Equity Unpacked®: The Stock Plan Administrator's Podcast

Amy Reback: Welcome back to Equity Unpacked, everyone. I'm your host, Amy Reback, from the Stock Plan Services team at Charles Schwab. And today I'm thrilled to have a highly anticipated special guest with us on our equity adventure to unpack the art and science of creating metrics and measuring success of your equity program.

She's a celebrated expert in the equity compensation world, the one and only Wendy Jennings.

Wendy, welcome to the show! We are so excited, in case you couldn't tell, to have you today.

Wendy Jennings: I'm thrilled to be here, Amy. Thank you.

Amy: Absolutely. Okay, now, fellow travelers, let's just review our roadmap today and maybe retrace our steps for a moment.

A few months ago, we did a Quick Takes episode on measuring success, with "quick" being the operative word there. And in that short episode the overall message was you have to know what you're trying to achieve before you can actually create metrics and analyze data. So as a provider, we see a lot of requests for analysis but not really a ton of clarity on what really needs to be analyzed.

So, hopefully, since then you've all had a chance to get some perspective on that for your own programs. And now we have Wendy here to unpack some of the specifics, based on her tremendous experience.

Now, Wendy, as we start our journey, in my mind I'm imagining that I've, like, snuck into first class, and I'm gonna spend a little time with you. In case you couldn't tell, I'm having a bit of a fangirl moment. And, I mean, you are truly nothing short of royalty in the equity compensation world. So, before we start, I'd like to do a review of your achievements, your bio, to introduce you to our listeners. And while I do that I'll just try and keep breathing, if that's okay with you.

Alright, Wendy Jennings, you received your Certified Equity Professional designation, or CEP, as we say in the biz, in 1993. And you have over 25 years of equity compensation plan experience in literally every aspect of plan management, compliance—we have to breath when we say "compliance"—and administration of global equity plans in over 90 countries. I also happen to know that you're an expert in administering payments through the China SAFE program. I saw you speak on that a few years ago in such incredible detail. It was really impressive.

You're an expert on IPO prep, plan analysis, design, implementation, system conversion, Section 16 reporting, insider trading compliance—this is where we breathe—proxy prep filing, mergers and acquisitions, tender offers, stock options, RSUs and RSA programs, employee stock purchase plan compliance—breathing—and administration. Plus employee communication and education programs.

You've been honored for your contributions to the equity compensation industry with the NASPP Individual Achievement Award in 2005 and were appointed as a Fellow Global Equity by the Global Equity Organization, or again, GEO, in the inaugural class of fellows in 2019. In Amsterdam, no less.

And, I mean, you're just getting started, right? Wendy, this is just a few things. It’s like a . . .it's a taste. Right?

I'm wondering if maybe you have more than 24 hours in your day. And by the end of the show, if you could share that with me, what your secret is to unlock that, that would be awesome.

Okay, on to our topic—defining metrics and measuring success!

Wendy, are you ready to unpack?

Wendy: I am ready.

Amy: Okay, here we go.

Wendy: Let's do it.

Amy: Alright. So can we start with your perspective on how important it is to define metrics and then how you look at measuring the success of an equity program? What does that look like for you?

Wendy: Well, I think it's really important. And I think it's an area that has really been ignored. When you start to look at metrics around your equity plans, it starts to tell a story. And without doing that, you don't know what story your equity plan is telling you. And if you have a good story, you want to be able to tell that. But if your story is telling you that you have issues with your equity plan, you need to know that. You need to pivot. You need to figure it out. And I think it's really important. And I think every company should do it.

Now, most of us in the equity world are doing our day jobs, and we don’t have a lot of time for this. But once you start to get your head around it and start to do it and then start to update it, it gets easier. And then the stories start to develop.

So I think it's really important. I think it should be top of mind for leadership. And I don’t think it has been. But I think we're starting to see it.

Amy: So, how do you make the case for that with your leadership. Let's say you put in some time, and you're starting to see the story develop, and you’re not getting the attention or, really, the importance that you need from them. But you really want to be able to demonstrate that this is meaningful data about your employee population. How have you approached that in the past?

Wendy: Well, I think it depends on what the data tells you. If you’re not getting your leadership's buy-in, then you’re probably not giving them the metrics that matter to them.

So metrics that matter: Data-driven metrics that can lead to good decision-making or strategic initiatives. Finding out what’s working, what's not working. You might discover issues that affect other stakeholders within your organization: your HR team or your payroll team or your tax team or your legal team. And so, if you're finding that leadership doesn't think this matters, then maybe you need to . . . First of all, that hasn't been an issue for me, in my experience. Most leaders do want to know how things are going. In fact, I think it is becoming more top of mind for leaders in the finance departments and the HR departments and the legal departments of companies because they want to know what’s working. They want to know what needs work. And you can’t determine that unless you start to measure the metrics. And digging in and finding out what the story is that those metrics are telling you. And the people that manage these stock plans day to day, they're the ones that know the what and the why once they do look at the data. And so, I think this gives an opportunity to people in our field to highlight the wins, accept losses if you story's telling you that something’s not working. But then show that you’ve got the initiative to pivot and to make things better.

So I think they will be open to hearing this. And, again, it just depends on the story that you're seeing.

Amy: Based on your experience, your tremendously deep experience, what's the top reason that employers offer equity programs?

Wendy: Well, the main reason is to attract and retain. Right? And that's all in the data. Do you work at a company that's having success in attracting people? Or are you losing people to other firms? Well, maybe your grant practices aren't in line with industry standards. Or maybe your grant sizes are too low. Or your ESPP plan isn’t as good as the one down the street.

Or are people sticking around? Are they really praising what's happening? Are they getting the bang for the buck out of their equity awards? Well, good! Then maybe your plan design is working, and you want to keep it up. Don't make changes, cuz things are working. So I think that's really important.

Amy: So examples of other data or things that you could show leadership. Have you experienced situations in the past where there's money that can be saved within the plan? Are there taxes that the company is paying, that maybe if they changed the plan a little bit maybe they wouldn't have to do that? What else would you say based on your experience that you could do or show value to your leadership teams?

Wendy: The thing that comes to mind on that is international compliance. Because if you show that your compliance review is . . . or your filings that are due, if they're not on time that can cause penalties. If they're done incorrectly that can cause a problem. Or if you can find . . . I'll give you a good example—and you mentioned China before.

The last company I worked for, we had a ton of China filings that we had to do. And we had to do so many because we made so many grants in China. If they would have, instead of making multiple grants every month and did it every quarter or once a year, it would have saved a ton of money. So that's an example of how your metrics can lead to redesigning how you do things in order to save money while still being compliant.

Amy: That's a really good example. Although I did hear you say "compliance" like four times, and you didn't breathe, so I just want to make sure you're okay. You doing alright over there?

Wendy: Compliance doesn't scare me. Compliance is top of mind.

Amy: It is!

Wendy: If you're compliant, you don't have anything else to worry about.

Amy: That's right! It's just getting there sometimes . . . oy!

Wendy: That is true. That is true.

Amy: What do you think . . . when you look back, what do you think are the most effective metrics that every plan should have?

Wendy: Well, I think the most impactful ones are the ones that look for problems. Because you want to identify if there are any problems and fix them. So is everything on time? The filings that you’re doing. Do you have any need to make corrections? If so, why are you making those corrections? Was it because you had bad tax data? Or was it because you had bad HR data, and somebody terminated the company, but nobody told you? Or it just didn't get put in in time. And then maybe you issued some equity to somebody, and they had an RSU that vested, and shouldn't have.

Look for the things that can cause problems. That's the most critical. Cuz, again, you want to be compliant. And if you have those problems, you’re not going to be compliant.

And then on the other side, it's like . . . I think the other things that are important are the metrics that can tell you how well people understand your plan. And are they getting the most bang for the buck? So your ESPP percentages. Participation percentages, for sure. If you have a great plan, but your percentage is low, there's probably a story about why it’s low. Is it because they don't understand it, and they didn't have education around it? And typically, that's what I have found. If you dig into the data, your systems as a vendor will help you figure this out pretty easily. You can determine what those metrics are and what needs work. At my last company, I dug into the data around this, and I was able to target those education sessions and get percentages up for people participating, which gives you the bigger bang for the buck, which then goes back to the retention aspect: People are more happy, right? Because they're getting more bang for their buck on the benefits.

And then there's a ton of metrics that you can capture. But I think those are the most important ones—the ones that can look for a problem or the ones that can show you how well things are operating.

Amy: When you think about those things, and you've got the data. But there’s also feedback that you should probably solicit from people who are buying those ESPP plans or the employees that you’re granting to. So how would you go about getting feedback and/or other information for your plan, outside of the data part?

Wendy: Surveys, of course. And then also, when I was at my prior company, I really dug into the HR support questions that were coming in. And what are people saying? What are they asking? A lot of times their questions can either tell you that they really appreciate your plan, but maybe they don’t understand it completely. So, okay, let's do some more education there. Are they confused? The questions that those participants are asking really tell you where they're at—with their sophistication level, with their understanding, with their appreciation of the plan. So, I think if you can dig into that, that's great data to get. I know for a lot of companies, they don't have the resources for that. But if you can get it somehow, you’re going to learn a lot. If you can do surveys, you’re really going to learn a lot.

At my prior company we did, for example, when we had an M&A deal and we were bringing in acquired employees, we always did a survey: How well did you understand our equity plan that we just told you about? They provided feedback to us, and we were able to use that to make our program better or to make our education session better. So I think surveys, if you can get it in a case volume and subject matters that they’re asking about, for sure.  

Amy: Do you typically use different methods of communication, as well—like sessions, emails, texts—whatever the different options are for you, just understanding people learn and absorb information at different times. They miss emails! I see that all the time: People miss emails!

Wendy: It's a combination. I think FAQs go a long way. My current company, we're doing a ton of FAQs. In my experience, I've had the opportunity to build out FAQs on every topic you can imagine.

Amy: I can imagine, yeh.

Wendy: But they're really, really helpful. And I when I create an FAQ, I try to put my mind in the mind of a participant that knows nothing about equity. And I ask myself a question, and then I answer it. I try not to get too technical. I try to speak to them in a way that's easily understandable and try not to use too much legal speak or stock lingo. But I think FAQs, sessions . . . I do an education session—I've done this at many of my companies I've been at—where I present the fundamentals of all of our programs, but I open it up to anything stock related. You could ask a question, "How's the stock market work?" It can be anything stick related. So I think you need to do a combination of things. And every company’s different—what people like and how they absorb information.

Amy: Mmhmm. Now it's super interesting, just the number of people that are in the workforce right now. And I think it’s like 55% of them are younger, maybe millennials or even starting to get Gen Z in there. And we had our intern class, here at Schwab, from last summer create kind of an approach of what they would like to see for people specifically their age, on education for benefits and stock plan and things like that. And one of the things they said—we always think, well it has to be easy, and it has to be computer-based or phone-based because they grew up with these iPhones in their hand, which was not my experience. But they took it a little further—and I thought this was a super interesting perspective—that it’s not just because we grew up with phones in our hands, they said. It's because at this stage in life everything is new. Everything is hard. And if I look at something that's hard, or it's new to me and it looks hard, I just can't. Everything I've done today is hard. And everybody that I'm around seems to know more than I do. And I'm just kind of done with that for the day. I only take so much, people! (Laughs.)

So I thought that was a really interesting perspective on making things easier just because it's so overwhelming to be that age and have every single thing you do—paying rent, paying your bills for the first time, owning a car, your mom's not getting you up to brush your teeth and do your laundry. It’s a lot!

And I thought it was really interesting from our perspective on what we need to do for those . . . education . . . there's such a different generation. And people in general absorb differently, but particularly it's important to pay attention to what people’s experiences are at a certain stage of life to make sure you're providing the right channel and the right information at the right time. So . . .

Wendy: Totally agree. I was at another company where we did these very short videos. Something that somebody could just click on and learn a little bit about how the ESPP worked or a little bit about how RSUs worked or little bit about how to open up your brokerage account. Short, sweet, to the point. That's what you need for employees that want to learn that way. But then, Amy, I've had other people who want to dig in so deep to the tax aspect of equity transactions that I've had to almost pull it back. They want to just get into the weeds. And I can do that. And I've done that. So you have this balance of people—the group you just talked about—and then the other group, who really want to be able to understand the minutia.

Amy: Mmhmm. Oh, I know, yeh.

Wendy: So there is a balance. There is a balance.

Amy: Yeh. I really hope you didn't give them my phone number when they said they want to dig into the minutia of the tax stuff. I have to change my name, if you did.

Wendy: I will next time!

Amy: Okay. Okay, great! That'll be great. Thanks.

Okay, let's talk about once you get the data and you get the indicators back, have you ever seen anything that contradicts itself? And if you have, what do you do?

Wendy: Oh, that's an interesting question. Contradict itself.

I don't really think I have because when I’ve looked at the data, things do end up making sense to me.

In stock, it's pretty black and white, as far as, if you do X, you can expect Y. And so I don't think I've seen anything that contradicts. But I guess if you did, if you had something that didn't make sense, it's probably an issue that you need to uncover. Because in my equity world, things typically do make sense. Like, when you see a metric—I'll use ESPP again as an example—if you see a country that doesn't have a high percentage, oh, well it makes sense. They never had an education session, so they don't understand it. Or if there's a lot of questions coming up on an RSU vesting . . . oh, and your company just started granting them six months ago, so no one’s experienced a transaction going through that before, that would make sense.

So I guess if somebody did see something that contradicted itself, there's probably an issue. You need to uncover it and dig a little deeper.

Amy: Hmm. Numbers don't lie.

Wendy: They don't! And they usually do make sense.

Amy: You have to be kind of a sleuth, though, to really dig into that and say, "Okay, that's . . ."—if it's something you didn't expect, and then you have to look layer by layer and see where it's coming from.

Wendy: That's right. Yup. For sure.

Amy: So you've talked about what would you do going in, and you can't really compare it to something unless you start to see that data year over year, quarter over quarter, and it starts to tell a story. So that sort of leads me to believe that there’s different levels of that. Is there an elementary school version of what you should be looking for? A middle school version, where you have information and you have it to compare it to, and you're starting to really build out the reporting and maybe change some aspects of your plan, based on what you’re seeing. And then is there PhD, Wendy Jennings eightsque level of metrics that we would be looking for?

Wendy: Well, I think yes. I think there are basic metrics, and there are the more strategic metrics that you can look at. And you've got to start somewhere. For me, I kind of look at it with the . . . what are the metrics related to employee impact? Those are the metrics that can tell you what you need to do to get more people to participate or improve their education so they understand it.

Then you've got the board's impact. What do they want to know? What do they want to see? And maybe that’s the PhD version—the burn rate, how's it going, are you totally out of whack, are you [unclear] budgets, are you continually over budget? If so, why? Your grant practices need to change if that’s the case. Your grant ranges need to change if that’s the case. Or maybe your recruiting team needs to be reeled in, and say, "Hey, stop making these offer letters with these numbers. They’re too high, cuz we keep going over budget." Or getting ready to get new shares into your plan.

Those are all definitely the more higher strategic compensation–committee-type of metrics that you want to keep your eye on. But all of the others, I guess the middle school version, those are really the operations of your plan.

How are things going? And how many corrections do you have? Are your participation rates in your plan what you expect? Or are they declining? If so, why? Are they losing faith in your plan? What’s happened? Maybe you have a plan that's kind of out of date? That has kind of the old-fashioned terms and conditions. And maybe you need to bump it up a bit. Because that’s quite frankly, that's going to help with retention, too. Cuz, again, they're gonna go down the street if they see something better, if your benefits start to get out of whack with new industry norms.

