March 16. 2022

Changes in existing equity incentive programs

This article sheds light on some of these issues and provides tips on how to proceed to make changes to the share payment program.

The share price development does not always go as one had imagined. Then you may realize that the structure of the share payment program is not optimal. 

 

* It is important to note that each case must be considered separately and that it is often recommended to involve a lawyer to ensure that one acts in accordance with applicable law.

 

What could be wrong with your share payment program?

The share payment program may have been well adapted to the premises at the time of creation. Then the development may have changed the conditions:

  • The exercise price of the options is far higher than the share price. You realize that it is very unlikely that the stock price will exceed the redemption price before the option expires.
  • The company is in a situation which means that shares cannot or should not be sold to cover the redemption price and / or tax (see article on financing the redemption price and tax).
  • There is a need to change the time aspects of the share pay program, for example because the "project" has taken longer than first assumed, or it is realized that it is not possible to transfer the shares before a later date.
  • The objectives associated with the performance shares are no longer relevant, or you may find that they were not realistic in the first place (see article on performance shares).

We often receive questions related to such challenges. Is it possible to make changes? What accounting consequences can this have? How will owners and stakeholders view such a scheme?

 

We mainly discuss these issues here in the light of option schemes for employees (Read more about options). But it is also partly relevant for several other types of instruments.

Let's get to the answers.

 

Is it possible to make changes to stock pay programs?

Most often yes. As long as the proposed change is not negative for the participant (in which case it must be accepted individually - something we recommend anyway). Furthermore, you must have an overview of the general meeting resolution for the program, as you can not make changes that conflict with this (in which case it must be up to a new general meeting). When you have control over all this, the change can as a general rule be approved by the board.

 

Note that this presupposes that the general meeting has adopted a program with defined overall frameworks, and that it is the board that implements and "owns" the program. It may also happen that there is information in planning documents, "Terms and Conditions" or agreement documents that come into play and make the process either simpler or more complicated.

 

How will changes affect the accounts?

 

Companies that do not keep accounts in accordance with IFRS (the accounting standard used by Norwegian listed companies) operate without accounting costs related to their share payroll program. Then there will also be no costs of changing the program (in addition to any higher employer's contribution as a result of higher profits).

If, on the other hand, you keep accounts in accordance with IFRS, a change in the program will most likely entail increased costs.

For example, if you increase the life of options - ie move the expiration date forward in time - you will have to make a calculation according to the valuation method Black and Scholes, with "old" and "new" expiration date (or expected redemption date) to identify the added value / cost of the change . This surplus value must be expensed from the change date to the vesting date.

The same principle applies if you lower the redemption price. You then make a calculation with the "old" and "new" redemption price and then enter the surplus value / cost in the time period from the change date to the vesting date.

This principle, where you add the increase in value to the costs and carry this increase over the remaining vesting period, applies to most modifications.

 

How do changes in the program affect owners and other stakeholders?

Here, there are no right answer.

If, based on the share price at the time of allotment, a requirement was set that the redemption price should be, for example, EUR 10 - based on an expectation that if the shareholders make money, the employees will also make money - then a reduction of the redemption price to EUR 3 based on the share price one year later likely to meet opposition from shareholders.


At the same time, the company must always keep its eyes on the future. You must ensure that attractive and important employees have good incentives to stay and do the work that is needed to reach the company's goals.

With these two contradictions in mind, based on the company's history and point of view, you must begin a process that hopefully lands a solution where the shareholders do not feel that they are just "giving and giving", but which gives the feeling that shareholders share interests with management going forward.

 

Some methods for this can be:

  • Do not lower the redemption price all the way down to the market price.
  • Take away some options. For example, by doing one calculation of the value of the option with the old redemption price and one calculation with the new redemption price - and then finding a new number that gives the same total value on the option package. This is to compensate for the fact that you have not achieved "old goals", but at the same time ensure that the options you are left with have an opportunity to provide some value. Here it is important to note that the total compensation must be thought through as there can quickly be a very low number of options left.

 

How do I proceed to implement the changes in the share pay agreement?

In order to get through this type of change, it is often important to have good preparation. Some key elements can be:

 

  • Examine what others in similar situations have done and include this in the evaluation and decision basis.
  • Calculate the consequences the modifications will have, preferably with sensitivity analyzes for different alternatives and scenarios.
  • Coordinate the proposal and spar with key people both internally and externally to ensure that the proposal takes into account the purposes of the program. If you have your own compensation committee, it is of course important to discuss the changes here. Then you make elaborate material and argumentation based on the points above so that it can be considered and - hopefully - adopted by the board.

 

 

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