Drive Operational Excellence with Equity Process Assessments
Administering equity compensation plans in a publicly traded company is inherently challenging, particularly for organizations experiencing rapid growth or those that have recently undergone an initial public offering (IPO).
The introduction of the SEC's T+1 requirement—mandating that shares be released to employees within one day of vesting—has intensified the need for streamlined processes within equity compensation. Errors in payroll and equity reporting can lead to costly fines and reputational damage, while resource constraints often hinder timely and accurate processing.
Organizations must now tighten their share release cycles, establishing processes that are efficient and error-free. Explore how equity process assessments can help organizations identify inefficiencies, mitigate risks, and enhance overall performance.
Key Challenges in Equity Administration
Several challenges can hinder effective equity administration:
- Tightened Timelines. The T+1 requirement has reduced the timeframe for processing equity releases, leaving little room for errors.
- IRS Remittance. Companies face stringent IRS requirements, especially when income exceeds $100,000, requiring remittance within 24 hours.
- Resource Constraints. Administrative functions often operate with limited staff, leading to increased workloads and potential oversights.
- Complexity of Processes. The growing variety of compensation types and the involvement of multiple stakeholders add layers of complexity to equity administration.
- Stakeholder Pressures. Stock administration teams must navigate demands from various departments, including payroll, accounting, and HRIS.
Why Equity Process Assessments are Needed
The primary goal of an equity process assessment is to help companies identify potential areas for improvement to support complete and accurate record-keeping throughout the lifecycle of stock issuance. This is crucial as companies often issue stock to employees for extended periods, often ranging from one to four years, with options sometimes remaining outstanding up to ten years after issuance. The systems tracking this data can be challenging over time.
The complexity of tracking these equity grants can lead to errors, which can have significant repercussions, including erroneous payroll reporting and the potential for costly fines. Fines can occur on the corporate side for submitting the income taxes collected for the employees and fines related to issuing an incorrect income statement for the employee, such as the IRS Form W-2.
Equity Process Assessment Framework
An effective equity process assessment can be broken down into four key phases:
- Discovery. This initial phase involves defining the scope of the assessment and gathering insights from key stakeholders. Interviews and discussions help uncover pain points and areas for improvement.
- Documentation. The information gathered during discovery is documented, often using visual aids like swim lane diagrams to illustrate processes. This documentation serves as a foundation for understanding current operations.
- Review. Stakeholders review the documented processes to ensure accuracy and completeness. This phase allows for the identification of risks and potential solutions.
- Presentation. Finally, the findings and recommendations are presented to senior stakeholders. This presentation should emphasize the risks associated with current processes and the proposed solutions’ return on investment (ROI) .
Equity Process Assessment Outcomes
The deliverables from an equity process assessment typically include:
- Executive Summary. A concise overview highlighting key findings and recommendations.
- Flowcharts. Visual representations of current and future state processes, illustrating pain points and areas for improvement.
- Pain Point Matrix. A detailed breakdown of identified issues, their impact, and potential solutions.
- Recommendations. A prioritized list of actionable solutions, complete with estimated costs and timelines.
Who Should Conduct the Assessment
Organizations can choose to conduct the assessment internally or hire third-party experts. Internal assessments use existing knowledge of processes but may lack objectivity, while third-party assessments offer external expertise and neutrality, though they require time for ramp-up. The choice between the two should depend on the complexity of the equity processes and the available resources.
Next Steps
By systematically identifying inefficiencies and implementing targeted solutions, companies can streamline their equity administration processes, mitigate risks, and improve overall employee satisfaction. Furthermore, as the regulatory landscape continues to evolve, investing in an equity process assessment will be crucial for maintaining compliance and achieving long-term success.
We’re Here to Help
To conduct a comprehensive assessment of your company's equity processes and identify gaps or enhance your equity compensation strategy, contact your Moss Adams professional.