We have blogged before on the increasing practice of imposing post-vesting holding periods on the equity awards granted to executives (see, for example, “More Interesting and Useful Information from Last Week's Conference”). Post-vest holding periods earn good governance points from proxy advisory firms and investors. They also facilitate companies and executives in complying with a company’s Stock Ownership Guidelines, as well as a company’s ability to enforce a compensation clawback.
Importantly for today’s posting, our previous blog also indicated that adding a post-vesting holding period could result in a reduced accounting expense due to the new restrictions on transferability. For example, I had been told that a three-year mandatory holding period for equity awards could result in a discount to grant date fair market value of up to 20%. This would save a company money (or, at least, expense) and look better in the Summary Compensation Table and other proxy tables (including peer comparisons).
However, in a speech “Remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments” made last December and brought to my attention by Don Norman, a friend in the industry, Barry Kanczuker, Associate Chief Accountant, Office of the Chief Accountant, warned that this discount to accounting expense may not be as easy or large as some had suggested.
Some market participants have indicated that post-vesting holding restrictions on share-based payment awards can result in significantly lower stock compensation expense. While post-vesting restrictions should be considered in estimating the fair value of share-based payments, when evaluating the appropriateness of measurement in this area, we continue to look to the guidance in ASC 718-10-55-5, which states that “…if shares are traded in an active market, post-vesting restrictions may have little, if any, effect on the amount at which the shares being valued would be exchanged”. With that being said, I would encourage you to consult with the Staff if you believe that you have a fact pattern in which a post-vesting restriction results in a significant discount being applied to the grant-date fair value of a share-based award.
This warning is consistent with most folks’ understanding, as companies generally rely on their accountants for this discount figure. However, we know of no one who has “consulted with the Staff” on this issue (if you do, let us know what they learned, on a no-names basis).
Another industry friend, Andy Restaino, suggested that the FASB staff believed there should be no illiquidity discounts because the expense measures the cost of the awards to the issuer and the illiquidity adjustment would apply to the value to the employee. Generally, a discount for illiquidity is only appropriate for private companies.
So let’s be careful out there.