Future expectation of the company stock drives
The objective of this chapter is to focus on the differences between a monetary plan and a stock plan. It will highlight the different infotypes that are related to LTI. It will also deal with some of the constraints of this new functionality like certain functions are only available for US and Germany
13 Managing Stock Programs or SAP Long Term Incentive Programs
Stock and stock options grants are handled using the ECM Long Term Incentive category of compensation plans.
13.1 Setup the budget (Non-monetary)
For LTI, we need to create the stock unit first. It is necessary to do this step first since within a company there might we different kinds of LTI instruments used e.g. Restricted stock, stock option, etc…
We will define a stock options unit ‘SOPT’ as shown in Figure 13.1.
We will now create the budget unit that is non-monetary. The budget type is not defined based on the stock unit.
Figure 13.2 Budget unit as non-monetary
We will continue to use the existing budget period. There is absolutely no constraint in creating new budget period if the key date is different or if the budget start and end dates are different. This can happen if the budget periods are aligned to financial calendar in a country. In many countries the financial year starts on April 1 and ends on March 31. In this case, it might be necessary to create different budget periods.
Figure 13.3 Using existing budget period
We will now create a new compensation plan with the compensation category ‘LTI Grant’ as shown in Figure 13.4.
We will add it to an existing Annual Review process. This will ensure that this plan comes up as another tab during the Annual review.
Figure 13.5 Adding stock options review item to Annual review process
We will setup the compensation review item attributes for the Stock options as shown in Figure 13.6
13.2 Setup the Compensation program
13.3 Setup the eligibility
We will setup the eligibility for the stock options plans by creating a separate stock option variant.
Figure 13.7 Setup stock options eligibility
We will need to use the eligibility grouping that has already been defined for the compensation area.
Figure 13.8 Compensation area based eligibility groupings
The executives are eligible for stock options if they have a performance appraisal between 4 and 8 points. This is setup as shown in Figure 13.9. The Appraisal rule ‘BONS’ is setup to include the condition of appraisal between 5 and 8.
Since no other group is eligible, it’s recommended that they be assigned as ‘Not Eligible’ in the eligibility rule.
Figure 13.10 Setting other groupings as ‘Not Eligible’
The overall eligibility variant is shown in Figure 13.11
13.4 Setup the guidelines
We will now setup the guidelines for the stock options plan. We will create a separate guideline variant for stock options.
Figure 13.12 Defining the Stock options plan guideline
We can use the ‘EXEC’ proration rule by including the rounding rule for the stock options unit ‘SOPT’. We will have to create different proration rules in case there are other stock units used. We are rounding up the stock option to the nearest 1000 for the executives.
Now we will setup the compensation matrix dimension segment. The Figure 13.14 shows how the 5 segments are created based on the performance ratings from 1 to 8.
The guideline provides the defaults for Executives who have performed ‘Satisfactory’ and above.
The final compensation guideline will include guideline matrix as defined in Figure 13.15 and the proration rule defined in Figure 13.13.
Figure 13.16 Setup the guidelines for stock options
The compensation plan attributes will include the eligibility variant and guideline variant that have been defined specifically for the stock options plan.
Figure 13.17 Setup the compensation plan
The compensation plan payroll data is not applicable for LTI plans. This is due to the fact that the LTI plans are not monetary.
Figure 13.18 The payroll data doesn’t need to be added here
This leads us into the discussion about the additional configuration that LTI entails.
LTI Setup
LTI requires further configuration then the standard budgeting and compensation administration. LTI awards are in stocks but the end goal is that the employee can realize the gains in monetary terms. We will review the additional configuration needed for LTI as shown in Figure 13.19 below.
LTI Vesting
An LTI award can follow different vesting rules depending on a company’s practices and policies. Some companies might follow a 3 year vesting period. This means that an employee has to wait for 3 years before they can ‘sell’ their LTI grants and realize any profit thereof. Some companies might follow a 5 year vesting. Some companies might follow 3 years vesting for their salaried employees and a 5 year vesting for their executives. What a company decides will be based on their philosophy and belief in what will work for them to retain and motivate people to achieve more and in turn the company achieves more and hopefully the stock market sees the same and the stock prices raise and the employee’s can sell their grant for more profit!!!!
There are 2 vesting rules configured in the Figure 13.20 below.
The gradual vesting schedule is designed as shown in the Figure 13.21 below. It means that 20% of the grant will vest after 12 months. After 24 months, another 40% of the grant will vest and so on. The employee can ‘sell’/ ‘exercise’ these options anytime after they have vested..
