More Education Needed on Equity Compensation

Overall, the study from Fidelity Stock Plan Services suggests 16% of the U.S. work force is enrolled in at least one type of stock plan, while 9% are enrolled in multiple plans. About two-thirds of those who work for an employer that offers a stock plan (11% of all employed) have received a stock option grant. Restricted stock plans, now offered by 9% of employers, showed 6% of the total work force participating. Stock purchase plans are offered by 17% of employers and the number of employees participating is 11%.

Three-fourths (74%) of respondents at companies that offered all three plan types report they feel more loyal to their company as a result of the plan and 76% of respondents say they work harder. Over two-thirds say stock plans made them feel more invested in their place of employment and about half indicated a stock plan offering made them less likely to change jobs.

Eighty-six percent of participants in stock option plans (SOPs) and 89% in restricted stock plans (RSPs) consider their plans to be a key part of their compensation package, while four in 10 say a company stock plan is a requirement when choosing a place of employment.

However, Fidelity’s survey reveals employers could reap more loyalty and productivity benefits if stock plan participants were more educated about their plans.

While 84% of SOP participants said they understand their plan overall, and 80% said they understand both how and when to exercise their options, the numbers actually reveal a troubling trend, Fidelity said. The 20% who do not know how or when to exercise options compares to just 5% in 2002 and the 23% who do not understand the tax implications of exercising options compares to just 11% in 2002.

In addition, when looking at other survey results it becomes clear that employees' self-assessed understanding is somewhat overstated. A majority of participants (58%) have never taken action to protect the value of their options. Their top reasons for this inaction include the assumption that share prices will always continue to rise, as well as the fact that no specific action has ever been suggested to them.

An alarming one-fourth of stock option plan participants also admit to having allowed in-money options to expire. One-third say they forgot about their options, and another third were either daunted by the complexity of the plan or did not understand it.

Participants in RSPs have the highest level of confusion among all three plan types, according to Fidelity, with almost one-third (31%) uncertain about ways to meet tax liability and one-quarter even unclear about what restrictions are placed on the stock. The tax considerations when restricted stock is accepted and when it vests are also widely misunderstood - by 27% of all participants in each of those situations.

By a slight margin, participants in stock purchase plans (SPPs) have the best understanding of their plan among the three plan types. Most SPP participants are regular purchasers - only 18% of respondents who had ever participated in their company's stock purchase plan had not bought stock in the past three years, and 58% said they buy stock every time it is offered.

However, although the rules applicable to stock purchase plans are comparatively straightforward, Fidelity said its survey indicates an erosion of overall understanding over the past five years. Twenty percent of participants say they do not understand the tax implications of their stock purchase plan, compared to just 12% who said the same in 2002.

According to Fidelity, the fact that a wider range of participants from the non-management ranks are participating in company stock plans may have contributed to the fall in overall understanding of the plans. Employees with no past experience of stock compensation plans are less likely to be familiar with the nuances and tax considerations.

Seventy percent of all respondents say they would like additional information to help them understand their plans. The help most requested (by 27% of respondent participants) is for information on tax implications; followed by information on "when and how to buy/sell/exercise" (over 20%); and clearer, simpler information and one-on-one assistance (over 20%).

The study suggests a higher level of personalized guidance is needed to bridge the knowledge gap and Fidelity says financial service providers that administer stock plans for employers can play a critical role in addressing that need.

Fidelity suggests that employers look for stock plan service providers that offer:

• An integrated plan administration platform,
• The ability for participants to view all of their stock plan assets in a single view,
• Resources to help participants view and manage their stock plans within the context of their entire portfolio,
• Access to specialized support, and
• Proactive employee communications supporting the complete range of stock plan rewards.