SEC Comments on Grant-Date Fair Value Discount for Share-Based Awards with Post-Vest Holding Periods

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We have noted a recent trend in incentive compensation practice regarding the inclusion of a Post Vest Holding Period as a provision in new awards. Post-Vest Holding Periods (PVHPs) require that any shares acquired as the result of the exercise of an ESO or the vesting of a TSR must be held for a specified period of time before they can be sold. Such provisions may result in a decrease in the fair value of the award, and afford an opportunity for the exercise of claw-back provisions if these become necessary.

Institutional Shareholder Services (ISS), in their Equity Plan Scorecard adopted in February of 2015, awards points for the inclusion of a PVHP provision in executive compensation programs. For this among other reasons, PVHPs are receiving increased attention. ASC 718-10-30-10 states “The post-vesting restrictions should be considered when estimating the grant-date fair value of the award.” In our valuations of share-based awards which include PVHPs, we have used techniques appearing in the academic literature to estimate the discount.

This practice was called into question on December 9, 2015, when Mr. Barry Kanczuker, Associate Chief Accountant of the SEC, in an address before the AICPA, cited ASC 718-10-55-5, which states that “… if shares are traded in an active market, post-vesting restrictions may have little, if any, effect on the amount at which the shares being valued would be exchanged.” Mr. Kanczuker further stated, “With that being said, I would encourage you to consult with the Staff if you believe that you have a fact pattern in which a post-vesting restriction results in a significant discount being applied to the grant-date fair value of a share-based award.”

Note that on the SEC website, Mr. Kanczuker’s remarks are preceded by the disclaimer:

“The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.”

Although these comments are vague and non-specific, we urge our clients to be aware of the SEC’s public statements. We welcome your questions concerning your specific awards, either existing or proposed.

April 1, 2016

About the Author:

Greg is a Derivative Valuation Consultant with Montgomery Investment Technology, Inc. He holds a BS from Carnegie-Mellon University and a PhD in Chemical Engineering with a concentration in Applied Mathematics from Princeton University. His experience spans management at both public and privately held companies, as well as teaching finance at the university level. Greg is a Chartered Alternative Investment Analyst (CAIA) and a Financial Risk Manager (FRM)