So I think if using the analogy of middle school and PhD, I think that’s how I would categorize it. And looking at the more strategic metrics, that can really help elevate your career, too. If you're bringing all this to your leadership and saying, "Hey, look, I'm noticing X, Y, and Z," or "Let me prepare the board materials," and give them these metrics that they're looking for every quarter or every month, to start building your own career out, if you haven't done that before.

Amy: Mmhmm. Yeh, absolutely. Delivering value for the company. That's great.

Wendy: For sure.

Amy: Can you help us unpack the ideal state for getting that data that you’re looking for? Is all the info data exactly as it came from your vendor—understanding that we'll give vendors a little bit of grace because there's no system that's perfect? Everybody has their own way of wanting to do things, and there's no system that does everything 100% according to everybody's preferences. But what do you look for and think, "This is a really, really good setup"?

Wendy: Well, what I did at my prior company worked pretty well. We got some of the data from our recordkeeping system, from our equity system. And if there was something that you have that you don't think you can get from your system, work with your vendor because they may know of a way to get it. But I don't think there's a one-stop shop for all of these metrics. You need to work with your HR team. You need to work with your other internal partners. You also need to measure yourself against your own budget: Are you even keeping in line with your budget quarter over quarter or year over year?

So there's a lot of different spokes to the wheel of these metrics that you need to pull information from. You put it all together. That tells your story.

But you do need to have a partnership with your stakeholders in order to get all these metrics in place and then to work back with them to make these metrics improve, if they need improvement. Or to say, "Hey, these are great! Let’s keep it up. Our partnership is going well. We're doing it right."

So, again, that just depends on the story that it’s showing. But you do need internal partners. You need your external vendors. You need your systems. And if you have a team, you need the buy-in from your team to help you put all this together.

Amy: And when you do start putting it all together, do you and your teams have a preferred way of doing that? It's a lot of information coming through the funnel. Are they all masters at Excel? Or what do you do to consolidate it?

Wendy: Yeah, it's a combination of things. Some of it will be the basic old Excel and charts and graphs that you put together. Some of it is just discussing the number. You know, putting the number on a slide and saying "this is an important number, and this is why. This is what’s happening, this is the change, year over year, quarter over quarter." And you need to understand that. The worst thing that I think can happen, is when you present a number, but you don't know why it is what it is. You gotta be able to back it up and understand it. So when you’re presenting these metrics, if you're having help doing that, but you don't know the story behind it, you need to understand it before you try to tell the story to somebody else.

Amy: Yeah, exactly. And just, thinking as a business unit, you have to be able to say "this is how we support the business, and this is why." So whatever is most important to the business and what they're trying to achieve, if you can show how you're supporting that, I've always found that—not only does everybody understand what they do and how they contribute, it impacts engagement, elevates your career, helps the company understand where they can make the right moves . . . So that's top-tier—that's PhD-level stuff right here, Wendy Jennings!

Amy: All right, so before we return to home base, just to round us out here, can you share your top five that every stock plan administrator should consider for measuring success?

Wendy: Every stock plan administrator should understand their plan, understand the what and the why of the metrics—they need to know their plans inside and out. Sometimes you'll have a conversation with people, and they don’t know all of the terms of their plan—they say, "Oh, I don’t know, I have to look it up." That’s the first thing you should do when you go to a company: Get your plan, figure out the top provisions of that plan. Then find out what your company goals are, and are you aligning to them? And are you administering your plan in a way that connects to your key objectives and goals of your company? And have you created a mission statement for your group? And are you operating in a way that aligns with that? Which then should also align with the company's goals. So it all kind of filters down from the top, down into the stock team, as far as aligning your mission and your goals to the rest of the company. Because that’s why you’re there. You're there to administer the plan, to help—again, getting back to retaining and attracting those employees and providing the great compensation benefits that come from operating our stock plans.

Amy: And keep fighting the good fight, right, ya gotta keep fighting the good fight. Stock plans may be somewhat overlooked a lot of times by employers, but only because they don't really understand exactly what those numbers mean. Would you agree with that?

Wendy: I do agree. And you know, there's the old adage the stock teams are not always highlighted unless there's something going wrong. But this is a way to highlight all of the great work that the stock administration teams are doing, and the huge impact it can have on your employees. You know this as well, but many times employees’ compensation from stock is a lot higher than their salary.

Amy: Right, right.

Wendy: And so, it's a huge impact. And you want to make sure that it's top of mind for the leadership, and they understand everything that’s going on. And the stock team, too—how important it is for them to get it right. This is important stuff. It's legal and tax ramifications that happen if they don't get it right. And you want to make sure that you’re doing everything exactly the way you should be.

Amy: Yeah. Don't you think it's one of the neatest, or like super-interesting things about the role and being in the stock plan side of things is it is such a great crossroads between compensation and legal and HR and direct line to employees and how much you impact people’s lives. So in case anyone hasn't told you recently, for all of those stock plan administrator teams and all your heroes on there, and Wendy, of course, for you, you do a really amazing work, and it has a huge, huge impact on those employees, and like things that they never thought could happen. So that you have choices. That's really all any kind of compensation or money is—it provides you more choices. And people like choices. We know that, right, being in this industry? People like a lot of choices. It makes such a big impact on employees' lives. And it matters. Your work matters a lot. Super important.

Wendy: Thank you. And I totally agree. Some of the most rewarding comments I've seen over my years of experiences—when an employee comes to me and says "I was able to put a down payment on a house," or "I was able to send my kid to college," or "I was able to buy a car for the first time." And that's great. That's where you know the work that you do matters, and it has a huge impact on these employees. So it is a rewarding career. And it's great to be able to help to make a difference in all these people’s lives.

Amy: Absolutely, absolutely. Wendy, thank you so much for joining us today and sharing all of your expertise with our listeners. I have been looking forward to this conversation for such a long time, and I can't express how much it means to me and to the team and to all of our listeners to have you share your very valuable time with us. So thank you! Really appreciate it.

Wendy: Thank you, Amy. It was a pleasure to be here. Appreciate it.

Amy: Thank you. So that’s the end of our journey today, listeners. Thanks for tuning in for this episode of Equity Unpacked with Wendy Jennings. If you enjoyed this episode, feel free to leave us a review. And subscribe to the show to get updates on new episodes. And stay tuned for our upcoming special guests and timely topics influencing the equity compensation world. Until then, safe travels, everyone.

For important disclosures, see the show notes, or visit schwab.com/equityunpacked.

Amy Reback: Welcome back, listeners! I'm Amy Reback, your host of Equity Unpacked. And we are going on a long-haul international journey once again today.
 

And here to help us unpack some of what's going on on the international front, both from a political side and from a financial services side, is Monica Protz, who is part of our team here at Schwab. She's our Director of Global Sanctions, which is a big job. And she's also our Anti-Money Laundering Officer for Schwab Funds. 

Monica, I couldn't ask for anybody more qualified or more knowledgeable to join this conversation today. So thank you so much for being here. Welcome.

Monica Protz: Thank you, Amy. Thanks for inviting me.

Amy: Of course, of course. We all know that I could not have this conversation by myself. But I really, before we dive into the facts, I think it's so interesting what's happened in just the last six months since we started talking about what we'd like to do and what we'd like to focus [on] on the international front with Equity Unpacked this year. And completely different now than it was just a few months ago.

If you look back since March, there's been exceptional conflict and tremendous political upheaval across the world, particularly with Russia and the Ukraine. There's supply chain issues. There's sanctions. There's all sorts of things going on. And then in the markets, that really affects things. There's inflation; there's, of course the supply chain has been a problem since last year. 

But trying to figure out what's really happening, what comes next. We hear a lot of words on the news and the things that are happening that we just can't really all make sense of if we're not an expert. So when I ask people, I think it's so interesting what their reaction is if you say, "Oh, my gosh. Did you ever think this would happen? Did you ever really imagine that Russia would invade the Ukraine?" And depending on who you ask and what generation they're from, you get a very different answer. And I think the millennials are very, very factual, right? And they'll say, well some of them will say, "Well, I thought we were friends." And then the others will say, "Well, yeah, Amy, they invaded the Ukraine like four years ago. This should not be a surprise." 

If you ask my parents, on the other end of the spectrum, they'll say, "Oh, yeah, I knew the whole time." Like this is not a surprise at all. 

And then there's something in the middle, between Baby Boomers and between the Gen X folks. So it's really interesting and fascinating to me how your initial kind of formative experiences and what the political climate was when you were a kid and you were growing up and kind of understanding the world really impacts how people view this issue and what their reaction is to it.

So I'll just ask our listeners, just watch for that, 'cause it's so interesting how people react to that question.

So let's go ahead and dive into the real meat of our topic today. And Monica, I'm going to ask you, for our audience, to give an overview on the developments related to the Russian sanctions and the effects that that could have on our corporate clients and their participants.

Monica: Sure, Amy. Over the past several months we've seen the U.S. and its allies impose unprecedented sanctions against Russia in response to the invasion of Ukraine. The situation rapidly developed earlier this year and continues to be very fluid.

Amy: So, Monica, who's involved in that? Is it all government? Is it the regulators for the market? Is it just U.S.? Is it international? Who imposes those sanctions? And how widespread is it?

Monica: Amy, the Office of Foreign Assets Control, or OFAC, is part of the U.S. Department of the Treasury. And it administers economic sanctions based on U.S. foreign policy international security goals.

In this case, the sanctions were imposed in response to Russia's actions in relation to Ukraine. And the U.S., in this instance, has collaborated with many other governments across the world. I believe there are 30 countries that have imposed sanctions on Russia at this point. 

Amy: And when did this start? I know we saw sort of an escalation, and I don't think anyone was surprised when we woke up that Thursday and there was all over the news that Russia had invaded the Ukraine overnight. But when did it really start?

Monica: The sanctions started in February and have continued to target investment in Russian debt and equity, Russian financial institutions, Russian oligarchs, and most recently, all new investment in Russia.

Amy: And when you say, "all new investment," that means corporate investment. That means not just the markets in debt and equities and things that you and I could buy, but investment banking and the whole entire spectrum of that, right, of investments?

Monica: That's exactly right. Trading in all Russian securities had been restricted since the market stopped trading Russian securities in early March. And then in April, President Biden signed an executive order prohibiting all new investment in the Russian Federation by U.S. persons. And just recently, OFAC issued new guidance that indicates that U.S persons are prohibited from purchasing both new and existing debt and equity issued by an entity in Russia. The prohibition doesn't require U.S. persons to divest of existing holdings—and, again, the securities aren't trading—but any divestment or trades would need to be to a non-U.S. person. 

So what that really means is that clients are allowed to divest or transfer Russian securities to a non-U.S. person. Or the alternative is to transfer to a like-titled account at a financial institution that will accept the shares.

Amy: So how does this actually happen? As a financial institution, I know what I experienced, and it was a whole slew of emails of what was happening and what was being implemented based on what was required by the government. But, typically, do financial institutions get official notice from the government? Do employers or anyone that does any kind of business, how do they know? Is it just like a broad-based message that goes out to anyone, saying, "Hey, this isn't allowed anymore"?

Monica: We do receive notice. However, we don't receive prior notice to when those sanctions take effect. So the results can impact clients very quickly. And in some instances, the sanctions take effect immediately after being issued. And in some instances, certain activity is allowed for a short time.

At Schwab, our response has been focused on two key areas: ensuring that the firm remains fully compliant with all sanctions and providing the best possible service to our clients in these uncertain times.

Amy: Okay. So, Monica, that covers financial institutions, or at least how we experience that process as a broker-dealer. But for our audience, I'm curious about the impact to employers. What challenges would you expect an employer and their employees to encounter as a result of these sanctions, specifically with paying out equity awards?

Monica: Amy, employers have fewer channels through which they can send payments to Russia or receive funds from Russia. The U.S. imposed sanctions on several Russian financial institutions, and that prohibits broker-dealers such as Schwab from doing business with those banks. And this means that clients are no longer able to transfer funds to, from, or through those impacted financial institutions. 

And then additionally, the U.S., EU, and other allies decided to disconnect several banks from the SWIFT payment messaging system. And transactions through those financial institutions are no longer possible.

So, from a sanctions perspective, participants could authorize payments to another individual just as long as it is not going to a sanctioned person or to or through a sanctioned financial institution or jurisdiction.

Amy: So when you say that participants could authorize payments to another individual as long as they're not on the no-no list, then do you mean from person to person? So if you and I were in that situation, I could receive funds and send it to you as an individual. As long as it didn't go through any of those institutions that were on the list or that had been blocked.

Monica: Right. Or you authorize your employer or Schwab to direct those payments to another individual.

Amy: I see. Okay. So let's just kind of break this all down into plain language, 'cause it is complicated.

Employers are going to work through—for equity compensation—through broker-dealers, because we're talking about securities for equity comp, and that issues equity compensation to their employees. If U.S. broker-dealers are not allowed to conduct transactions with certain types of financial institutions that have been sanctioned—and even more seriously, a lot of those institutions have been cut off from that SWIFT system (which, for those of you that are not familiar, the SWIFT system is kind of the main highway that international transactions take place across jurisdictions and across borders). So if that's the primary means of executing those international firm-to-firm electronic transactions, it's gotta be pretty difficult for employers to issue those shares to employees if the receiving account or bank with a foreign equivalent of a broker-dealer is sanctioned by the U.S. or one of the Western allies and not really able to access SWIFT. So kind of like a highway system that's been blown up. The destinations are still there, but the on-ramps and the roads to get there are few and far between. Is that a good analogy?

Monica: That's exactly right, Amy. That's one of the direct impacts of the sanctions and the events in Ukraine.

Amy: So what could come next? Is there a pattern of escalation with something like this? Are we in completely uncharted territory? Is there something we could pick up on from history to give us a clue?

Monica: Sanctions in relation to Russia are truly unprecedented in the way they have rolled out and how comprehensive they are.

And although I don't have a crystal ball, a potential possibility over the long term is that Russia becomes a sanctioned jurisdiction, just like North Korea, Cuba, or Iran, with an embargo against the entire economy.

Amy: Okay. So earlier you mentioned OFAC, which is the Office of Foreign Asset[s] Control. That's a U.S.-based institution. Whenever I hear "North Korea," "Cuba," "Iran"—that's OFAC. So are you saying that we could potentially see it escalated to Russia being on the OFAC List? 

We don't make those decisions, by the way!

But it could potentially escalate to that?

Monica: That's right. And I think what's really significant about these Russian sanctions is that over 30 countries have imposed sanctions and export controls on Russia. We've seen more coordination between the U.S. and its allies as the sanctions have continued to increase. 

Again, the U.S. sanctions apply to a U.S. person, no matter where you're located. But with other countries rolling out similar sanctions, it could become more difficult over time.

Amy: Yeah, so, even though the Office of Foreign Asset[s] Control is what we know from a U.S. domestic perspective, there are equivalents across the world that would impose or have imposed those same sanctions or could potentially escalate that. Do you feel like those sanctions are happening in concert? You said that they've joined the U.S., but are they all the same? Is it a united front?

Monica: They're very similar, Amy. There can be some differences. One example would be where maybe the UK sanctions different Russian oligarchs than the U.S. But to a substantial degree, we are working in parallel.

Amy: Okay. So, there's so much to unpack here. I don't even know . . . like, beginning, middle? It just starts to be Pandora's box. From these sanctions, do you think we've seen the last of it?

Monica: I think the way the conflict is progressing that this could be a longer-term impact. And so I don't see immediate pulling back on those sanctions. I think what we've also seen are more and more firms derisking and voluntarily making decisions to move operations out of Russia.

