Financial Reporting & Accounting

Equity-based Compensation: Taking Plan Administration to the Cloud

Companies can lure talented individuals to join their teams utilizing a multitude of options. Once new hires have been brought on board, what is the best way to maintain their motivation and commitment? Compensation-related tools can help. One excellent cash-conserving tool gives employees the ability to share in company ownership, accomplished by offering participation in an equity-based compensation plan.

The Challenges of Using Equity-based Compensation as a Benefit

Even though the use of equity awards as a benefit can be fairly straightforward, companies may still face a number of challenges with respect to the administration, accounting and reporting of the plan. Depending upon the selected structure, equity-based compensation plans can be very complicated from an administrative and resource perspective and can be a struggle to maintain as participant pools grow and award types change.

Award activity, which needs to be tracked and managed by participant and award, may include some of the following items:

  • Grants (valuation may require complex calculations depending on composition of award)
  • Vesting (can vary depending on the type of award)
  • Dividend calculations (may need to track on a cumulative basis)
  • Modifications (specific accounting rules apply depending upon the type of modification)
  • 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 (effect can vary depending on domestic/international locality)

Upon grant, the company will need to assign a value to the awards. Depending on the nature of the award, this 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 worksheets to be used for calculation and tracking.

Dividend calculations, distributions and forfeitures may 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, it would be most beneficial for the company to have the ability to provide participants with their individual equity information on a regular, real-time basis. Creating and maintaining this reporting manually can be a very inefficient, time-consuming and frustrating process for the company as well as the participant.

The Limitations of Worksheets

Many companies rely on Excel worksheets to help manage tracking, accounting and reporting of award activity. However, this is not an ideal solution for many reasons. Worksheets can be difficult and time-consuming to maintain. They pose significant risk for data errors, contain minimal reporting and security functions and limit the ability to share information across individuals and teams.

A major challenge with relying on worksheets is that activity needs to be captured by participant and by award. As companies grow and the number of participants increases, worksheets can become difficult to manage and accuracy can become a challenge. Additional resources may also be needed to maintain proper tracking and reporting.

Although one person may be responsible for maintaining the worksheet, additional employees and departments (including accounting and finance, payroll, tax and legal) will need to access or review the data or may recreate the same data in other worksheets. Therefore, companies should consider utilizing a cloud-based or SaaS (software as a service) solution when first deploying their equity-based compensation plan. Companies with a plan in place could also benefit from transitioning administration to a cloud-based solution.

The Benefits of a Cloud-Based Solution

Companies using a cloud-based solution for the administration of an equity-based compensation plan will enjoy benefits that include:

  • Significant time savings in administration
  • Improved data accuracy
  • Cost efficiency for data entry and management
  • Ease of sharing information across individuals and departments
  • Control features that provide multiple levels of security and SOX compliance
  • Tracking of individual participant calculations (i.e. dividends, vesting, taxes, etc.)
  • Integration with external service providers such as payroll companies and brokers
  • Participant access to individual account information on a “self-service” platform
  • Streamlined communications, reporting and tracking

Considerations When Selecting Software

There are many different cloud-based software solutions that can help companies manage equity plan administration and accounting. You’ll want to assess the options and select the one that will work best for your business needs. Some equity-based compensation plans present more requirements than others.

The software selected should be able to accommodate current plan needs and be flexible enough to meet future requirements. It should also allow for special attributes incorporated by the plan such as awards granted based on seniority or role and vesting based on time and/or company performance.

Other attributes to consider during the software selection process include the following items along with related questions:

Flexibility – Does the software have the ability to handle different types of awards and related activity (e.g. restricted stock awards, restricted stock units, stock options, dividends, taxes, amortization, modifications, etc.)? Is it easy to translate equity-based compensation plan changes into the software?

Scalability Can the software continue to meet your needs as your company grows?

Internal systems integration Can the software integrate with your general ledger system to produce monthly uploads? Are there other accounting or project management systems with which it needs to interface?

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?

Compliance Does the software facilitate proper and timely accounting and account reconciliations to support quarterly reviews and annual audits, as well as documentation to evidence compliance with SOX?

SEC filing support For publicly-traded companies, a cloud-based equity accounting solution should be able to provide information to support footnote disclosure in forms 10-Q and 10-K, as well as the annual proxy and 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 Statement on Standards for Attestation Engagements, or SSAE 16, report (from their auditors) at least annually 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?

A Compelling Benefit, Made Easy

With your equity-based compensation plan “in the cloud,” you’ll take the headache out of offering this key employee benefit and only wish you’d made the transition sooner.

If your team is spending too much time on equity-based compensation plan administration, 8020 can help you select a new cloud solution and work with you to make the transition seamless. Reach out today, and one of our consultants would be happy to answer questions and discuss options.

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About the Author

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 has provided guidance to numerous clients regarding selection, infrastructure design, implementation and management of cloud-based software. Most recently, he provided project management for a cloud-based software implementation a solution that delivered significant time savings and improved data accuracy across his client’s accounting, legal and tax departments.

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