Now is a good time to obtain the current SOC report and that it doesn’t have any control deficiencies. If the review period doesn’t cover the full fiscal year, you’ll need a bridge letter for the gap period.

Cross-Functional Areas with Compensation

14. Has your proxy process been updated in light of any new team changes or award modifications?

The proxy is an area that requires multiple people from various teams to gather all of the information. Teams may have changed in the past year, so the list of groups and individuals involved in preparing the proxy will likely need to be updated.

We also suggest taking special care to consider any modifications or discretionary adjustments made to executive compensation awards during the year. Even if the adjustment wasn’t deemed to require the modification framework within ASC 718, this should still be discussed in the narrative of the proxy’s compensation and analysis section.

15. Are you making any adjustments this year to your human capital management disclosures?

As we enter year two of the human capital management disclosure requirement, we suggest reviewing disclosures made by your peers now that there are significantly more disclosures available to benchmark against. From there, you can make an informed decision about what and how much to disclose.

Similar to the proxy, we suggest setting up a process to connect all of the relevant stakeholders and compile information as needed.

16. Is everything in place for the upcoming annual grant?

We often see year-end reporting last until it’s time to issue the annual grant, so it’s helpful to finish as many of those preparations as possible before the new year begins. It’s likely that forecasts will expand to include the upcoming year, which will require inclusion of any proposed award design changes. We have a checklist to help with such forecasting here.

Wrap-Up

While this is by no means a comprehensive list of everything that may come up during year-end, we do hope this will help you prepare and make decisions about some of the more novel and nuanced areas of year-end reporting for equity compensation. If there’s an area you’d like to discuss further, we’re always happy to help.