How to prepare for equity compensation grant approval with your corporate due diligence

Equity compensation programs are a powerful tool for attracting and retaining top talent. They’re  also a labyrinth of compliance, global challenges, and ever-evolving regulations. As someone deeply versed in this world, I’m often asked to share my insights and best practices, honed through working with dozens of companies from nimble startups to global giants.
Typically the best advice is personalized to each company, this is something our team does when we work with clients during a long term engagement, or on a free consultation. But as for the broad strokes, here’s the best practices and top-of-mind items that every company should be laser focused on during the EC grant approval process.

Staying compliant during the EC grant approval process

Let's be honest, missteps are costly in this realm. Public companies face intense scrutiny from internal and external auditors. Having top-down buy in, starting with an involved Board of Directors that outline the process, frequency, and who holds the reins. Here are some areas to consider designating leads for:


Securities Laws Compliance: 

Equity compensation, such as stock options and restricted stock units (RSUs), involves the issuance of securities and thus is subject to securities laws. This includes complying with registration exemptions under laws like the Securities Act of 1933 in the U.S., and ensuring proper disclosure to recipients about the nature of the equity and any associated risks.

Tax Implications: 

Different types of equity compensation have different tax implications for both the company and the recipient. Compliance with tax laws, including withholding and reporting requirements, is essential. This might involve understanding the implications of Section 409A of the U.S. Internal Revenue Code, which deals with the valuation of deferred compensation, including certain types of stock options and full value equity awards. In addition, if your company is in non-US locations, it is crucial to get tax advice and guidance from a legal advisor company that understands the tax law in each country. 

Corporate Governance: 

The process of granting equity compensation must comply with a company's internal policies as well as external corporate governance standards. This can include board of directors' approvals, adherence to the terms set forth in the equity incentive plan, and following any shareholder approval requirements. A best practice is to have a grant policy which captures, at a minimum, the delegation of authority and the timing of equity grants. 

Accounting Standards:

Equity compensation must be accounted for in accordance with relevant accounting standards such as the Generally Accepted Accounting Principles (GAAP) in the U.S. or the International Financial Reporting Standards (IFRS). This includes proper expense recognition and disclosure in financial statements.

Employment Law: 

In certain jurisdictions, equity compensation is considered part of an employee's remuneration and may be subject to employment law considerations, including but not limited to, issues related to termination of employment and discrimination. Best practice is to not include equity awards in an employment offer and include a written disclaimer acknowledging the discretionary of the equity plan so as to avoid plan entitlement.

Exchange Control and Cross-Border Issues: 

For multinational corporations, compliance with the exchange control regulations of each country where employees receiving equity compensation reside is crucial. This includes restrictions on the transfer of funds and securities across borders and reporting requirements to local authorities.

Data Privacy: 

The administration of equity compensation plans often involves the processing of personal data. Compliance with data protection laws, such as the General Data Protection Regulation (GDPR) in the European Union, is required.

Plan Documentation and Communication: 

Clear and compliant documentation of the equity compensation plan, including plan rules, grant agreements, and employee communications, is essential to ensure that all participants understand their rights and obligations.

Regulatory Filings and Disclosures: 

Depending on the jurisdiction and the public/private status of the company, there may be regulatory filings and disclosures related to equity compensation plans that must be made to securities regulators or other governmental agencies.

The decentralized dilemma

Larger companies tend to be decentralized, which creates a real challenge to implement a company wide program. This means that more individuals around the world are responsible for ensuring that information is updated in the HR system (or system of record). As an example, if a new hire employee receives an equity grant as part of their offer letter but the person responsible for submitting or updating within the HR system does not occur, the grant does not get legally approved. This can delay the grant approval process until it is caught and ultimately a poor employee experience. Clear communication, streamlined workflows, and a centralized data management system are your secret weapons. 

Staying ahead of the regulatory curve

Changes in the legal and regulatory framework greatly impacts the management of equity compensation. It is crucial for the individual or team responsible for the management of the equity compensation plans to continuously stay abreast of best practices, technology innovation and regulatory changes to ensure that all compliance and process efficiencies are implemented appropriately. 

Industry conferences, webinars, even social media groups – these are your allies in staying ahead of the curve. By keeping your ear to the ground on best practices, technological advancements, and regulatory updates, you can implement compliance and process efficiencies like a pro.


You have to benchmark

I’ve yet to come across a company that regrets researching their competitors. For talent management and retention purposes, it is crucial for companies to conduct effective benchmarking in their industry across the Total Rewards umbrella, especially equity compensation. 

Annual benchmarking is a best practice in order to understand any changes being employed by peers/competitors to attract the same talent in the industry. A company’s external compensation consultant typically pulls together this data for leadership to review and decide upon any changes that need to be made for compensation purposes.

Find the vendor that aligns with your scope and scale

You won’t find any shortage of vendors to manage your stock plan. Almost all of them are going to serve your company. Your main challenge will be aligning on what scale and features you truly need, as some platforms provide stock plan management as just one of a suite of platforms that you may or may not be interested in. If you want a good head start of this, my colleague Justin Docter wrote a blog article on how to choose the best equity management software

Things I see in the industry future

I don’t have a crystal ball, but if I did it might say: expect more regulatory changes, stricter tax audits, and even closer monitoring of mobile/remote employees. As the world steadily moves towards a remote workforce, companies will draw from a global talent pool.

If you're a smaller company taking your first steps into the equity compensation world, tread carefully. Seek guidance from advisors early on – understanding the specific tax and security laws of each country is crucial. And remember, choose an equity platform that can grow with you, just like a loyal companion on your journey.


The journey continues

This is just the tip of the iceberg, friends. Explore the valuable resources offered by industry organizations like NASPP, GEO, and WorldatWork. From bootcamps and webinars to conferences and white papers, they're here to equip you with the knowledge and confidence to navigate the complexities of equity compensation.

The team at CompIntelligence also have a long and successful track record of guiding companies through implementation, you can request a complimentary consultation to review your equity plan or its implementation here.