Equity Compensation is on everyone's radar. Inside the company, boards, compensation committees and executives are all aware that equity plays a critical role in performance. Outside the company, shareholders, regulators and watchdog groups are concerned about fairness. This makes equity compensation a high profile item with many important stakeholders–all of whom are interested in financial reporting.

There are two major risks associated with financial reporting around Equity Compensation:

1. the computation (and recording) of compensation expense, and
2. the disclosure in the financial statements.

Both risks are elevated by complex performance targets and the ever-expanding body of tax and accounting rules.

Many companies depend on their stock administration system to assist with financial reporting, but are quickly realizing that canned reports held together with spreadsheets are not the answer.

EquiLink takes a unique approach to financial reporting with a configurable system that can handle modifications, accelerated vesting schedules, retirement eligibility, mark to market and performance conditions. There is also a planning feature that can be used to test the impact of any number of ¿what-if¿ scenarios.

Most importantly, EquiLink gives its clients complete access to their own data, rather than going through various gatekeepers.

Computational Risk

The best plans align management incentives with shareholder goals, bearing in mind competitive conditions in the market for executive talent. The inevitable tension between these competing objectives creates complexity. And complexity increases the risk of computational error.

Plan modifications, performance targets, early vesting for terminations, retirement eligibility and tranche management are all factors that increase the complexity of the compensation expense computation. Likewise, accounting for forfeitures carries its own set of risks as the forfeiture rate needs to be adjusted to reflect actual experience. Translating all these requirements into an amortization table that supports a journal entry or a tax return can be quite daunting.

EquiLink includes all of the functionality needed to manage these moving parts, starting with discrete accounting periods. These are the building blocks of any financial reporting system and are used to support monthly, year to date and annual schedules. Beginning balances are rolled from one period to the next at any level of detail. Closed accounting periods are locked down, preserving the integrity of past journal entries and tax returns.

Journal entries can be automated to record the amortization of compensation expense at any level of detail. This also allows users to allocate compensation expense to departments, budgets, projects, legal entities, geographic regions and to track the creation and draw-down of deferred tax assets.

Accelerated vesting schedules are automatically created and maintained by EquiLink. This ensures that all amortization tables reflect the most current facts and circumstances at the company, including progress against performance goals.

Upon exercise or release, EquiLink will true-up the common stock accounts and compute the excess tax benefit/detriment for tax purposes.

Any number of human resource analytics can be run to understand the impact of equity compensation on salary levels, c-suite executives, departments and geographic markets.

EquiLink gives its clients total ownership of all data and calculations, providing complete transparency on all aspects of the equity compensation.

Financial Statement Disclosure

The calculation of compensation expense needs to be 100 percent correct. It is equally important that all disclosures in the financial statements are compliant with GAAP, IFRS and SEC requirements.

The current climate for external reporting is very unforgiving. New tax and accounting rules are proliferating rapidly and auditors are setting higher bars for documentation, support and procedures. This additional work has to be done within shorter and shorter timeframes. Non-compliance is noted swiftly by the markets and can lead to declines in the stock price of the company.

These challenges need to be met with a system that provides a high degree of automation. Simply putting more people into the breach is not the answer and can actually make a bad process worse.

EquiLink provides the necessary automation by linking its equity compensation calculations with a financial reporting tool that handles:

1. Basic and Fully Diluted Earnings per Share, and
2. Footnote Disclosures

This creates a repeatable process within a single system that can be used as an audit trail for all external reporting needs.

EquiLink gives full control over the financial reporting process by putting all data and calculations in the hands of its clients.

EquiLink is:

• Used by Human Resources to model their compensation plans.
• Used by Accounting to amortize compensation expense, including modifications.
• Used by Accounting to automate forfeitures.
• Used by Tax to support corporate deductions.

EquiLink Key Features:

• Supports all plan types, including restricted shares, performance shares, options and liability awards (Human Resources)
• Configures to company-specific plan policies, such has minimum service-period requirements for vesting. (Human Resources)
• Creates accelerated vesting schedules for retirement eligibility or other conditions. (Human Resources)
• Applies performance multipliers to account for changes in performance relative to targets. (Human Resources)
• Marks-to-market expense for liability awards or awards with undetermined grant conditions. (Accounting)
• Supports dynamic or static forfeiture rates. (Accounting)
• Manages tranches, either for straight-line or graded expense. (Accounting)
• Allows for easy modification of schedules for one-off items, such as changing vesting schedules or terminations. (Accounting)
• Prepares journal entries based on general ledger accounts and locations. (Accounting)
• Supports the timing of tax deductions with detailed exercise schedules for provision, return and audit. (Tax)
• Maintains history of all build and takedown activity needed to support deferred tax assets. (Tax)