As the COVID-19 pandemic continues to financially impact companies worldwide, employers have been working to implement creative compensation strategies to mitigate the financial impact on their workforce, continue to incentivize employees and reward on-site essential workers. While cash is king, equity awards have long been a key component of an overall compensation and benefits strategy for many companies, from small to large, private and public. In difficult economic times such as these, granting equity awards can help companies save cash while filling a compensation gap created by salary reductions, unpaid furloughs or decreased benefits. Equity awards could also soften the blow to employees losing their jobs due to layoffs and redundancies resulting from an employer’s Coronavirus-related financial losses and cost-cutting measures.
“Pandemic Pay” and Severance Packages
Some companies are using equity awards as “pandemic pay” in order to save cash, whether to provide a bonus to on-site essential workers or to compensate for unpaid furloughs or reduced salary, even in countries where government subsidiaries pay a percentage of employees’ salary. Some are considering to use equity awards to make up for a reduction of traditional benefits, e.g., pension plans, company match on 401(k) contributions. In that regard, a number of U.S. multinationals are deviating from their normal grant practices to provide “additional” equity benefits to employees. For instance, companies that make value-based grants (whereby the number of awards is determined by setting a flat dollar value for each employee and dividing it by the fair market value of the company shares at grant) could change the timing of their grants to take advantage of lower share prices, which would of course result in a greater number of shares being granted to each employee. The rationale behind this approach is that once stock markets recover, the aggregate value of all of their shares would be greater than if the company had adhered to their typical annual grant practices, simply because the employee has more shares. Another possible approach would be to make special off-cycle grant(s), to make up for unpaid furloughs or “top up” government financed furloughs that pay only a percentage of employee salaries.
Equity awards could also be used as a component of severance packages for employees and other service providers who have been laid-off due to the company’s financial hardships. This approach could involve providing for continued vesting post-termination where the award terms would otherwise provide for forfeiture of unvested awards or a limited period for exercising vested options, or perhaps even grants of additional awards. Another alternative would be to provide for immediate vesting of unvested awards upon termination. Please note that extending vesting post-termination would likely be considered a new grant, which would give rise to accounting and other potential issues. Therefore, a company should further assess before providing additional severance via continued post-termination vesting, depending on the countries involved.
Furloughs – Continued Vesting?
It is common practice for U.S. multinationals to condition the vesting of options and restricted stock units (“RSUs”) on continuous service, and accordingly, suspend vesting during a leave of absence. However, many companies allow awards to continue vesting if an employee is on a statutory leave of absence (e.g., maternity leave, disability leave) that is protected under local law.
The novel Coronavirus presents a novel issue of whether furloughs due to the pandemic should practically be considered a type of “protected” leave during which vesting of outstanding equity awards should continue. The treatment of COVID-19 related leaves vary by country, depending on special government implemented and financed relief measures, whether employees’ wages are covered in part or whole, provided relevant requirements are met. (For some examples, please see our blog “Reducing Salary Costs Across the Globe – An Overview of COVID-19-Related Work Hour Reduction and Furlough Schemes”). In the event the company is putting employees on unpaid furloughs to avoid mass layoffs, or relying on government subsidies that do not pay the employees their full salary, equity vesting continuation (or even acceleration) could mitigate the negative impact on the employees’ morale and finances. Vesting continuation could even serve as a type of “top up” on partial salary without triggering any potential loss of government benefits in most instances. Most of the COVID-19 related regulations affecting compensation, including government payment of salary expenses, relate to cash compensation.
Note that if the relevant equity award agreement provides that vesting is contingent upon continuous service, a company does not necessarily have to obtain the employee’s consent for not enforcing the relevant provision, because the change is favorable to the employee. Generally, employee consent is only needed for changes to award terms that are adverse to the employee, especially to mitigate the risk of any potential claims.
Limitations and Legal Requirements
With any of the above approaches, the company should check whether the terms of the relevant equity plan and award agreement provide for Board, Committee and/or company authority to implement these changes. In addition, if any off-cycle or special equity award grants are made as part of a COVID-19-related compensation strategy, it is important to evaluate the potential impact on the plan share pool, being mindful of the “burn rate”, i.e., how quickly shares authorized to be issued under the plan are being used.
For grants made outside the U.S., a company will also need to determine any securities, foreign exchange or tax filings or other compliance actions that must be completed before grants can be made or soon after grant. For instance, Japan requires securities filings depending on whether options and/or RSUs are granted and whether an employee stock purchase plan is offered, unless an exemption applies or certain thresholds are not exceeded. Another example is Malaysia, where a notification must be filed with the Securities Commission within a certain period after grant materials are communicated to employees (although many companies take the position it is not necessary unless there are material changes to the corresponding equity incentive plan). A company must also consider whether any thresholds for securities exemptions being relied upon will be exceeded with the additional grants. For example, if there are more than 20 individuals in Australia who are granted equity awards in any given 12-month period, a disclosure document and notification must be lodged with the Australian Securities and Investments Commission. Note that the requirements can and often do differ for grants to consultants and non-employee directors as opposed to grants to employees.
U.S. multinationals will further need to consider that regulatory bodies may have implemented special procedures in light of lockdowns in their countries, and may have reduced capacity and systems. On the other hand, many authorities have extended filing deadlines in light of the COVID-19 crisis, but a company must be mindful that the authorities may revert to normal operations by the time grants are made or soon thereafter. As with other COVID-19 related matters, filing and other compliance formalities are subject to change depending on developments in the relevant country.