We saw that with Visa back in March, when Visa card transactions in Russia were discontinued. We've also seen other firms, examples include McDonald's and Starbucks, that have also made decisions about how to continue operations in Russia.

The other things I think we've seen from a broader economic perspective is the U.S. imposed a ban on all Russian oil and gas imports in March. And more recently, the European Union also agreed to ban or reduce Russian oil and gas. 

Amy: Oh, boy. Pandora's box just got even wider here. So I'm seeing a lot of headlines in the U.S, or just in the news or actually hearing it in podcasts when I'm driving to and from work these days, about inflation, about oil and gas prices, about the war in Ukraine and the sanctions. Do you feel like the war in the Ukraine is contributing to inflation and gas prices and all of those things? The volatility that we're seeing in the markets, the bear market we just entered? How do you feel that the sanctions are impacting the markets?

Monica: I do think that in addition to the investment-industry impact around securities, that we're going to see other impacts. One example is Ukraine is a top global producer of certain commodities, such as wheat or other natural resources used in computer chips or electronics. In fact, Ukraine is expected to harvest less than half of its usual grain this year. So I think there are some downstream effects from those sanctions. 

Amy: Based on your experience and your expertise, what do you think is the most important consideration for our audience here to consider?

Monica: Amy, these sanctions have evolved rapidly. And the firm doesn't receive advance notice. So clients can absolutely be impacted in very short order. We do understand that there is a significant impact on the client.

Amy: If employers and their participants want to learn more, what resources would you recommend for them to understand these sanctions and what's happening on a global scale?

Monica: Schwab has created a website and kept it up to date with the latest information on Russian sanctions and the impact to transactions and securities. You can find it at schwab.com/resource/Russian-Sanctions. Another great source of information on OFAC actions is the U.S. Department of Treasury's website. And you can find that at home.treasury.gov/news.

Amy: Awesome. That's perfect. Thank you. 

I'm curious to know, based on your experience and your role here at Schwab, what kind of questions do you think we should be receiving from participants? What do you think the reaction would be from an individual?

Monica: I think typically they want to know how they move money and how they invest their funds. And so there are sanctioned securities and then there's that broader market restriction on trading Russian securities. So I think those are the types of questions that we're typically seeing. We've even had specific securities that are blocked by OFAC, and that means that we have to freeze those. We can't allow the client to even hold them. So that's a very rare occurrence, but we have seen that sort of thing. And so I think those are typically the most likely questions that we're receiving and trying to address on that website.

Amy: I haven't seen that personally. I don't know that we would because we don't issue any securities that would have been affected by those transactions. They're all U.S.-based companies. But questions from participants that I would expect, unrelated necessarily to their equity compensation but more related just to their investments, maybe if they've diversified, is: So the sanctions happen; they're not allowed to hold or trade in those Russian securities. What happens to them? Do they just evaporate? Do we sell them off? Does any broker-dealer sell them off? What do the regulations require us to do with those holdings? 

Monica: So if a security is actually blocked or frozen by OFAC, we have to actually open up an internal escrow account, and we move those securities into that account, and we hold those until we're allowed to do otherwise. So, unfortunately, that's the most, I think, severe impact that can happen if a client happens to hold a blocked security.

Amy: And that's every broker-dealer is required to do that. 

Monica: Absolutely.

Amy: Is the function of moving it into an escrow account—where it's still labeled as "These many shares belong to this individual"—is the function of that to prevent any access to it?

Monica: That's exactly right. 

Amy: Okay. And would that individual still be able to see, sort of as a book entry, that they still own that? They just can't do anything with it?

Monica: That's correct. And so, really, Schwab had never had to take an action on that large of a scale before. And so we worked very hard to create a process that was good for the client as well. And so in those affected client accounts, they do see, basically, a dummy security and know how many short shares that they hold.

Amy: Mm-hmm. Okay. That's interesting. Just how the pipes work in the background is super interesting. 

For our audience, I think, it's interesting to understand that we've been receiving a lot of questions—some from participants and also some from the corporate side, the administrators of the plan—and they've been things that I would not have expected, and it's posed a lot of new challenges. One of them is, we've had, at least in the beginning, we had a lot of questions from employers saying, "Can you help me locate my employees?" That were in the Ukraine. Because they were on the move. They were fleeing the invasion, and they literally could not find them. If they didn't have updated information or they didn't have access to those or the networks were down. It was really troubling. And we were in the middle of that. Much more troubling for the employers and certainly for the employees that were experiencing that.

That sort of died down. I think the initial panic over that has died down. And employees have been able, at some point, to get in touch with their employers, but they may not be able to receive their shares, or they may not even be able to be paid. So there's a lot of scramble, really, just to try and figure out how to iron all of this out and take care of their employees but also make sure that they're safe. And from afar that's really, really difficult to do. So when you're in this type of business, you're exposed to those things that you wouldn't necessarily think about just as a regular person. But I'm sure you see those types of issues with individuals and their accounts and access to funds all the time, as the Global Sanctions Officer. 

So, really interesting stuff. Monica, I'm so pleased that you were here with us today. Thank you so much for joining. Thanks for giving us some additional resources for our listeners.

And one of the things that we started to dive into when we were formulating this episode, everyone . . . one of the biggest impacts in this process that always boils down to impacting equity compensation as well is supply chain. And that makes that Pandora's box even bigger. So we did decide to do another episode on supply chain. So watch for that because that's going to be interesting as well. 

Lots of intangible things here, but we've tried to make the most of it and tried to make sense of it for you all. 

Thanks for joining us on another journey today, with Equity Unpacked. 

Monica, thanks again for being here. And happy travels, everyone.

Female speaker 1: Subscribe to our podcast. And visit schwab.com/equityunpacked.

Female speaker 2: For important disclosures, see the show notes. Or visit schwab.com/equityunpacked.

Amy Reback: Think of Quick Takes as little podcast snacks. These are short episodes, just a few minutes long, that cut right to the chase of hot stock plan topics worth unpacking quickly.

Welcome back, everyone, and thanks for joining us on Equity Unpacked. I’m your host, Amy Reback, from Stock Plan Services at Charles Schwab.

Our Quick Takes episode today is focused on measuring success in your equity compensation plan.

Okay, so first, why do we care? Every employer that issues equity compensation does so for a reason. What’s yours?

And before you answer that for yourselves, I’ll ask you to consider the following three things.

So first, when measuring success for your equity comp plan, ask yourself, what are you trying to accomplish? And then ask, is that aligned with the mission and purpose of our firm?

Second, do you have an equity compensation strategy? And if you do, is it well-defined? Does it have a clear philosophy? Does it have clear goals? Does it have a compelling value proposition to accomplish those goals? 

And third, will your strategy stand the test of time? Equity comp is a long game. Most of those awards vest—and here’s the key—over time. If one of your goals is to increase retention, is your plan enticing enough to weather the changing employment market? Are the metrics or even the type of awards you can grant flexible enough to overcome a drop in the equity markets? There’s external, uncontrollable forces like those that might force you to revise your plan year after year. And as you react to those changing factors, you could lose sight of your compensation’s strategy and then the plan goals you had originally established. And without those, measuring success becomes impossible.

So, in short, before you can actually measure whether or not your plan is successful, you have to do the following.
 

Define what success looks like. 

Devise a strategy that’s aligned with that mission and purpose of your firm so your employees understand how they contribute to those goals as an individual. They’ll be more engaged. They’ll be happier. And you can increase retention by that alone.

Devise a compensation strategy that rewards that behavior. And then ensure the structure of the plan is sound enough to withstand major fluctuations in the workforce and market volatility.

Offering a specific yardstick that measures success for every equity comp plan is just impossible. But if you keep those three foundational values in mind when building your plan, measuring success becomes a lot easier and more consistent over time.

Thanks for joining us today for this episode of Equity Unpacked. And be sure to join us again for our next adventure. Safe travels, everyone.

Female speaker: For important disclosures, see the show notes. Or visit schwab.com/equityunpacked.

Amy Reback: Think of Quick Takes as little podcast snacks. These are short episodes, just a few minutes long, that cut right to the chase of hot stock plan topics worth unpacking quickly.

Welcome back, everyone, and thanks for joining us on Equity Unpacked. I'm your host, Amy Reback, from Stock Plan Services at Charles Schwab.

Today we're looking back on some mistakes we've made in the past, along the road of equity adventures. Things we've learned but would really like to avoid doing again. So let's get started on our Quick Takes episode with the top three participant missteps.

Number one: selling too early.

Ouch! I mean, seriously, your tax bill could be really interesting this year. Did you just volunteer to pay a higher tax rate on everything you earned? Nobody does that. Nobody does that willingly. So know the rules—especially the tax rules for selling.

Number two: I held it too long.

Uh-oh. Did you leave your stock options sitting in your account? Did you forget about them, and then they expired? That's a really steep cliff to dive off of, and man, there is no coming back. Or did you take your employee loyalty to the next level and hold onto those shares for a really long time over the years? And then all of a sudden you had this massive position? So, you know, that can lead to a huge concentration of a single stock, also known single point of failure. Remember the old saying, "Don't put your eggs in one basket"?

There's a lot of wisdom there. 

And number three on our missteps list: not knowing the rules.

I have seen the look of horror and surprise on the face of a lot of RSU recipients who don't understand that restricted stock units don't belong to them until they have vested, which happens over time. Then they accept a role at another firm, thinking they can take all those equity awards with them, only to find out that they can't.

And then second, you get a second whack. Equally big oops. Is then, even vested options typically have a timeline attached to them. Those are vested options that you think belong to you. But if you leave your current employer, do you have the funds to buy and hold all those shares in the next, let's say, next 90 days? Or if you cash out of those options, what does that do to your tax bill? These are really big considerations. They can be really big mistakes that are completely avoidable. Really important to make sure that you pay attention to those.

So let's make sure we review.

First, don't sell too early. Understand what that means for your taxes.

Don't hold it too long. Understand that you could miss out.

And the last is, you gotta know the rules. Know what you have, and know how to make the most of 'em.

So, that's the top three mistakes. But how do you avoid them? And all of the rest of the big mistakes people can make with their equity comp?

First, ask questions. Look at your statements. Get online and chat or call the service number and just ask. The can give you all the details you need to know about your awards and how to avoid big mistakes like these.

If you're a DIY type, go online. There's lots of resources out there to help you to find what you have and get you started.

Or ask your employer. They gave you the award to begin with. They did it for a reason. Why? Ask some questions.

Most importantly, no matter what path you choose, you have to invest a little time. Just like everything else.

We're talking about money here. If I gave you a hundred envelopes and told you that one of them has a lottery ticket in it worth 50 grand, you'd spend the time to open every envelope and find it, right?

You have to approach your equity comp the same way and invest a little time to find the most value that you can get from them.

So that's it for today. Thanks for joining us for this episode of Equity Unpacked. And be sure to join us again for our next adventure. Safe travels, everyone.

Subscribe to our podcast. And visit schwab.com/equityunpacked.

Female speaker: For important disclosures, see the show notes. Or visit schwab.com/equityunpacked.

Amy Reback: Think of Quick Takes as little podcast snacks. These are short episodes, just a few minutes long, that cut right to the chase of hot stock plan topics worth unpacking quickly.

Our Quick Takes topic today is increasing participation in your employee stock purchase plan. And from here on out, I'll just indulge in industry jargon and refer to it as "ESPP."

So the question du jour: how do you increase ESPP participation?

Now, you can search the internet and find a never-ending list of suggestions on things you can do to increase awareness of your ESPP. But ultimately the puzzle you're trying to solve is: what will tip the scales and drive your employees to participate—or purchase—your ESPP plan?

Now, chances are, if you're listening today, you've done the aforementioned internet search, and you've made those basic tactical changes to your plan to drive awareness. But now it's time to get a little more adventurous. So there's two steps we recommend you take to get there: message and method.

Step one: The message.

Stop focusing on the plan itself, and start thinking about who's buying it, and what do you have to say to get them to buy it? If you approach your ESPP plan as just part of your employee benefit plan, you're likely missing the mark.

That's right! Your ESPP and your employees are consumers that are making a choice. And you have to approach them as such.

Now, if you think about it, there's two types of basic choices consumers make. First, either-or choices. Inherently more difficult. Second, a supporting decision—or an and decision. Investing in your ESPP is competing with all the other either-or choices your employees have to make with their income, like housing, food, transportation, entertainment. Those are tough choices. And let's be honest—people don't like to make tough choices.

So to turn the tides in your favor, your message should clearly demonstrate how investing in your ESPP is an and decision. In other words, your message should be focused on how ESPP participation can support and enhance the buying decisions they're already making. Versus asking them to make another foundational buying decision that really forces them to chose between one thing or the other.

So we say this all the time in marketing and advertising. Even simple things that we all do, like, let's say, buying laundry soap. Just make it really simple. So here's the example. Most people do laundry. The goal is to get clean clothes. And, generally speaking, that can be accomplished with buying laundry soap. So the initial decision is either-or. Which brand? This one or that one? Once you've made that decision to buy the product and you're walking down the aisle or you're scrolling through your app, you're going to be faced with another decision. And human nature dictates that you're likely to stick with the first decision you've made. But what if you're offered an opportunity to buy something that makes that first decision even better? And that's the and decision.

If you buy this extra special additive, your shirts will be even cleaner. Or softer. Or smell better longer. And they probably do. But if those products were positioned just as a competitor to laundry soap, you're asking them to go back and reconsider their initial decision. And that's a lot harder to get than offering an opportunity to reinforce their original choice as a good one.

So our number one suggestion is to create a message that clearly communicates how investing in your ESPP can support the spending or saving choices your employees have already made.

So here's an example. Let's say your ESPP has a fifteen percent discount to market value. And let's say your stock price is $150. Employees who participate in your ESPP today will pay $127.50 a share. That's an automatic gain of $22.50 per share if they sell it. Now let's say the majority of your employees buy an unlimited data plan. That's a pretty safe bet. Most people do. And that unlimited data plan is going to cost $1,200 a year. How do you position your ESPP to support the choice to buy that unlimited data plan versus having to choose between that and investing in ESPP? Which is the way that most of us do that today. Right? We're competing for those dollars.

Well, what if you did this? If your employees buy 54 shares of your company stock through ESPP and hold it for at least one year to minimize taxes, as long as the stock stays at or above $150 a share—and there's no guarantee of that, but as long as it does—the 15% discount on their ESPP, that means a gain of $22.50 per share for 54 shares. Let's do the math. That's a total gain of $1,215. Enough to pay for that unlimited data plan for a whole year.

Now, apply that thought process to a bigger financial goal, like buying a house in the Bay Area, and giving an example of how investing in your ESPP plan can help them support that decision. Suddenly, you're in the marketing business, and you've got their attention. You're not asking them to sacrifice a spending choice. You're offering them an opportunity to support the spending choices they've already made by leveraging the benefits of your ESPP plan. And that's the power of the message.

Now step number two is method. And by method, I mean method of delivery. So once you've decided on a message that supports a spending decision, focus on how you're going to deliver it.

First, segment your employees. Everybody learns and absorbs information in a different way and at a different level of urgency. For me, I'm less likely to care about, you know, an unlimited data plan. But if you delivered a really compelling example of how the ESPP plan might help me pay to put my boys through college or retire earlier, you've got my attention.

So change up your method and the message a bit to attract different audiences at different levels and different phases of life. Method's also related to communication and multiple different channels and repeating it, repeating it, and repeating it.

You know, there's a reason we see advertising all around us. If your eyes can land on it, there's a good chance you'll see an advertisement there. So advertising your ESPP plan, marketing it to your employees, should happen early and often.

