Equity Unpacked™: The Stock Plan Administrator's Podcast
Host Amy Reback teams up with Brad Hass, Director of Stock Plan Services, to interview Kelley Yurt, a client who recently went down the pre-IPO path with her current employer, Olo. They dissect Kelley's experiences at different stages in the pre-IPO journey to help private companies unpack the path to taking their companies public.
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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.
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.
For important disclosures, see the show notes, or visit schwab.com/equityunpacked.
Host Amy Reback explores how the pandemic has changed participant attitudes and their sense of financial security, and what admins can do to address their growing need for help.
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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 UnpackedTM 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.
There's granting equity, and then there's granting equity to an international workforce. In episode 2, Amy and her guest Kate Gory, VP of International Global Services, discuss how to navigate the biggest hurdles when granting shares to international employees. They unpack current global dynamics that have the potential to change the game for equity compensation—and what those dynamics mean for employers and participants.
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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.
What do employees really think about equity compensation? Amy speaks with Lilah Raynor from Logica Research to unpack the data from this year's participant survey and explore the ways COVID has impacted how people are (and aren't) investing.
- Read the transcript
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.
Amy Reback, head of Stock Plan Services, currently leads more than 150 employees in over 50 different roles. With over seventeen years at Schwab, she's responsible for business acquisition and development, corporate client onboarding and service, product and platform development, operations, relationship management, financial reporting, retail engagement, and business strategy.
Amy previously served as Vice President, Regional Market Executive for the Great Plains in the branch network organization at Schwab, leading the efforts to provide ethical and transparent financial services to thousands of clients among 16 branch locations, 8 branch managers and 125 branch employees located between St. Louis, Missouri, and Aspen, Colorado. Amy and her husband, Dan, currently reside in Denver, Colorado with their two boys, Tyler and Jackson.