There might be some restrictions on exercising the grants after they have vested. There might be different exercising windows for all the non-executive employee and executive (or insiders) employees. The non-executive employee can be setup to exercise their grants anytime but the executive employees can only exercise their grants during certain periods where they can be considered to have the same information as has been disclosed to the public. These can be a month after the annual results have been announced, or a month after each quarter results have been made public.
Figure 13.22 Defining the exercise window
Figure 13.23 Designing the exercise window
LTI plan configuration
The LTI plan attributes consist of 3 many options.
The first is a checkbox ‘At Ex’ that determines whether the exercise price is determined at the time of granting or exercising. If the check box is clicked then it’s determined at the time of exercising otherwise it needs to be updated on IT 0761 at the time of granting.
The second is a dropdown ‘Data Evaluation Mode’ for accounting interface. We will chose ‘No Data valuation’ for our stock options plan.
The exercise window (EW) is a dropdown of all the exercise windows that have been created. If we leave it blank, the employee can exercise their grants at any time. We could do a manual override for the executives on their infotype 761 and add an exercise window only for them.
Figure 13.24 LTI plan data attributes
We can update the LTI grant of an executive to have an exercise window as show below in Figure 13.25:
We will now setup the LTI plan time dependent attributes. The plan terms indicates the validity of the award. The stock options will be forfeited after 4 years if they are not exercised.
Figure 13.26 LTI Plan time dependent attributes
For a particular plan, the exercise price can be fixed for everyone. If the stock is trade above the exercise price, then the employee makes a profit on the difference. If it’s traded below the exercise, the employee will not exercise the stock option and will not make any profit.
Figure 13.27 LTI plan pricing information
When the exercising data is received back from the broker, the following wage types have been provided by ECM for payroll calculations.
Figure 13.28 LTI plan payroll data
Life events impact LTI awards. Some of the life event are listed in the Figure 13.29 below. These life events change the LTI grants in some form. If the employee terminates, most company forfeit the unexercised options. In case of retirement, the options can vest immediately.
For each life event, we can configure the system reaction. If the employee is terminated, all the remaining awards will be forfeited.
Figure 13.30 Employee termination impact on awards
13.5 Setup the Award
<<Executing stock options plan> >
We will first need to create the stock options plan. We would not really do it to the lowest level of the organization but restrict it to the top 3 levels. By restricting the budget to the top 3 levels doesn’t mean that the awards can’t be granted to people below that level. It only means that the budget numbers will be cumulated at level 3 for all the awards that happen under. We will add the budget amounts to each of the budget units.
Figure 13.31 Planned budget for stock options
Once the budget amount is finalized, we will release the budget and the status will change to ‘Released’.
Figure 13.32 Released budget for stock options
The manager follows similar path for selecting an employee. As you would notice in Figure 13.33, the stock options plan is now added to the annual review process along with merit and bonus plan. You would also notice that only the executives (Chief Operating Officer, VPs) are eligible and the status displays that it is a new record and not yet been created in the system. The statuses for rest of the employees are marked as ‘ineligible’. The effective date defaults based on the value from the compensation plan review item configuration.
Instead of scrolling up and down for eligible employees, we can turn on the filter by clicking ‘Filter On’ button and adding the status filter as ‘New’.
Figure 13.34 Filtering the eligible employees
When we apply the guidelines to the selected employees, the stock options are assigned to the employees. Based on the budget unit the employees are financed by, the budget numbers are impacted.
Figure 13.35 Applying guidelines for stock options plan
Since exceeding the budget is just a warning as configured for the compensation review item in Figure 13.6, we can go ahead the create the records. You would notice that there will be no record with ‘New’ status now and on removing the filter, you will see that all of them are now ‘in planning’. The corresponding records for infotype 0759 have been created for the employees
Figure 13.36 Stock options assigned to employees
Now we need to follow the approval process. All the approved records need to be activated by the compensation specialist. The infotype 0762 will be created with all the relevant information.
Figure 13.37 LTI grant for stock options
13.6 Integration with Brokers/ Banks
We need to setup the system to receive the information from the brokers in relation to the exercised options. If this is not possible, we will still have to maintain this information manually.
Figure 13.38 Create LTI Exercising
The brokers will also need the participant data as shown in Figure 13.39
13.7 Summary
The chapter covered many aspects of LTI awards. It covered the compensation administration process and also the LTI specific portion of vesting, exercising, etc…
Hi,
ReplyDeleteThis is a very good and useful information.
It would be great if you can also share the navigation path and Screenshots. Kindly share the full document or let me know the source of availability.
Thanks and Regards,
Sreenivasa Reddy