So, to summarize, your employees are consumers. Create a message about how your ESPP supports and enhances the spending decisions that they've already made. Then plan your method of delivery to attract different audiences. And do it often.

Thanks for joining us today for this episode of Equity Unpacked, and be sure to join us again for the next adventure. Safe travels, everyone.

Female speaker: For important disclosures, see the show notes.
 

AMY: Think of Quick Takes as little podcast snacks. These are short episodes, just a few minutes long, that cut right to the chase of hot stock plan topics worth unpacking quickly.
 

Hello listeners! Thanks for tuning in and welcome back to Equity Unpacked. I'm your host, Amy Reback from Charles Schwab Stock Plan Services and I have to say it one more time before the year ends, "this is your moment of equity zen."
 

Now in our quick takes episode today we're going to bring together all the themes we explored in 2021, so, let's reflect. It's so hard to believe that just this year, I mean, less than a year ago right now, we embarked on our first Equity Unpacked journey together, and we set out with the intent of creating a specific space to highlight equity comp industry topics and had an aspiration of uncovering some useful nuggets to help you manage your equity plans and serve your employees.
 

Along the way, we welcomed some of our experienced peers, industry experts and even leaders from across Charles Schwab to add additional perspective to the conversation. We learned a lot and managed to have some good times as well.
 

So, today, I'd like to share a few key takeaways from our year of conversations. You could call this our twelve-days of equity admin edition, and I hope you like it. Oh, don't worry…despite the twelve days reference, there's no carol singing involved so I'll just get into it.
 

In our first year of equity unpacked we ventured into some big and very intentional topics to learn about navigating things that you face every day, such as The International Landscape. We heard from Schwab's own Kate Gory about how granting awards to those international, mobile, and global employees is pretty complex and different than granting awards to the domestic employees.
 

And that subject became more and more relevant as the year went on due to that continued "work from anywhere" approach. So then we spent some time with the wonderful Christine Zwerling on Workplace Mobility who explained the difference between a transfer vs a traveler, and the importance of creating a remote work policy and a tax policy associated with it both at the corporate and the employee level. Super complex stuff.
 

We also drove down the Path to IPO thanks to the expertise of Kelly Yurt and Brad Hass, and unpacked what's most important in preparing a private company plan to transition to a publicly traded company,  that was a really timely topic as the IPO market continued to surge in 2021.
 

And of course, we always inject some insight on how these administration topics relate to the needs of your participants. We leaned on our guest Liliah Koski to unpack Various surveys (our own Schwab participant survey, Gen X, and a few others) which reiterated that employees are in need of help and guidance now more than ever, and made a few suggestions on how you might incorporate that into your overall return to office or workplace flexibility programs going forward.
 

When I look back at our inaugural year of Equity Unpacked conversations, a really common theme was rapid and perpetual change, and people, if there's one thing we're all acutely aware of, and maybe could use a little less of, it's change.
 

However, time and equity comp waits for no one, and these very specific topics we addressed in 2021, the international landscape, the path to going public, increased demands of workplace mobility compliance, and how you support the needs of your participants through it all, are guaranteed, and I don't use the word guarantee very often, but I guarantee that those will be recurring and evolving themes over the next few years.
 

Another common theme we heard from our guests throughout our podcast series is the need to communicate. Over and over and over again. And just when you think you've said something too many times, say it again. And then do it one more time after that. With business partners, compliance, legal, finance, HR, and of course, our employees. We all know that, but it's a good reminder that you can never communicate enough, especially as we plan our agendas for the new year.
 

And you know, as we end our initial journey together in 2021, I want to take a moment to recognize the exceptionally important work you and your equity administration teams do, and even more importantly, the role you play in creating better financial futures for your participants. And I don't believe you often hear about the positive impact your work has on the lives of your employees.
 

Each and every one of you makes it possible for your participants to fulfill a major life-long goal. You know, how many people get the opportunity to do that? At Schwab, we experience that all the time, it's part of our core mission and purpose, it's literally in our DNA. But for most of our listeners, playing a major, yet relatively silent role in the financial futures of your employees is probably not included in the foundational corporate values of your firm, so your contributions here are really unique.
 

As a provider, when your participants call our service teams, we routinely hear stories of how their equity compensation has allowed them to buy their first home or send their children to school, support their families and or their extended families, weather some of those unexpected changes in life, both good and bad, things like unshackling themselves from the weight of revolving debt and looking beyond the next paycheck to plan for the long term and retirement.
 

You make all of those things possible for them through the work you do every day, and at Charles Schwab, it's our exceptional honor to serve you and the needs of your participants in your endeavors. So thank you for all you do. It's just, it's so important to recognize that you make a real difference in the lives of your employees, and it matters. It matters a lot.
 

Now, on a lighter note, for 2021, we hope you've enjoyed the conversations this past year. Found them informative and at the very very least, a good use of your time. We know it's been a challenging year with Covid and navigating the "work from anywhere" mentality that came with it.
 

And You know, I think if it would be possible for one year to send a holiday message to the next year I imagine it would read something like this, "Dear 2022, you've got skills that we apparently didn't have. You can do this! Sincerely, your pals, 2020 and 2021."
 

Now, in all seriousness, speaking of next year, I'm looking forward to a new set of adventures here on Equity Unpacked, and would love to hear from you on what you would like to explore with us. Until then we wish you a happy and healthy holiday season from our team at Charles Schwab. Cheers to you all, and safe travels everyone!
 

Subscribe to our podcast. All episodes of Equity Unpacked are available wherever you get your podcasts.
 

And visit Schwab.com slash Equity Unpacked.
 

For important disclosures, see the show notes. Or visit Schwab.com/equityunpacked.

AMY: From Charles Schwab Stock Plan Services, this is Equity Unpacked, the podcast dedicated to simplifying the complicated world of equity compensation.

Well, hello everyone. Welcome back to Equity Unpacked. I'm Amy Reback, your host, and I'm thrilled have Christine Zwerling here today with us as our guest. Christine, welcome. Happy to have you.

CHRISTINE:  Thank you. I'm so excited to be here. I'm a huge fan of your podcast.

AMY: Oh, thanks. It's so exciting to hear. So today we're going to be spending time on mobility, which is a really big topic, I think, at any given time. But especially in the last year, when we reflect on 2020, there were a lot of employees who were forced to work from home. And there's a lot of great things about that, but there's a lot of complexities that go from a record keeping perspective and a finance perspective as well, particularly for equity plans.

So I have Christine here from Twilio, and she's our Director of Global Equity Operations there and an expert on mobility. So Christine, what changed in 2020? What was the biggest change as a stock plan administrator? What did you notice the most in 2020?

CHRISTINE:  From a mobility perspective, I just noticed mobility took off. All of a sudden we went from everybody, most people were in their own office, and so we could kind of track them. We knew where they were. If they were moving, they moved offices, so it was easy for us to track. We would get reports, and everything would flow, and it was fairly easy to manage where they were and to track how we're taxing them and all of that.

But all of a sudden, no one was in an office, and it was trying to figure out where are they actually working? Where are they performing that work, especially the places that are close to where state are close together. And maybe they live in New Jersey, but they usually work in New York, but now they're working in New Jersey. So where is their actual work location?

So all of a sudden payroll, stock, everybody had to become an expert in mobile tax, and where was this income actually earned and tracking that.

AMY: It's got to be really difficult for corporations to do that across the board, just as a corporation from a payroll perspective, but it gets even more complex when you talk about the different types of compensation.

We're most interested of course, in equity compensation, but there's bonus and there's regular salary and reimbursement and all of those different things. 

So for 2020, what I noticed is the world sort of ended in about March, and everybody went home, and we were all asking, well, when are we going to go back? When do we go back to the office? And slowly people started to realize it's going to be a while. This is sort of the new normal that we're all experiencing.

And about July, when people normally would've gone on some kind of summer vacation, they decided to not just go on vacation, but maybe go somewhere for a month or two and work from there. Because if you're working remotely, why wouldn't you work remotely in someplace that's really close to a beach or a lake or your vacation house or a rental that you can have for a long period of time just to change it up. Because everybody had been locked up in their houses for a while.

So the hard part, like you said, is figuring out where they are. And I'm wondering, do you feel like employees know that they have a responsibility to report that to their employers and the implication for their employers?

CHRISTINE:  Definitely in the beginning they did not. For some, they just felt like everything is online anyway. I can get you on Zoom. You can email me, you can find me. So I think in the beginning they did not.

I know at Twilio, we did a lot of campaign to please update your work location. We set up our HRIS system with a temporary location. We know maybe temporarily you're working at your vacation home or your parents' house or wherever you got trapped when the border's locked down and all of that. So we tried to get people to do that. You know, as a leader, people 50/50 that they read the message and then 50/50 of that, that they actually action what they're supposed to. So we did a lot of updating, a lot of manager training like if you know your person is somewhere else, you need to help us find that out.

At the same time, also rolling out work anywhere, the ability to, okay, if you went ahead and you moved somewhere else, maybe you're just going to stay there anyway. So what can we do? What would that look like for you? So for some planning. And there was almost somewhat... We're headquartered in San Francisco, and somewhat, there was almost a disincentive to let us know that you moved outside of the San Francisco bay area, because there would be a pay differential.

So if you went to live in Montana, you might take a pay cut. So a little bit of that to deal with too. Our employees tend to be fairly honest, so they did report when they moved. But I think that's something that I've talked to other stock administrators about how they track it. And they also have run into some of those issues too.

AMY: It's a big conundrum, I think, that everybody's really just trying to figure out, but it's been a long time coming that individual jurisdictions or states if we're just talking domestic, it gets a lot more complex with international, but there's this concept of difference between a transfer versus a traveler.

So transfer would be someone who decides to move somewhere or actually changed their residency for a significant period of time. And a traveler is someone that frequently travels for work. That's a different thing that a lot of people sort of know that if they go somewhere for a day or two, they may have to report income. But the transfer piece, the big change with that is that there were some employers who it was okay for you to say, "Hey, I'm going to go live in Florida, or I'm going to go live in Hawaii."

And that was okay, because maybe you were a remoter. Maybe you traveled a lot, and it wasn't necessary for you to be in one specific place. But now it's becoming a lot more mainstream for employees to say, "Hey, this is my choice of where I want to live."

And in a very short period of time, we've accelerated this mainstream acceptance of you can be full-time remote. So instead of the employer knowing, hey, we're initiating a transfer and we're moving you to this specific place for your job, it's more of a voluntary thing that we're seeing from employees that are saying, "Hey, I want to go and work in Montana or relocate to this place."

I don't think the mobility idea of different tax jurisdictions is new. Like you said, someone that lives in New Jersey but works in New York, that gets a little bit of complicated of where they are, but having to pay taxes or be responsible for income tax in two states is not new.

But it is new when it's voluntary, and it's a sudden change. So how do you get that education out there? I know you said that you've asked, and your employees tend to be pretty honest about that, which is terrific, but what's your advice for other stock plan administrators and equity teams who are having a hard time tracking it down?

CHRISTINE:  Yeah, well, hopefully you have a committee that's working on, a COVID committee or some kind of HR committee that's working on this type of program, and you have someone from tax involved because you can't do it alone. You need your internal team who's going to work on that have a consistent message. Make sure that at you are getting that mobility information out in every message that goes out.

We have on our intranet, there's a website that talks about when you're moving, here are the things you need to work about. There's a section on equity, and we have... It's a little matrix that our tax provider provided us, where you can say, I'm moving from California to New York, and it'll give you the blurb of here's how that affects you. So people can get that in front of them.

Any opportunity that we can take to over communicate to employees to let them know there is a trailing tax liability, just, the day after vesting is not when you want them to go, why did you sell so many shares for my taxes? What happened?

Tax surprises are never fun. Once the work location is updated in our HRIS system, they automatically get an email that lays out, Hey, you've moved tax jurisdiction, you're going to have a trailing tax liability. Go check out this website. It'll give you more information.

The more that you can educate employees and just get the word out there, the more likely it is that they will hopefully let somebody know that their work location has moved.

I feel like we're in the upswing now of finding out maybe before or while somebody's moving rather than, oh, I moved two months ago. So I think it's getting better, and the education's getting out there, but it's definitely not something that you can take a break on. You just have to keep hounding them. It's so complicated and confusing.

Employees get confused enough about tax on equity as it is, adding in the complication of trailing tax liability, you just lose them. And then they're like, I don't have time to even deal with this.

AMY: Right. I just can't. Right? I just can't.

CHRISTINE:  Right. I'm just sprinting through each day.

AMY: Did you just say, tax? I'm leaving now. Hey, so we've heard a lot in the last 18 months, and you were giving some great details on surprises that employees can experience, but there're surprises on the corporate side too. So I'm really curious to know how often is that happening? I think the employee tax surprise, which, like you said, never fun. We know that that happens. We've seen that in the news, but something that we don't see in the news very often is the corporate level. Because there can be tax implications at the corporate level as well. If you have an employee that moves to a place where the corporation doesn't have an existing entity, there could be new corporate taxes at the corporate level. How often are you seeing that?

CHRISTINE:  And that is definitely something that when the pandemic first hit, and we first went into lockdown and people started either going places or getting stuck places or maybe going back to help family somewhere that was sick.

AMY: Sure.

CHRISTINE:  You can't tell them no, they can't do that. And it seemed like cruel and unusual punishment to say, "Oh, you can't work if you're there." So there were definitely things that we needed to look at.

Thankfully Twilio is big enough that we were already registered in all of the states, so we didn't have that issue. But I had talked to other colleagues at of oftentimes private companies who weren't registered in each state that all of a sudden they're scrambling to register in those states to do tax returns in those states and pay payroll and all of that. So we didn't quite have that issue.

We did internationally. People would be like, well, I have to go help family in X country, or we're vacationing in a certain country and then the borders closed and they couldn't get back. So definitely things where we had to pull together with tax and legal and our outside advisors to, what's our policy? How long is that going to last? What are the policies in that country?

A lot of countries did put in a temporary if you got stuck here, we understand. You can do that for a certain amount of time, but each country is different. So we did a lot of that. And then as things started opening up, it was okay, if you're in a country where we have a jurisdiction, these countries, then you can stay, or you can settle there permanently. Here's some of the options to do.

There were some, I'm going to say, happy coincidences on the tax side. Because as I said, we are headquartered in San Francisco, and San Francisco has a pretty high local tax. But most people don't live in San Francisco.

AMY: Sure.

CHRISTINE:  So all of a sudden we could do that survey too. And we could put that out to the local San Francisco employees. Like we need you to update your work location. If you're not working in San Francisco, we will save money. So we didn't have to pay as much of the local tax as in prior years.

AMY: Interesting, okay. I want to just flip over really quickly to... We've talked a lot about the transfers and surprises that come with that when folks choose to work somewhere else for a certain period of time.

What about travelers? I know that states have gotten a lot more savvy this. If you were to fast forward 10 years from now, what do you think the capability will be both for transfers and travelers, considering there's 22 states that impose income tax on the very first day that a non-resident comes, a business traveler comes to work in their state. I don't think a lot of people know that there's quite so many.

I think even for myself, I had to look at the list and say, okay, let me just double check and make sure, and there were some surprises there. So if you look forward, and you say right now, a traveler that's going someplace for one day, it's really up to them to be able to report that. How do you think systems and tracking are going to come together maybe 10 years from now to allow that to be a little more automatic? What are you seeing?

CHRISTINE:  What I'm hoping since I have you on the phone here is that we will be able to link our travel systems up with our equity and/or HR systems to have the information flow through. I do feel like we've gotten a little bit of a break in the last year and a half because nobody was really traveling, so we could a little bit say, okay, we'll take this time to figure out what we want to do when people do start traveling and how we want to change because I think also with everybody being remote now, there's going to be more travel.

