It’s a jungle out there. Well, not literally. But within the business world, competition to attract and hire the best and brightest employees can be quite fierce. And once they have been brought on board, what is the best way to maintain their motivation and commitment? There are a multitude of techniques and tools that can help companies support this goal. One such financial vehicle available to publicly-traded companies is to give employees the ability to share in the ownership of the organization, which can be accomplished by offering participation in an equity-based compensation plan.
Even though the use of this benefit can be fairly straightforward, it can present a number of challenges with respect to creation of the structure, administration, accounting and reporting of the plan.
Equity compensation plan management is fluid and complex. It changes constantly, as participant pools grow and award types change. Many companies rely on spreadsheets to help manage the tracking, accounting and reporting of the award activity related to these plans. Unfortunately, this is not an ideal solution for many reasons. Spreadsheets are notoriously difficult and time consuming to maintain, pose significant risk for data errors, contain minimal reporting and security functions, and limit ability to share information across individuals and teams.
Cloud-based or SaaS (software as a service) financial systems are becoming increasingly popular ways to manage equity-based compensation award activity – and for good reason.
The Benefits of Using a Cloud-Based Software for Equity-based Compensation Awards
Equity-based compensation awards can create many administrative and resource challenges for organizations. The award activity, which needs to be tracked and managed by participant and award, includes the following:
- Grants (valuation may require complex calculations)
- Vesting (can vary depending on the type and/or composition of award)
- Dividend calculations
- Forfeitures of non-vested awards (estimates may need to be made and applied when amortizing the cost of the award)
- Distributions (may be subject to deferral)
- Income and payroll tax considerations
Upon grant the Company will need to assign a value to the awards, which, depending on the nature of the award, may require an involved calculation utilizing various external factors. The cost of the awards is typically recognized on the Company’s income statement during the vesting period, which often requires additional spreadsheets to be used for calculation and tracking. Dividend calculations, distributions and forfeitures need to be tracked and reflected in the related accounting and reporting. There are also income and payroll tax implications that affect both the Company and the individual participants. In addition, the Company usually provides the participants with information regarding their individual awards on a regular basis. Creating and maintaining this reporting can be a very inefficient and time consuming process.
A major challenge with relying on spreadsheets to facilitate this process is that all of this activity needs to be captured by participant and by award. As companies grow and the number of participants increases, these spreadsheets can quickly become unwieldly and difficult to manage. Accuracy becomes a challenge, and excessive resources will be needed to maintain proper tracking and reporting. Although one person may be responsible for maintaining the spreadsheet, additional employees and departments – including accounting and finance, tax and legal – will need to access or review the data, or may recreate the same data in other spreadsheets.
Cloud-based equity accounting solutions can save significant time and prevent potentially costly errors by providing:
- Improved data accuracy
- Cost efficiency for data entry and management
- Ease of sharing information across individuals and departments
- Control features to provide multiple levels of security
- Tracking individual dividend calculations
- Integration with outside consultants, such as payroll companies and brokers
- Participant access to individual account information
- Streamline communications, reporting and tracking
What to Consider When Selecting an Equity Accounting Solution
There are many different software solutions that can help companies manage equity accounting. How can you assess the options and select the one that will work best for your business needs?
To help you consider whether a cloud-based equity accounting solution is right for your company, consider provides:
- Customization to suit your needs
Some programs are more straight-forward, and some are more complicated. The software should understand how your business’ equity compensation plans work and be able to adapt to your needs. For example:
- Is it easy to make changes? Equity programs can change frequently. How easy is it to translate those changes into the software?
- Does the software allow for special attributes? For example, some awards may be granted based on seniority or role, others may be time-based or performance-based. Is the software flexible enough to work for every potential equity activity or transaction?
Can the software continue to meet your needs as your company continues to grow?
- Internal systems integration
Can it integrate with your general ledger system to produce monthly uploads? Are there other accounting or project management systems that it needs to interface with?
- Third-party integration
Can the software integrate with the specific payroll provider you use? Or with other companies that are integral to your equity accounting operations?
- SEC filing support
For publically-traded companies, a cloud-based equity accounting solution should provide information to support footnote disclosure in 10-K (filed annually) and 10-Q forms (files quarterly), as well form 4 (for certain Section 16 filers).
- Self-service information for participants
This can remove the task of individualized reporting from the accounting department and provide participants easy access to their own account information.
- Documentation of data security and software functionality
The SaaS company should provide a SSAE16 report (from their auditors) to validate data security and accuracy of data manipulation in the system.
- Customer support
What kind of support will the company provide during and after implementation? Will the software provider help manage any change management that needs to take place?
One of 8020 Consulting’s talented team of consultants, Brian Barton is a CPA with more than 20 years of finance and accounting experience across many industries. He recently helped a client select and implement a cloud-based equity accounting software, which delivered significant time savings and improved data accuracy across his client’s accounting, legal and tax departments.
Want more? Learn more insights from our team of financial consultants by subscribing to 8020 Consulting Insights, and receive updates whenever we post new content.
Categorized in: Financial Systems