Financial Analytics & Derivatives Services Stock Compensation

Financial Analytics &
Derivatives Services
Stock Compensation
Of late, companies have been fighting for talent and consequently, have been working on ways to design compensation
strategies that allow them to attract and retain the best talent. Along side it, companies have also been making attempts
to better align compensation with the performance and goals of the company and its shareholders. This has resulted in
companies re-working their existing employee-based stock compensation and designing new compensation plans.
Accounting Standards Codification 718 (ASC 718)
PwC’s Financial Analytics &
Derivatives team includes
professionals who hold
advanced quantitative
degrees in business,
economics, finance and
mathematics. We have
access to state-of-the-art
tools, technologies and
models to assist your
company with the most
complex financial
instruments and
valuation challenges.
Administering and valuing stock compensation is a fairly complex undertaking for most
companies. ASC 718 Compensation – Stock Compensation provides guidance on
accounting for employee stock-based compensation and mandates the recognition of
equity-based employee compensation as an expense. Also, valuation of equity-based
employee compensation is necessary in the context of tax compliance and impacts the
calculation of earnings per share and presentation of cash flow statement.
ASC 718 applies to all stock-based compensation when a company acquires employee
services by issuing its stock, stock options, or other equity instruments. It also applies
when employee services are acquired by incurring liabilities whose amounts are based on
the price of the company’s stock or other equity instruments or incurring liabilities that
may be settled through issuance of the company’s stock or other equity instruments.
Key challenges
• Getting the accounting right
• Choosing the right valuation framework
• Making the right assumptions
How PwC can help
The Financial Analytics & Derivatives professionals at PwC can help your company with the valuation of stock
compensation for financial reporting and tax. PwC provides independent valuation of stock options, restricted stock
units, stock appreciation rights, and other equity-based compensation awarded to employees.
•
We can help companies understand the valuation and accounting rules that apply to their current stockbased compensation plans.
•
We can help companies in reassessing the design of their stock-based compensation plans with a focus
on the plans’ overall effectiveness for stakeholders, while optimizing the efficiencies of these plans.
•
We can structure alternative plans, analyze the implications of each plan on the company’s financial
results, and assist with the development and implementation of a new plan.
Our skills
Our Financial Analytics & Derivatives team specializes in valuation of complex securities, financial derivatives, and
other contingent payments. We routinely perform complex valuations using Black Scholes, Lattice, and Monte Carlo
modeling. Our professionals have extensive experience in valuation for financial reporting purposes, tax planning,
and investment decision making.
Sample ASC 718 valuations
• Total shareholder return (TSR)
Plans that pay stock, stock-unit, or option awards based on a company’s TSR, as ranked within a peer group. Such
plans have been increasingly used with tax-rules and as incentive plans for “pay for performance” by shareholder
advocacy groups.
• Compensatory stock options
Comprised of options that vest based on continued service, performance conditions, or performance conditions tied
to stock price movements. Valuation techniques vary form Black Scholes to Monte Carlo modeling.
• Restricted stock and restricted stock units (RSUs)
Restricted stock is a share of stock granted to an employee for which sale is prohibited for a specified period of time.
RSUs represent a promise to deliver shares to the employee at a future date if certain vesting conditions are met.
Stock or stock-unit awards may vest based on continued service, performance conditions, or market conditions.
• Stock-appreciation rights (SARs)
A contract that gives the employee the right to receive an amount of stock (stock settled SARs) or cash (cash settled
SARs) that equals the appreciation in a company’s stock from an award’s grant date to the exercise date. SARs
generally do not involve payment of an exercise price.
• Long-term incentive plans (LTIPs)
Generally a cash settled plan that is earned by employees over a number of years. LTIPs are within the scope of ASC
718 if the amount earned by the employees is based on the price of the company’s stock or other equity instruments
e.g. a cash award earned by employees if stock price achieves a specified target in 5 years.
For more information contact
Pedro C. Santos
Principal
(415) 498 7317
[email protected]
Dwight Grant, PhD
Managing Director
(415) 498 8116
[email protected]
Tanuj Leekha, CFA
Director
(646) 471 5211
[email protected]
Marina Kagan
Director
(415) 498 8405
[email protected]
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