So I definitely think it's something that we are going to have to continue to educate the employees on and then figure out what are the tracking systems and what are the travel tracking systems? Because I think since a lot of people haven't been traveling, those systems aren't really being updated right now.

I think those companies are waiting to see what's coming also so that they know what to provide their companies. So I think in the next couple of years, it's really going to be a lot of development for what do companies need? Are they going to force people to use one travel company? Some companies let you use whoever, some force you to use one travel company, except for these people, they can use this, it's that type of thing. So I think it's going to be something where we streamline a lot more and with an understanding of why because I think the complications from COVID educated a lot of people that are in those decision making roles on why it's important to track where people are working in that when states start looking for this revenue, they're going to start focusing on all of these different pieces.

And when they see, oh, I see, you do have a lot more people maybe living and working in this state where you didn't before, I bet there are other people that are traveling in and working here. Let's start auditing this. Let's start looking at this. I think what I had heard is that the tax authorities would pull the proxy statements for companies and look at who their officers are and then look to see if they had done any investor conferences in their state. And then look back and see like, oh, I see the executive from this company did three investor conferences in my state. That's weird. There's no tax return because this is one of the states maybe that has a one day in, they should have paid taxes. So now I need to go back and audit everything.

So I've heard that from tax professionals. That is not advice. That is something that I've heard, so that somewhat scares me that we do need to start getting better at making sure we know when people were in certain places for no matter how long.

AMY: Sure.

CHRISTINE:  And I think it hits on some privacy issues too because what if you were on vacation, but you worked for a day while you were there. So definitely things I think will come up with policies about.

AMY: Right, and a lot of complex details to figure out. It's definitely a gray area at this point. There's a couple of things that are recommended for equity professionals and SPAs to take to help your companies and your teams track these things. The first one is educate employees, which we've covered really, really well. You gave us some great tips on that. What about systems? What advice do you have on systems to track this and how does that help?

CHRISTINE:  Yeah, definitely look at what systems you're using to track where people are and when they are. Since this is a trailing tax liability, and most of us have at least a four year vesting on our equity awards, that means we are going to be tracking that move for four years.

So when I had first gotten to Twilio, we were much smaller. We were a few hundred people. I had a spreadsheet, and my tax advisors who would help me track the mobility, it was kind of a joke that we had this funny little spreadsheet that we would send back and forth. I would get information from HR on moves, and then we would add it to the spreadsheet.

Thankfully, we upgraded our systems shortly before the pandemic hit, so the moves are entered into our HRIS system. They flow automatically over to our equity tracking system, to EquiView. And then the system applies all of the taxes according to the rules that we set up.

But definitely having something automated. I can't say enough how glad I am that we have this because the moves just accelerated. They went from maybe a hundred people a year to probably over a thousand. There's no way we could have done that in a spreadsheet. Yeah, yeah.

AMY: Wow. Do you think most employees, I'm thinking about a disconnect between it's one thing for an employer to track where employees are working and there's, like you said, there can be employee tax surprises, especially from a trailing tax liability perspective. But at the end of the year, they get all of their tax documents, and they see that they're being reported for income in let's say five different states. What happens? Are you seeing any disconnect if they are not paying attention to that, and they're not filing in those states? Is that happening yet, or is that five to 10 years from now?

CHRISTINE:  You know, I don't know. I've not heard from any employees that they've not filed in certain states. I have done a number of phone calls with employees and their tax advisors because their tax advisor didn't understand why we reported income in different states.

AMY: Got it.

CHRISTINE:  And they didn't necessarily understand how to report that or how to help their client with their tax returns. So I think on the tax advisory side, I think those folks are going to have to become a lot more educated in how we process or how they process tax returns in multiple states.

AMY: Okay, let's move on to support. You mentioned how important it is to have a really robust tracking system. And I loved what you said about tracking employees on a spreadsheet. A hundred is still a lot, but it is exponential when you start really looking at more than that. And then as the world opens up and people start traveling and start moving around, and the world has changed, so we're going to see that more and more often, systems may not be enough. So what kind of additional support would you suggest, and what do you use? What have you found helpful?

CHRISTINE:  Yeah, well, definitely we have our internal committee, so we have employment law, tax, HR, all of those people in a one room, our facilities folks, who know where the offices are and all that to, to look at what our policies are going to be at least on a grand scale.

But then on the tax level, which is where most of this falls in, we partner with one of the Big Three or however many firms there are, accounting firms there are, who've been just amazing helping us first, because one, you can't go it alone. There's no way that anybody knows all of this information.

It can be expensive, but it's a cost of doing business. So that's something you need to help your company understand if they're a little leery of we're going to have all these huge bills. It's like, well, it's part of what we have to do.

So we definitely have partnered with them. Again, we were fortunate to get this process started before the pandemic, but they sat us down, and we looked at the countries we were in, the countries likely to go into, and then just the domestic, all the different states, and came up with what our tax policy was for each of those moves.

Here's what the law says that you will tax from, or you will treat the income from grant through vest. Is that how you're going to recognize it? And that type of thing. What type of things that we could comply with with our system, we sat down with payroll, with HRIS, with here's what we can do and came up with our tax policy.

Then they actually worked with Schwab to help set up our mobility preferences in the system so that it works. But it definitely was not something that I went alone at. We had an internal team that were worked on it with our external experts, and I feel a hundred percent confident that what we have now is getting us to where we need to be to be compliant.

We also, in coming up with that tax policy, they created a workbook for us in Excel that we can share with payroll and HR. I don't know if they actually use it, but we also took that and created a separate matrix that we posted on our intranet. So employees can kind of see how the move will affect them also for their equity, but it has those policies out there. So HR or not HR, sorry, payroll can look at it and see why are we getting taxes for this guy? He moved a year ago, and they could look and be like, oh yeah, a year ago he was here, per their tax policy, that's what we do.

So it feels good that we don't have to, every time a question comes up, we have backup for it. And we give here's our tax policy. Here's our matrix. Here's why we do it. The employees get the same information. Payroll has the same information. I have the same information. Our systems are set up.

So it's that is really figure out... I kind of feel like the order we talked to about these in as far as educate the employees and then figure out systems. I think we maybe almost did that backwards where it's figure out your tax policy, document that, get your experts in line, then set up your systems, then educate the employees, so everybody's got that same information. It makes it so much easier.

AMY: Yeah, yeah. You're absolutely right. I'm really curious. You talked about having a partner and having mobility experts. Being in the equity comp industry and being the expert that you are, when you look around at your colleagues and your own experience, how common is it for a company or even an equity team to have either a mobility specialist or a specific dedicated mobility staff?

CHRISTINE:  It depends on the size of the company, and this is something Twilio was growing internationally already. So we had a global mobility team, and that was already growing. So that was great that we could work with them and make sure that as they are applying for work permits for somebody in a certain country, that we know that that was coming. So, especially if it was a new country, so we could get things set up.

Smaller companies or companies that maybe were mostly domestic with a little bit of outside, probably don't have those teams. And with those, it's even more important that you get outside expertise that can help you with this. I think no matter what, you need that outside expertise because they can go out and look up.

It'll be some obscure issue. Everything will go along fine, 80 percent of the time. Then you'll have those side cases that are like, I'm a citizen of XYZ country, but I'm living in this country, and then I move to that country, and now I'm in the U.S. And how do you tax that?

There's just, nobody can figure that out. And then it's also some of the issues that come up is if you are applying a hundred percent of the letter of the law of tax in those jurisdictions, there are times when employees actually won't receive any shares because they're being taxed so high. And what is your policy on that? How do you communicate that to their manager? Their manager needs to know that they're not going to see that money until they file their tax returns or whatever. This is maybe getting of it before they move.

Hey, you're going to have this trailing tax liability for this employee moving. I don't know if you really want to do that. One, very high social taxes in that country, and that's going to come out of your budget, and/or they're going to be double taxed for a couple years. So is that really, everybody's going into this eyes wide open. But definitely something to bring up.

AMY: Yeah, gosh. Do you know, I'm really curious. I've done absolutely no personal research on this whatsoever, but for mobility experts or mobility staff, is that typically just a tax and accounting function, or are there a specific professional designation for mobility experts?

CHRISTINE:  I don't know if there's a specific designation. It does roll up into HR, and I found that other companies too, it typically rolls under the global comp and benefits type team.

I know one of the people on our team actually has her undergrad. I think it's an undergrad degree in mobility. She lives in France, so I think it's more common in Europe that they do that.

But they definitely, that team deals with everything about the move, the work permits, all of that. And tax just like little, tiny sideline of it, where they actually, the employees actually have a tax briefing with our outside advisor to give them a heads up on what's going on.

But that all starts changing too when you have people that choose to go live somewhere else. Do they still get a tax briefing? What do we give them?

AMY: Sure.

CHRISTINE:  Again, we don't want anybody surprised at tax time, so maybe it's better for the company to provide that tax briefing, but those are different things that I think all companies are struggling with right now is do we pay for that tax information, or do we just tell them to go it alone? Talk to your personal tax advisor, which is what we all fall back on.

But to me it feels like such an empty message because I get that deer and headlights look from employees like tax advisor? How do I even find a tax advisor? And they just, like Uncle Bob? Like what?

So some of it's also educating them on how to find a tax advisor. And I think it's common for us in the U.S. to have tax advisors because our tax system is so complicated, but a lot of foreign countries, it's not that complicated, or the company does it all, and you only have to do a return if you have some wacky stock situation. So it does feel like we need to do more.

AMY: I'm sensing the rise of a whole mobility industry here, so definitely keep your eye out. I think we're going to see a lot going forward.

So I'm going to take our four key actions for SPAs and flip them based on your recommendation and start with, you really need to have a remote work policy and a tax policy associated with that, both at the corporate level and to be able to help employees.

And then make sure that you get your systems in place, and you've got the right support, and then go out and have a plan to educate your employees, and you can support them better. So I think that's a really, really good plan.

What would you do first if you were starting out brand new? You go to a brand new company, and let's say even a private company, but you're about to go public. What's the first thing you would do from a mobility perspective to support your employees and make sure everything was in compliance?

CHRISTINE:  I would go out to the experts and figure out who my team is. Internally, who's my team? Who knows where all the bodies are buried? Who knows where the employees have been? And then with the outside experts, who has the expertise here? What vendors can I work with? And get that team in place first. And then start pulling data and having the outside experts help evaluate what we've got, what we need to do to clean up, and how we need to move forward.

AMY: Yeah, but I guarantee you that's a multi-year effort, right?

CHRISTINE:  It can be, it can be. And you do have, I feel like, knock on wood, I've been here almost five years. We've gotten all of the zombies from before. I think we've cleaned all of those out and, trued everything up and corrected everything. So I feel like we're almost at baseline zero, but that is definitely something I would do first.

AMY: That's a great place to start. And I think one of the most important things probably to remember with this is that you're not going to get to perfection with compliance day one, but if there was an audit or the regulators did come knocking on your door, it's super important to be able to show here's what we're doing to work towards compliance. And here we do have a future state and a strategy in mind. Here are all the actions we're taking to get there. And that's a lot better than trying to have one big, significant launch where you're you reach perfection.

This is it's evolving. It's not going anywhere. Mobility's definitely here to stay, but nobody achieves perfection and a hundred percent compliance with it overnight. But being able to show progress towards that, having the policies in place, the systems in place, the right support, and the right education is super important. So thanks for your guidance on that. Really, really appreciate it.

This has been so much fun. Thank you so much for joining us, such a hot topic and so complicated, so interesting, and definitely something we're going to have a lot more to talk about. I anticipate we're going to have this conversation in a year, and there'll be so much more to talk about. Don't you think?

CHRISTINE:   I agree. I agree. Thank you for having me. This has been so fun. I'm a huge fan again.

AMY: It's super fun to have you. It's great to see you. Thanks so much. Thanks for being a part of Equity Impact. And to all of our listeners, thanks for joining us today, and we'll see you at the next episode.

Think of Quick Takes as little podcast snacks. These are short episodes, just a few minutes long, that cut right to the chase of hot stock plan topics worth unpacking—quickly. Today we're talking about a new generation of investor that has emerged in the last year, despite a global pandemic, economic uncertainty, and market volatility. 

It's called "Generation Investor," and it refers to the large number of people who are bound together not by their birth years but by when they started in their investing journey. These days, being new to investing spans multiple traditional generations as investing in financial markets has become more accessible. 

Schwab partnered with Logica Research¹ to survey investors who first began investing in 2020 to learn more about this group and their goals. 

Based on the information from the survey, the median age is 35, they earn an average of about $76,000 a year, and they like fast moving markets, and are interested in trading strategies and crowd sourcing their information. 

The overwhelming majority of Gen I reported that they want access to materials and tools to do their own research and improve their knowledge on investing topics. They also find value in access to live investment professionals for ongoing help and guidance. They get to a point where they're beyond their depth, where they just have done their own research, and need a thought partner—someone to answer their very well thought out questions.  

We have to ask, what kinds of tools and services will this generation need to be successful? And mobile is definitely going to be key. Along with the ease of use and simpler user interface. Gen I will find modeling tools helpful to understand the long-term impacts of their investments— or, for an equity comp specific example, tables that compare outcomes for exercising awards now versus 1 year from now versus 5 years from now and tax implications and all of those things. 

In thinking about the future for Gen I, this generation has likely been emphasized by the pandemic because people had more time to really engage with their portfolios and they learned about new ways to invest that require minimal or even no asset minimums. There's just no way to put that cat in the bag, and why would we want to? 

It appears that Gen I has caught the investing bug and that will continue. What will be really interesting going forward is how some of the new trends and sources of information for the investing public are regulated. Let's keep in mind upfront, that the objectives of financial market regulation is to protect the investing public, and provide the level of transparency they need to make informed investing decisions. And while social media is nothing new, the trend to look at social media feeds or blogs for investing tips or to predict volume is. 

The question is, how do regulators react to meet the demand of enacting rules and regulations beyond those in place for traditional access points such as broker dealers, and ensure the investing public is being protected, and that our financial markets are fair and transparent. Broker dealers have operated in compliance with such rules & regs for decades, but what happens when investors are not leveraging broker dealers as their primary source of information? That used to be a one-off dinner party conversation, but what happens when that dinner party conversation becomes global and is being driven by individuals that are not regulated and have little oversight? 

Also, Gen I appears to be focused on trading strategies and playing the market. And that's very different than how a licensed professional would define investing. That would include a clear understanding of risk tolerance, long term financial planning, expected rates of return, dollar cost averaging and price limits, or having a strategy to exit a position, and yaddah yaddah yaddah. It's really, really important to understand the differences between trading and investing.

That's a wrap on this Quick Takes episode. I hope you're enjoying our new abbreviate format. And more episodes will be coming throughout the year to keep you current on all things stock plan administration. 

Subscribe to our podcast, and visit Schwab dot com slash Equity Unpacked. 

For important disclosures, see the show notes. Or visit Schwab dot com slash Equity Unpacked. 

AMY: Hello everyone, and thanks for joining us for another episode of Equity Unpacked, a podcast dedicated to simplifying the complicated world of equity compensation. I'm your host, Amy Reback, from the Stock Plan Services team at Charles Schwab.

Our session today is focused on the complexities of the pre-IPO world, helping private companies unpack the path forward to taking their company, and their respective equity compensation plans, public.

