It’s that time of this new year to start thinking about updating your stock based compensation for fiscal year 2014. If you’ve been keeping up with quarterly activity and updates, you are already ahead of the game. Regardless, there are several things to keep in mind to ensure your stock-based compensation expense is accurate and up to date. We highlight a few of the bigger items you can incorporate into your yearly checklist for stock-based compensation.
1. Forfeiture Rates: Is this updated? Are you using a rate and if so, are you allocating by employee type? Normally, allocating expected rates amongst executives vs. non-executives is a good basic approach to bifurcation. The assumption is that executives would normally stay on longer with the company and thus have a lower forfeiture rate.
Running actual forfeiture calculations on historical grants/awards will give you a better idea of expected rates, but this assumes a long enough history with a relatively sufficient amount of terminations over the years. If you have an unusually loyal workforce with relatively zero termination activity, using a low flat rate should be fine. With fairly new plans, determining a good rate is difficult, and so, the consideration of even using a forfeiture rate should be kept in mind.
2. Volatility: Is this updated? If calculating for a private company, are you using the most recent 409A valuation to update public peers? If you’ve recently gone public, you probably won’t have sufficient price history for the look-back/expected term in question. If not, continuing to run with public peers that have a sufficient history is a good option.