To help tackle this topic, I'm super excited to welcome our client Kelley Yurt from the DC area—who recently went down the pre-IPO path with her current employer, Olo, and our very own Brad Hass, from Schwab Stock Plan Services. Let's do some brief introductions before we start our conversation and, in addition to introducing themselves, I'm going to ask each of our guests to choose a word to best describe the pre-IPO journey and why they selected that word. Brad, I'm going to pick on you first. Go! 

BRAD: Thanks, Amy. I've been with Schwab for over 20 years and have worked with our Stock Plan Services group for the last 10 years of my career. Within Stock Plan Services, I do have the privilege of leading both the Stock Plan Sales team as well as the Relationship Management group that is responsible for our largest clients. To answer Amy's question specifically, about the word that best describes the pre-IPO journey, gonna cheat a little bit and use two words: Those words are "exciting" as well as "daunting."

I used "exciting" because there is an amazing sense of validation for the company's founders' vision and the efforts of the team that helped the company reach this milestone event.

I use "daunting" because there are just so many moving pieces that are involved in an IPO.

AMY: Excellent. "Exciting" and "daunting." Two words—always the overachiever. Totally fair assessment. Got it. Thanks, Brad, appreciate it. Kelley, your turn!

KELLY: Thank you, Amy. I'm looking forward to the conversation. I'm the Director of Equity Administration at Olo, and for the past 15 years or more I've worked for several public companies, and I've also been a part of four teams taking their companies pubic.

So, if I look at one word, I would say that IPO is, the process is more like a wedding. It's a huge event. It's been dreamed of, planned for over many years, by many different people, with varying expectations. We put together a large team in preparation and think that everyone is prepared for all the different circumstances, and we just know that we're ready for that wedding. But inevitably, there is something that happens that was not imaginable until it happens.

AMY: Yeah, totally right. I mean, that is the honest truth, right? The best-laid plans go awry. I hear it. I've seen lots of wedding nightmares. Thankfully, none of them were mine, but I've seen some interesting stuff. I'm sure we all have. 

BRAD: Kelley, thanks again for joining us today. I chose the word "daunting" because, as I mentioned, there are so many things to consider when heading towards an IPO. If we just focus on the equity plan itself, there are still an overwhelming number of topics to consider—from plan makeup, to finding a provider and a platform that meets the needs of internal stakeholders such as you, the equity admin, as well as the CFO; an HR group, who leverage the plan to acquire and retain the best talent. And then there's always participants of the plan and their needs. Then there are considerations for the end of the lockup period and ensuring that participants in the plan are educated on the process and have a strong understanding of what they've been granted and the choices they have between holding, exercising, or selling their shares. Can you share your experience in going through these, and any other considerations you went through?

KELLEY: Sure. I'd begin focusing on the equity plan and the equity platform. These are key in my opinion. The plan needs to be understood clearly from all of the different team members, both internally, cross-functionally, as well as your vendors. So the team needs to understand that the vendors that they choose need to also understand their plan and that just by providing the documents is not enough. You really need to discuss it. Hopefully, both teams are asking questions and overcommunicating. And that really it's the company's responsibility to understand the plan and disseminate the information to the vendors. The plan's a legal document, so not everyone who reads it will understand its complexities or interpret each clause in the same manner. So be prepared to break down the nuances of the plan for your internal team, if you're the stock plan administrator or on the legal team, which I am both. And then also, communicate that and break it down for your vendors into very clear English. Don't be afraid to repeat yourself or to overcommunicate. 

I'd also say, remember to focus on timing and build extra time into your plans. So if you leave the timing to one team or one vendor, then they may not understand the complexities of the next step and may not build enough time into the overall process. So you can't expect to just hand a letter of instruction to one of your vendors and that it could be implemented in one day. I've seen that happen, where the process plan has one day for a vendor to do their piece and yet, they're not really thinking overall about how that vendor may have extra steps that they're not aware of to get the quality control and ensure accuracy for your request. So, all of this takes time. And additionally, while the Company may be working 24/7, preparing for this exciting IPO, all the vendors are not. This is normal, they have a lot of different clients, and we need to remember that they're our partners. And we don't want to overly stress them with last-minute urgent items, so we need to build a strong long-term relationship with them and start on very good footing. 

AMY: That's a super important point. I was just thinking that I'm not sure "unpacked" quite covers it. I'm thinking  more like "unravel" is a better word. Because there's so much. And a lot of times you don't really have the time to build that long-term relationship. But I love the fact that you used the word "wedding," Kelley. And really what you're saying is the relationship and the time you have to build into this process is the contingency plan for if it rains or the groom gets sick or whatever. So I think that's a great, great point, and I'm so thrilled to have you both here today. We couldn't do this topic without both of your expertise. I'm going to back up for just a second and set the stage. I probably should have covered this in the very beginning. There are so many proverbial rabbit holes we could go down regarding this path to public and how all of that is changing. We've got SPACs—these Special Purpose Acquisition Companies—Direct Listings. These are playing a really big part in the shifting landscape. So I just want to clarify for our listeners that we could spend an entire episode on each of those. But our focus today is really going to be on this traditional path for private companies to go public versus via a regular IPO. So that is the most likely scenario for most of our listeners, and there is a lot of regulatory debate going on with SPACs and Direct Listings. I don't know about you, Kelley and Brad, but I love to get into debates. But not necessarily on regulatory topics, so I'm just going to steer clear of that, let the experts sort that out, and maybe we can unpack those alternative paths for going public down the road in a future episode when we have a little more clarity from the regulators. 

OK, let's get back to the traditional pre-IPO path. Kelley, you are an expert here. And your most recent experience with Olo's journey to being a public company is, like, hero-level story. So you've got a ton of insight on that role that equity compensation plays in navigating the journey. I'd love to start at the beginning. What was that initial journey like? How did you chart the path for going public? There's just so many questions. What were the activities? So many questions came to mind here, but tell us your story. How did this work? 

KELLEY: I interviewed and actually started nine days before we went public, so a lot of the planning phase had already been completed. And as I arrived and realized that we really were that close to IPO, I had to really grab a hold of the reigns and start diving into things. So I do remember, I interviewed, and have talked to a lot of the team, about how did they start on the path to IPO. I've noticed that it was very consistent with other companies that I've talked with and worked with previously. The Olo company debated on timing. And this is very normal. I think that all companies look at not only the timing but also the market's appetite for purchasing shares of the company. There were huge efforts that were made to transact this IPO. And many meetings, discussions, timelines, considerations, tons of excitement. And factors that the team were making sure that they were ready and which vendors to utilize. 

So understanding the compliance and the audit role is also a must. Compliance and auditing are both key pieces of the puzzle of transitioning from private to public, and that seems to be one of the hurdles that a lot of companies spend a lot of time on. I think that it's part of the story of the company that you're telling in the S-1, and the numbers and details are more important than most realize. So the S-1 is the start of the public numbers. And particularly from an equity plan perspective, this is where the plan has defined numbers of authorized shares and what has happened so far as you've become public. The numbers are normally kept at one vendor, or sometimes in Excel sheets I've seen as the company goes into finding a vendor and a third-party administrator. So often times, the IPO is when a company moves into the new equity system with a broker relationship. And I think that you have to keep in mind that most public companies have equity administrators who have other roles in their company. They may have inherited the equity role. They may not have specific equity training. So when I arrived and a lot of this had already taken place, it was being handled by different members of different teams, and it was a lot to reign in and really get a handle on. So a very busy time. I've worked with a handful of companies as a consultant and in house as well. And what I've heard from all of them when I arrived is, "I wish you'd been here earlier." So just a note: If you're starting this path to public, you probably should be involving an equity administrator from the start. It makes sense to have that person help choose and implement the vendor and equity solutions that you're choosing. And most of the teams at a private company don't have experience with transfer agents or brokers or any equity administration platforms, so it's hard for them to choose what would be best for the company. You really need the help of whoever is going to oversee this. 

BRAD: Kelley, those are all great points. We've also heard from other clients the importance of bringing in your key internal stakeholders is a must. For example, legal, HR, accounting, finance, and any others that want to have input. 

KELLEY: Yeah, that's a great point. It's another good reason to bring in the equity admin early, so that they can help develop this cross-functional team and kind of shepherd it through the process. HR generally handles more of the employee participant type of aspects of this. But all these internal teams need to understand that their roles in the overall process of becoming public are important and just what their role is. So, as HR understands the culture, they can help with communications, the training. And they can help everyone in the company realize how they're going to sell their shares. That's generally a joint venture between equity administration and HR. But so much excitement and tons of questions go into it. So I would say spend less time on preparing FAQs and more time answering the individual questions. I would drop the terminology and put it into plain English for your employees. I've seen a number of different companies spend a great amount of time creating wonderful educational tools. But in the end, a lot of people won't go out and read or watch the videos. They kind of just want to ask their question. They think its unique to them. They don't understand the terminology. So if you can build in some office hours, that's a great way to communicate and educate your team. 

AMY: OK. So what I'm hearing is, it's a big, daunting, wedding-size project to tackle, involving regulators, compliance, vendors, internal partners. Accuracy is super important, and accounting methods are very different for public versus private companies. And there's very few people who've really been trained to administer a public equity compensation plan and even fewer that have significant expertise with the transition from private to public. You put all of that together, and I've definitely heard of easier things to tackle. I don't know about you two. One thing we think we should really point out that we didn't cover because we probably don't have to for our actual listeners and equity compensation experts or SPAs out there . . . For folks that might be listening from the benefits world, the reason that this transition is such a big deal is pre-IPO shares that are issued as a private company, the accounting methods are completely different. It's on paper. It's just on paper. There's nothing happening in the markets. There's no real-time market value that you can see on CNBC. So when you go public, suddenly all of those shares are trading on the public markets. And there's regulations and restrictions, and accuracy, like Kelley said, is so important. And that transition for the employees of what they can do and can't do and when they can do it is really hard, and it's all new. So that's why it's such a huge, daunting, wedding-size task, and it has to be perfect. Now, one thread I'm going to pull on that is about the data management, Kelley, that you mentioned. There's a lot there to consider. So when you think about it, and in your experience, what kind of assessment do you do to determine what you wanted or what you needed in a recordkeeping system. How do you assess those systems? What do you keep? What do you add? I know that's a lot to unpack, but that recordkeeping part helps you get to that point where the accuracy is really, really good. So it can make or break that transition. Can you give us some key points that our audience should consider?

KELLEY: You really do to need to have your equity-plan–experienced SPA right there and helping decide what you can keep and what you need to change and which vendors to use. So they've had a little bit of experience. If you're allowing a team that doesn't have experience to make the choice, it can be very difficult. Most of the private equity platforms may house grant data and shares outstanding, but they don't have all of the compliance and all of the data that you are going to need and want to see. So you're going to have to transition, implement into a new vendor, and learn how to find a transfer agent. Choose one, implement that. That's a huge undertaking, going from a private company and issuing your initial mass issuance file to the transfer agent. That's a whole project in itself, and its one that I've seen not be given the amount of attention that it needs. So I strongly suggest you use an equity admin for this piece. A lot of people let it sit with outside counsel. And although they're wonderful and have done many of them, they may not have all the details or all of the key concerns. So I prefer to go ahead and do that myself. I know that my general counsel says, "Don't let it happen to you." Make sure that you choose your vendors wisely and have open communication between the teams. And just try to move forward making sure that everything is clear and buttoned down. 

BRAD: Kelley, did you work with vendors at the data management stage, and what role did they play?

KELLY: We used different vendors to compile some of the data, to create the documents. However, there is not an experienced team member there to represent the public happenings of a company. If you don't have that, then things can be missed. So you want to make sure that when you provide plan documents to the vendors—as I said, before they've read them in depth—they are understanding the language and the nuances of your plan, making sure that your team may be new to the vendor as well, so overcommunicate things. Ask for extra time. The transfer agent probably needs two weeks, or maybe two days. However long they need, you need to find out how long do they need before they can do what you're asking—making these shares live on their website and sending out communications to your new shareholders, or old shareholders, but now your public shareholders. So I think that we need to keep all of that understanding that maybe we've provided the information in a document to a vendor but they maybe are forgetting because they're working with a number of different clients. So overcommunicate and constantly review information as they're updating the information that's going into your systems. 

AMY: OK. So we have covered a lot—all great points to cover from a private company perspective. Let's go to the next phase, the S-1 filing. I'm not sure if we should have, to use your word, Brad, daunting music in the background or follow-the-yellow-brick-road kind of stuff. I'm not sure. What does that look like? You show up on the front door of the SEC. You feel really prepared. What's that like? Is it an exciting moment? Is it a hold your breath moment? What was the path here? 

KELLEY: Well, the accounting and finance teams, and equity, everyone are really working on the S-1. It's also a time for auditors to ask a lot of questions. They want records to support the numbers. The compilation is generated. The S-1 is drafted and filed. And initially there's usually kind of like a holding S-1. So it has a lot of blanks. And I'm sure I'm not using the correct, proper term. Maybe it's a pre S-1 or the initial S-1 that's filed with different blanks and different terms that then are updated as you get closer to the actual filing and going public. So as you're nailing down all of these and explaining different items to the accounting team and internal and external auditors, you need lots of coffee, lots of patience, and much time as possible to get these things ready. 

AMY: Right, exactly. I was just thinking, I was gonna ask, did you also remove all of the sharp objects off your desk because I think that would have been necessary for me. 

KELLEY: Sure. 

AMY: OK. So it's gameday. Let's unpack the IPO. Tell us about your experience once things got rolling after the S-1. And, for our listeners, if you're a SPA about to go through this process, what's the top three things we should keep in mind? 

KELLEY: That's a good question. I think that the excitement like "It's here" really starts on Pricing Day, so the day prior to going public. It's what everyone on the team is looking for. What is the number? So everyone's waiting to hear what the CEO tells us the IPO price will be. And it sets the initial ESPP offering price if you have that kicking off at the same time. Helps calculation on the awards that are being valued, usually for the board and particular milestone grants that have been waiting for this day. So it gets a lot of calculations going. Lets many people figure out what kind of profits they may make if they have options and they want to sell. And it's really changed a lot in the last year as the SEC has allowed or regulators have allowed for this early lockup release period, which Olo had and a number of companies have had over the past year or so. It's a new feature, and it gets a lot of excitement. We had our early lockup release from IPO date through the end of the month, so about a two-week period, where employees could trade 20% of their shares held at IPO and 20% of their vested options. So that sounds great, but it adds a lot more complexity, a lot of extra work. It requires extra preparations, like having the shares delivered or just 20%. Doing more calculations on which shares are eligible, which different colleagues in the company are eligible to be a part of this early lockup release. And just ensuring that all the right groups of employees are excluded or included. And everyone understands who or who cannot trade. So it's a great way for people who have been waiting a long time to actually trade on the market in a short, defined period. It's valued and utilized, but it is a bit more of a headache, I think, at the end of the day. It created a lot of work at a very busy time.

AMY: It's a lot to keep track of, that's for sure. But what an exciting journey. That's a touchdown, right? So what comes next? Can we talk a little bit about regular lockups and lifts?

KELLEY: Sure. So we're actually in the midst of preparing for our lockup release. And that's generally about a six-month period defined by the brokers and part of the contract when you do the signing there. So questions are starting to roll in again. The company's getting excited, and they're preparing for more exercises, some sales. And the company is preparing to have the freedom to be involved in the market, like the Olo shareholders have been doing since IPO. Once again, there are many regulations to follow, black out windows to be aware of. And for the equity team it means preparing the broker, the transfer agent, for a bulk transfer of the remaining 80% of our shares, and preparing to manage any of the outside 10b5-1 transactions after the release. It's a very busy and exciting time for Olo.

AMY: Well, they're lucky to have you and all of your experience, that's for sure. So we've covered a lot today, and we're definitely at the end of our journey and our time together. Kelley and Brad, thank you both so much for helping us unpack this path to pre-IPO. It's such a complicated subject. Your insights, your experience, and your knowledge really helped us navigate this journey today. 

BRAD: Thank you for having me, Amy. And Kelley, thanks so much for joining us.

KELLEY: Thank you! 

AMY: And thanks to all of our listeners for joining Equity Unpacked and being on this journey with us. Subscribe to our podcast, and visit Schwab.com/equityunpacked.

DISCLOSURE: 
For important disclosures, see the show notes, or visit schwab.com/equityunpacked. 
 

EPISODE 3 TRANSCRIPT

AMY: Think of Quick Takes as little podcast snacks. These are short episodes, just a few minutes long, that cut right to the chase of hot stock plan topics worth unpacking quickly. 

It's been over a year since the beginning of the pandemic, and—here's the understatement of the year—a lot has changed. One of the biggest concerns that COVID has intensified is regarding financial security. The uncertainty from the past year has impacted people's personal finances, their attitudes towards financial wellness, and who they are looking to for help—which is a topic we touched on earlier this year during our inaugural Equity Unpacked^TM episode. 

Last year, in July of 2020, our annual participant survey asked employees what they really thought about equity compensation. And what we found was an increase in the need for help due to the pandemic. 39% of stock plan participants are more likely to need financial advice due to COVID.

And in late 2020, almost a year into the pandemic, a study conducted online by Morning Consult reported that 77%—that's nearly 8 in 10 workers—want their employers to focus on providing benefits central to financial wellness. 

While this isn't necessarily an apples-to-apples comparison, these numbers do shed light on changing views towards personal finances—and to suggest the pandemic has played a significant role in how their attitudes may have shifted. 

Now that we're starting to return to the office, it may be a good time for us to consider how we can help our employees with their financial stress. 

Which makes me ask: How can employers beef up education around equity comp to address employees' needs for more financial security? 

And I think first it's going to be important to understand what's already out there for participants to reference. Are the existing resources comprehensive enough? Because if they are, then it's a matter of encouraging participants to engage with them. Sometimes participants just aren't really aware of what's available. Or maybe they're not taking the initiative to engage with it.

As an admin, you can ask your provider to offer seminars on financial planning and maybe leverage that return to office as a way to engage employees—either on-site or virtually—to support that increased need for financial education overall. 

You might also consider creating subject matter experts across your firm on how to best leverage equity awards, as we know the most powerful conversations often take place peer to peer. 

In closing, we can be super confident that workplace benefits are potentially more powerful than ever as tools to help employees build financial confidence. Employees have spoken, and they've made it clear they are looking for benefits from their employers that will help them with long-term financial security. And the pandemic definitely amplified that need. As your employees return either back to the office or however you define the new normal, this might be a good time to help support their desire to learn more about creating that financial security they're seeking. 

I hope you enjoyed our new abbreviated format. More Quick Takes episodes will be coming throughout the year to help you stay ahead of the curve on all things stock plan administration. 

Subscribe to our podcast and visit schwab.com/equityunpacked. 

For important disclosures, see the show notes. Or visit schwab.com/equityunpacked. 

EPISODE 2 TRANSCRIPT

AMY: Welcome back to Equity Unpacked, a podcast dedicated to simplifying the complicated world of equity compensation. I'm your host, Amy Reback, from the Stock Plan Services team at Charles Schwab. 

Today, we're going international, and not just because we're all stuck at home yearning to travel. For stock plan administrators, granting awards to international, mobile, and global employees presents additional complexities versus domestic employees, and that in itself is worthy of a long-haul trip. 

As our guest today, we have the one and only Kate Gory, Vice President of International Global Services here at Charles Schwab, and she'll help us navigate some of those ever-shifting sands that admins and participants may encounter when it comes to equity awards and global investing. From Brexit to China, Kate is joining our journey today to help us unpack a few key topics.

Kate, welcome to Equity Unpacked and thanks for joining the show!

KATE: Thanks, Amy. It's wonderful to be here, especially since we don't get to see each other in person, and I'm really looking forward to our conversation.

AMY: Where to begin? I mean, we could do an entire series on all of the themes that are swirling around on the international investing scene, but let's start with what issuers and plan administrators might need to consider on a foundational level: So if I'm a stock plan administrator building an equity award program for a global company, what are the current international employment and labor issues I need to consider? 

KATE: Well, you mentioned it in the introduction, Amy. I would be remiss if I didn't start with a very hot topic, which is Brexit. I think that's really one of the many key international events that employers will be considering as they look at their hiring strategy, both for this year but well into the future. There are some protections in the Withdrawal Agreement, which is the treaty that was signed between the UK and the EU last year, that protect the status of UK citizens legally resident in an EU country or vice versa—EU residents that are living in the UK at the 1st of January 2021. So, each participant needs to really consider their own personal situation, but most employees of an EU company that are UK citizens, or vice versa, should generally retain the right to work, access to health care, etc. At present, there is also a pathway for these individuals to gain permanent residence in those host countries, so if you've already resided continuously for five years, or after you've done so, there's a pathway to gain permanent residence in that host country. So, for existing employees in this situation, this will hopefully have a limited impact.

The real open question, that will take some time to resolve, is the ability to work across borders for those who were not already resident outside their country of nationality on 30 December 2020.  For new hiring, where previously European employers could source from across the UK and any other EU member state as the role warranted, it is unknown what—if any—provisions will be made allowing individuals to work across borders.

Of course, Brexit is just one of many trends that could impact where work is being performed. You also have my favorite topic, the emerging trend of digital nomads, which has really come about in response to COVID.

AMY: Oh my gosh, digital nomads. I love it, tell me some more. 

KATE: Well, I think we may see a shift in the way people work due to the impacts of the pandemic. When your home is your office, why can't your office be somewhere fun? So, you see countries like Anguilla and Bermuda offering visas for expats to work remotely from their islands. With limited community transmission of COVID and sandy beaches, it is an alluring prospect. But, with this new freedom, it will require employers to take a hard look at the cross-border legal, regulatory, and tax framework that applies to these digital nomads. Personally, I am just waiting for the day I am invited to work remotely from Disneyland.

AMY: Ha ha, Disneyland, I know how much you love it there. I think you might need to invest in some military-grade noise-cancelling headphones for that, but we'll see. Let me know how that works out. Let's go back to something you mentioned a minute ago. I'd like to explore your comment around data flows and Brexit. What can you tell us about GDPR post Brexit?

KATE: Well, the good news is, for now, we expect data flows to continue. The EU GDPR requirements were already incorporated into UK law, and as of the 1st of January the specific privacy regime post-Brexit is the Data Protection Act of 2018—affectionately called the UK GDPR. While UK organizations need to ensure their privacy programs align with the UK GDPR requirements, we don't really expect any immediate disruptions. Organizations that are operating on a cross-border basis, however, between the UK and EU, will need to ensure they are meeting both EU GDPR and UK GDPR requirements.

Really, the major space to watch is a final adequacy decision, as we saw last July—when "Schrems II" was passed by the Court of Justice of the EU and it declared that the "adequacy" previously provided for data flows between the EU and U.S., what was called Privacy Shield, was no longer valid. The concept of "adequacy" will be a critical topic for determining the ease of data flows between the UK and the EU. Recently the EU released a draft adequacy decision, but it still has to be approved, and it will need to be reviewed every four years to ensure that the UK has continued to meet those adequacy requirements. 

AMY: I'm really wondering if you were using air quotes around "affectionately." But moving on, GDPR, Schrems II, what does this really mean, I mean, fundamentally, what does this really mean for employers with international employees and their requirements regarding data privacy?

KATE: Well, Chapter 5 of the GDPR talks about ways in which personal data of people living in the EU can be transferred to "third" countries—countries that aren't EU member states or EEA countries. Through an adequacy decision, the EU can declare that a third country, like the U.S. and now the UK, is adequately secure for data transfers. Countries like New Zealand and Japan were expressly determined to have suitable data protections in place so that data could flow from the EU into these countries—assuming the data transfer itself, obviously, is legal and meets the other terms of GDPR.

Previously, the adequacy decision for the U.S. in relation to the EU was specific to the U.S.–EU Privacy Shield. On the 16th of July, the ECJ declared Privacy Shield to be inadequate. In the ruling, they point to two key areas where U.S. laws did not provide sufficient protection to meet EU minimums. First, GDPR has a concept of necessity when it comes to all data sharing—even for sharing data with the state for things like surveillance programs. In the case of Privacy Shield, the courts found that the U.S. surveillance programs had too broad of a scope. The other aspect of the U.S. privacy rules that the court used to determine insufficient adequacy under Privacy Shield was the lack of effective redress for European data subjects.

AMY: OK, so, so what are the options for employers—and providers, for that matter, really—to remain compliant with this EU data privacy?

KATE: Well, Privacy Shield gets a lot of coverage because it, and its predecessor, were ultimately struck down in EU courts. However, there are several mechanisms of data transfer between the EU and a third country: adequacy, which, frankly, I think we've talked about enough for this podcast, but that's what Privacy Shield used to provide; derogations, which are exemptions from the law; binding corporate rules; standard contractual clauses; certification methods; and codes of conduct. While I know this podcast is called Equity Unpacked, there is just too much, frankly, to unpack on each of these options! In the absence of an adequacy decision between the EU and the country to which the data is being transferred, employers will need to consider how they are using the data, why they are transferring between the EU and this third country, and what other mechanism might be feasible and appropriate for their data privacy process. The EU has a great FAQ on this topic, which we'll link in the show notes for this episode. 

AMY: Terrific, thanks for the resource tip. I know everyone will appreciate that. Let's pivot and talk about China. Kate, what's happening in China these days?

KATE: Oh, just a few things, Amy. There's lots interesting happening in China, and I think that really begins with Schwab. We began a partnership with the Shanghai Advanced Institute of Finance at Jiaotong University in 2016. We really want to study China's rising affluent investors with an annual financial well-being index, and we launched that back in 2017. The Chinese rising affluent investors are a large yet really not well understood segment. And so we're really proud that this is our fourth year tracking such a growing, vibrant segment. 

AMY: Hmmm, OK, so are there any key themes you're seeing? I mean, what trends really stand out for the emerging affluent in China? 

KATE: Well, this past year we saw several key themes for the emerging affluent in China:
 

• We saw improved rates of financial planning, and it really points to a growing awareness of the importance of being prepared for emergencies. We expect that financial wellness education would be meaningful to the employee base.
• A desire for cash and other low-risk products to respond to changes in circumstances was another critical theme.
• We have seen prevalent missed debt repayments, indicating vulnerability to unexpected financial challenges and underscoring the benefit of financial wellness resources to employees. 
• Influence from social media could undermine the achievement of long-term financial well-being.
• And, a greater financial literacy can heighten focus on financial aspirations. 

AMY: What about financial confidence? What have we seen in the past year, and is it changing? 

KATE: Well, despite the pandemic, the rising affluent in China continue to increase their financial confidence, and it's underpinned by a faith in future prospects and a personal sense of financial preparedness. Specifically, and this is good news for those stock plan administrators, a job with stable income and stable family circumstances. Rather than the financial planning that we often think of in the U.S. as being critical to that financial confidence. Additionally, only 20% of the rising affluent answered basic financial literacy questions correctly, meaning that a focus on just those fundamental financial literacy topics with employees, through the financial wellness solutions offered to them via equity awards and other programs, will continue to be meaningful.  

AMY: OK, great. Kate, as always, you always bring such an incredible depth of knowledge for our stock plan administrators and employers. There's a clear reason you're a fan favorite! 

Now, I'm not done with you, just yet, Kate. But before we swing into the last part of the show, I'm going to add one carry-on sized note on the participant experience side, as that's always a hot topic for stock plan administrators and employers.

As a provider, we get asked about the participant experience, particularly equity compensation education for international participants, so I'm going to quickly unpack a few things on the participant side.

Let's think of equity awards like a vehicle—an actual vehicle, let's say, a red, four-door, five-passenger sedan. You deliver a sedan as an award to a domestic employee in Ohio and the same exact sedan to an international employee in Bangladesh, let's say. Despite the difference in destination, the same red, four-door, five-passenger sedan is received by each employee. 

So, let's ditch the analogy and go back to actual equity awards. An international employee in Bangladesh and a domestic employee in Ohio both receive an RSU grant on the same day. The awards are the same, but the locations of the recipients are not, so what happens after they receive their awards will be different. For the employee in Bangladesh, they will be taxed at a different rate, and possibly taxed even at a different time. 

The way they are allowed to interact with the broker-dealer that holds or custodies the award for them will be subject to the securities regulations in their country of residency and/or citizenship, or both. And the exchange rate for their native currency may impact the final value they receive. But ultimately, the nature of the award they receive is the same, just like that red, four-door, five-passenger sedan. I mean, fundamentally, an RSU in Ohio is the same as an RSU in Bangladesh. 

I mentioned before, providers often receive requests for specialized education for their international participants on equity awards. But remember, the awards themselves that are granted to those international employees, again, in the vast majority of cases, are no different than those granted to domestic employees. In other words, if the domestic participant from Ohio and the international participant from Bangladesh both come to me as a provider and ask, "What is an RSU?" or, "What is an ISO?" the answer for both is the same. The answers to fundamental equity compensation questions addressed by participant education programs do not change based on where the participant lives, and it's simply table stakes for any provider to offer at least fundamental participant education. However, there's a catch: The type of education and support most often requested by international participants is not usually related to the securities business. 

The most common questions participants ask—international participants, that is—are things like: "How and when will I be taxed on the award?" and "Will the exchange rate for my country impact the value if and when I sell?" 

Now, as you can imagine, trying to address those very individual, personal questions from participants just isn't possible in a group setting, in a workshop, or, you know, in an education forum, because every single one will be different, and they become increasingly complex when dealing with not just global but mobile employees. I've been to a number of education workshops with international participants and I'll never forget getting this one question from an attendee. I wrote it down, actually. He asked: "I'm a citizen of France, my permanent residence is in Singapore, I spent three months in Shanghai, six months between Ireland and the U.S., and I've been in the UK on assignment for the last eight weeks. What will the tax implications be for my equity awards?" Now, I know that may seem like an egregious example, but trust me, that level of complexity is very common with these international employee populations. 

They are important, but really tough, and individualized conversations that really need to be addressed by a local and appropriately licensed tax expert or accountant that can customize the response to meet the needs of each unique participant, and many, many employers, not all, but many employers, create partnerships with international tax consulting firms that do just that for their participants. 

So, there it is. The burning questions about how to support the greatest needs of international participants, unpacked!

OK, Kate. Digression over. Back to our original agenda. Let's close out this episode with a Lightning Round. I have three questions—are you ready?

KATE: Oh, I'm ready. 

AMY: First, I'll ask you to sum it up for us—what are the top three global dynamics that employers and participants should be aware of that have the potential to change the game for equity comp?

KATE: Well, the first that I really think about is social media. Social media and other digital means of communication really close that gap that may have previously existed between employees in the company's home country of the U.S. and employees that are working in other locations. We saw from the study I mentioned earlier, with the Shanghai Advanced Institute of Finance, that influence from social media can actually undermine individuals' long-term financial well-being.  

The second thing to consider is financial wellness solutions. As you were mentioning, Amy, and as we've talked about, we see emerging affluent not only in China, but in a number of countries in which U.S. companies have employees, and we will likely see a continued demand for financial literacy to be part of that solution when people are offered equity awards.

And the last one—not to take us all the way back to the beginning with Brexit, Schrems II, and GDPR—but it's data privacy. We've talked about it a lot in the EU context, but I think really data privacy is an important space to keep an eye on regardless of where your employees and your consumers are located. Whether it's GDPR, Privacy Shield, and standard contractual clauses, or the recent data privacy updates in places like Brazil, China, and India, a number of countries are reviewing how their residents' personal data is used and shared across borders. Companies need to be aware of these emerging changes both for their own data transmissions as well as those of their service providers.

AMY: OK, so tell us, what's the number one question regarding international or global policies that have an impact to markets and investments that you typically get from your business partners?

KATE: Well, you are one of my business partners, and it's probably not a great way to get invited back to the podcast—but the number one question I get is, "Why is it so complicated?" And my answer disagrees just slightly with the carry-on-sized topic that you just unpacked for the audience. My answer is honestly that it's not inherently complicated. The rules in any one jurisdiction aren't any more complicated than dealing with all of the rules in the U.S.—it's just that when you're working on a global basis, you could be asking about the rules in over 200 different jurisdictions. And so there's a lot of different rules at play, versus just the single set of U.S. rules. But we cannot ignore the fact that we now see more multi-national companies than ever, and especially multinational companies offering equity awards to their employees outside the U.S. And so, in order to be able to best support our clients—corporate and retail—we have to have a robust program to understand the rules of the jurisdictions in which we do business and the differences between those jurisdictions and the U.S. rules. I am a problem solver at heart, so what others might see as complexity, I honestly just see as a fun puzzle to put together.

AMY: Well, thank goodness for that. And finally, quite possibly the most difficult to answer after 2020: What has been your favorite way to "escape" since we've all been working from home and on lockdown?

KATE: Well, Amy, I have a toddler who received a trampoline for Christmas. I'm just grateful my "escape" hasn't been multiple trips to the emergency department.

AMY: We're all grateful for that. Well, Kate, as usual, you've been just such a great wealth of knowledge, and I'm so grateful you were here today to help us unpack the rather nebulous and of course ever-changing international landscape. Thanks so much for sharing your time and your knowledge with us today. 

KATE: Thanks, Amy, this has been a ton of fun. 

AMY: Thanks again, Kate, and thanks very much to all of our listeners. I hope you'll join us for our next journey on Equity Unpacked. Until then, safe travels.

Subscribe to our podcast and visit schwab.com/equityunpacked. 

For important disclosures, see the show notes. Or visit schwab.com/equityunpacked.

EPISODE 1 TRANSCRIPT

AMY: From Charles Schwab Stock Plan Services, this is Equity Unpacked—a podcast dedicated to simplifying the complicated world of equity compensation.  

I'm Amy Reback, and for the last few years, I've spent at least a portion of every day searching for a source of simplicity within an otherwise notoriously complex profession.  

While technical, detailed sources abound, simplicity and even suggestions on where to learn more about current trends are scarce.  

I've scoured websites, had endless discussions with plan administrators, accountants, participants—both experienced and novice—in an effort to uncover a digestible source of information to navigate hot topics and themes within the stock plan world. 

When was the last time you looked beyond the details to take in a broader perspective? And how do you know if you're even asking the right questions?

In Equity Unpacked, we examine emerging themes in managing equity comp. From administrators to participants, this is your moment of equity zen.

In our inaugural episode today (very exciting), we will focus on participants—how they feel, what they want from their stock awards, and the role they want their employers to take.   

After all, the core purpose of equity compensation, or stock awards, is to retain and attract top talent. In other words, participants are the reason equity compensation exists to begin with. So, we figured they're a great place to start.

For the last four years, Charles Schwab has commissioned Logica Research to produce a stock plan participant study to examine the mindset of employee participants.  

How do they view this type of compensation? What do they use it for? Are they confident in making those decisions? And in 2020—wait for it, you knew this was coming—how has the unrelenting reality of COVID-19 influenced how they feel and the decisions they make?   

My guest today is Lilah Raynor, CEO of Logica Research, and our goal is to unpack the Schwab Stock Plan Participant Study for 2020.

Lilah, thanks for joining us today.     

LILAH: I'm so happy to be here, Amy, thank you for having me. 

AMY: Now, Lilah, Schwab and Logica have produced this study for a few years now. And, as with any study, one would  assume that over time certain trends would emerge—and then… 2020 happened.  

Now, I'll ask you to forgive me ahead of time for using "normal" and "2020" so close together in the same sentence—but, under normal circumstances, we know employers use equity comp as a means to attract and retain talent.  

One of the data points that stood out in the 2020 study is that 57% of respondents—who are all stock plan participants—would prefer to stay with their employer specifically due to COVID. Let's think about that from a "retain and attract talent" perspective.  

Clearly, it's harder to attract employees if they're less willing to change employers—but employee retention, on the other hand, has become automatically easier due to COVID.  

So, if we look at that through an equity compensation lens, the longer an employee participant stays with their employer, the more they'll benefit from their stock awards. Their awards have a chance to vest, they may even receive additional grants as well, but 57% staying put—I'm curious how this might influence participant behavior.   

So, Lilah—are you ready to unpack? I'm wondering if participants are simply seeking security, or are they waiting for shares to vest? Is there a greater need for income? Walk us through the data from the study.    

LILAH: Yeah, Amy, all great points and great questions. We have seen over the years in conducting the study for Schwab  on equity compensation that equity comp does play a key role in choosing an employer. 

So absolutely, under normal circumstances, that is true as well—but yes, of course this is a totally different kind of year, and so we're seeing a few things going on, and you hit on a number of them. There really are a mix of reasons. 

It's a time of uncertainty, and staying with an employer helps limit or mitigate uncertainty for people, by not switching jobs. It's also a time of waiting, and waiting for shares to vest.

And then, also, there is a sentiment right now that we're seeing in our research around employee engagement. For a lot of people, employee satisfaction is actually up due to COVID. And we're seeing that there can be increased employee engagement based on how employers have handled this challenging time. Part of it can be just increased employee engagement right now. 

In addition to reasons for staying, we've seen that between 2019 and 2020, the likelihood of employees choosing to work for a company because of equity comp went up significantly, as well. It was already high at 87%, and it went up to 90%. We also saw that equity compensation went up as a main reason to take the job and that this was especially true for millennials.

AMY: So I see the importance of equity comp as part of that decision-making process increased pretty significantly, as well—and then when you add COVID to the mix and the multitude of difficulties that go with it, you factor all of that in, and participants are choosing to stay with their existing employer longer, so they do benefit more from those employee equity plans. And then, if they're faced with that "should I stay or should I go" decision, their awards are worth more, the stakes are higher, and that decision becomes even more difficult.  

Now, on the flip side, it makes it significantly more expensive for employers to attract new talent, as they may need to offer higher amounts of equity to prospective employees to lure them away—and it sounds like great news for stock plan participants, but it also means employers may have to step up their equity game to compete for talent.  

Lilah, in the 2020 participant study, we also saw that 39% of respondents feel they're more likely to need financial advice due to COVID.

Let's unpack it—what kind of advice are they looking for? Is this a new trend?    

LILAH: Yeah, it's so interesting. We have seen in our research that now is a time when people are more open than ever  to talking about money, and they are really looking for advice.

The type of advice they need can depend on their financial situation.  

So, people have been looking for financial advice for a long time, of course, but it's especially true right now. And you have a range of people needing help moving from spending to saving on one end of the spectrum, so they need help with debt management and budgeting.   

And when we have conducted interviews with people in the past on how they use their money from their stock plan, we found that it could be used for basic needs such as paying down debt and basic budgeting needs.  

Then they also want to know how to use their equity compensation to help them do these things.

And then when you look at the other end of the spectrum for more affluent and more highly compensated employees, they need help and advice to plan for the longer term and to look at some of the more complex aspects of their financial situation.  

So, what we see in our study among stock plan participants is that employees need help with a range of financial advice—from budgeting, debt management, to investment advice, to retirement planning. So, that full range.     

AMY: So what I'm hearing is there's a range of needs here. And that's normal, don't you think? I mean, financial concerns in your twenties are super different than they are in your thirties and forties.  

And hopefully, as people mature and they save and invest, they have more choices in how they spend or use their money, right? So, the overall theme here is participants need help understanding the best way to use their equity compensation at just about every stage of their financial life. Do you agree?    

LILAH: Yes, absolutely. 

AMY: So, these are big decisions. It sounds like these are the type of big life decisions that could induce a lot of anxiety, mostly because it's really hard to ask for help, especially with financial matters. But it can also be even harder to commit to a long-term strategy for anything in 2020.   

What can employers or plan sponsors recommend, and what can participants do to mitigate this type of stress or apprehension about their finances?    

LILAH: You know, knowledge is power and really helps alleviate anxiety and fears in general.  

This is certainly true for finances, as well. And we've actually seen that confidence in making decisions on equity compensation has gone up in the last year.   

Our hypothesis as to why this is happening is that there is more information and education available and that people are educating themselves, which really makes them feel more confident.  

Equity compensation is one part of this financial picture.  

There are more communications from employers and from other people in an employee's network—and with this is a need for education and how best to use equity compensation and when.   

Our research revealed that the majority, 85% of employees, agree that they would like their employer to provide more education to help them understand their equity compensation. So there's really an opportunity here for employers to provide education and help in planning, and help alleviate that anxiety. 

One of the things that we see in our study is that confidence in decisions is higher for those with an advisor.  

Getting education and advice is super important. And, going back to that earlier part of our conversation, people are open for that advice and asking for it more now because of COVID.  

We see in our stock plan participant study that 30% of people exercise or sell as part of their long-term plan.    

AMY: You know, Lilah, I love that you said "knowledge is power." That just sums up everything in 2020, doesn't it? We could use that as a simple way to answer nearly every question relevant to this year—"What should you know about COVID?" "Knowledge is power." "What should you know about the election cycle?" "Knowledge is power." "Where do I find household paper products these days?" "Knowledge is power." And, of course, closest to our hearts—"What should you do with your stock awards?" And knowledge is definitely power there.  

So, Lilah, let's turn to another standout statistic from the study, and this one is particularly interesting because it's specific to the millennial generation:

Why should we pay attention to millennials? Well, two reasons. The first is they represent the largest percentage of employees in the workforce today, and, also, they have a lot more energy than those of us from Gen X.

I mean, Gen X, love you, mean it—'80s music always gonna rule—but let's face it, we are outnumbered here. So, the more effort we put into understanding millennials, the happier everyone will be.  

Besides, millennials are fun and they teach us how to do really cool things with our phones—so perk up, Gen X. Lilah's about to unpack how all of this is different for our millenial friends.  

Here's the stat: the study reports that 27% of millennials are more likely to exercise or sell equity compensation due to financial stress versus 13% for older generations.  

Now, Lilah, we already know financial stress reaches everyone—so why is this so unique, or more prevalent, for millennials?    

LILAH: Millennials have had a lot of financial challenges as they've gone through their lives. They entered the job market at a challenging time, they were hit by the great recession, and then manage the stages of careers, families, homes, and retirement planning. 

They came of age during the last recession, many with a lot of college debt, and then—COVID.  

COVID is hitting millennials hard, with younger ones not as established in their careers so their jobs are more vulnerable, and older ones with more financial responsibility—while at the same time they're having job security issues, and they're taking care of kids and working at home with kids at home.

So of course it's understandable that stress is high for millennials due to COVID, and they're going to need a lot of help.

But what we also see is that millennials are engaged in their finances.

In our study among stock plan participants, we see that they may rely more heavily on company stock as part of their portfolio and assets. So they're going to need extra help understanding how to manage this, how to manage their equity compensation, and how to diversify, and how to plan. 

And we see that in other research as well, too. 

AMY: You mention "plan"—let's go back to long-term planning for a second. The study also indicates that 5 in 10 (or  50%) of participants, overall, use or intend to use their equity comp as a means to supplement their retirement savings.  

Now, most millennials are just starting to think about retirement as a reality—but as a card-carrying member of Gen X, retirement has been top-of-mind for a while over here.  

What does it mean if 50% of participants are using their stock awards to support their retirement? Are we all grown up now? Are participants embracing long-term planning here?    

LILAH: Yeah, it's a really great question, and you raise a good point. You know, this really goes back to that idea that we  seem to be at an inflection point right now in terms of how people are engaging with their finances.  

They are engaged—and I'd say that in the 25 years that I've been doing this research on people's attitudes toward money, they are more engaged than I've ever seen before.

And, we see that show up in different ways.   

One example is we know people are spending less and saving more on average right now.   

Those people who have the income, who have the abilility to save—they are. And we see that people are looking for ways to make the most of their money, and to make it work for them.  

This includes their retirement accounts and their equity compensation programs.  

So, we are seeing that people are increasing their contributions as well as rebalancing their accounts.    

One finding this relates to is that about 1 in 5 people anticipate delaying their retirement, so the increased contributions are a way to help address that.     

AMY: So, if 1 in 5 (or 20%) of participants are delaying retirement and staying in the workforce longer, they likely continue to earn more equity awards, which contributes even more to that retirement fund.  

Lilah, you've really helped us to unpack what's happening in the hearts and minds of participants today—so let's see if we can sum it up.   

First, thanks to COVID, more than half of participants prefer to stay with their existing employer, which allows them to gain more benefit from their stock awards and also reduce some uncertainty of a new job. But that also makes it harder for new employers to lure them away in the long run.  

Participants face anxiety about making decisions on how to make the most of their equity awards across all ages, and they are looking to their employers to provide opportunities to them to get help and guidance, to alleviate that stress. And that's especially true for the millennial generation—who we love—and who has unfortunately suffered more than their fair share of financial setbacks.  

Lastly, more and more participants are engaging in long-term financial planning and subsequently using their stock awards to help them save for retirement.  

So, let's bring it home with some suggestions—what can participants and their employers do to make the best financial decisions in terms of long-term equity awards?    

LILAH: So, I wanna take that from two angles. One is, if you're an employee or a stock plan participant, what should you do—and the other is if you're an employer. 

If you're an employee—first of all, you want to understand your choices so you can make informed decisions. Second, you can seek help from your employer. And third, understand where your equity compensation fits in your total financial picture.

And then, if you're an employer—first of all, your participants are seeking help from you. Second, help employees understand their financial picture and where equity compensation fits. And then, finally, as an employer, you can offer greater access to financial advice and planning tools to all of your employees, so those employees who are on that full spectrum of financial needs—not just the executive team.    

AMY: That's fantastic advice, Lilah. You know, after 17+ years of serving clients at Charles Schwab, I can attest to the importance of planning and the peace of mind it can offer when tailored to your specific needs.  

I mean, let's be honest—financial planning doesn't sound like a barrel of laughs. But you said it, Lilah knowledge is power. And having a clear sense of where you are, what you need to plan for, and steps on how to actually get there is such a relief, I've seen it time and time again, that life just becomes a whole lot more fun when you aren't stressed about your finances.  

A financial plan is simply information that helps you make better decisions. Word to the wise—you are the decision maker.  

Lilah, your insights have been terrific. Thank you so much for being here to unpack equity today.    

LILAH: Thank you so much, Amy. It was great to be here.     

AMY: And thanks to all of our listeners for being on this journey with us.  

In our next episode, we'll explore the ever-shifting sands of the international investing landscape with the one and only Kate Gory, Vice President of Global Investing here at Charles Schwab.  

From Brexit to China SAFE, Kate will help us unpack how to navigate the biggest hurdles when granting shares to international employees.  

Until then, thanks for joining Equity Unpacked, and safe travels.

CTA: Subscribe to our podcast, and visit schwab.com/equityunpacked. 

For important disclosures, see the show notes. Or visit schwab.com/equityunpacked.