With the world of equity administration rapidly changing, stock option plans and other share-based incentive plans are experiencing increased scrutiny. CFOs and other finance professionals are often saddled with managing this piece of financial complexity outside of their existing ERP systems, and are finally coming to grips with the reality that spreadsheets and old legacy systems are no longer adequate.

Equity compensation instruments continue to become more intricate, and their widespread use is resurging as competition for top talent has companies again looking beyond standard benefits in today's competitive recruiting climate. While the majority of new share-based incentive plans use stock options as the primary grant instrument, current trends indicate an increase in the use of restricted stock. Companies that utilize restricted stock tend to issue fewer shares than would normally be issued with "at-the-money" stock options, and also are beginning to include more performance measurements as vesting criteria rather than traditional time-based vesting. The difference in today's use of equity as compensation is not just in the complexity of emerging instruments, but also in the disclosure and reporting requirements now required around equity compensation, including valuation and expensing of grants.

Corporate finance professionals working for companies of all sizes, both public and private, are grappling with internal controls, as well as audit and security issues surrounding their equity administration responsibilities, while simultaneously working under newly issued, highly complex accounting standards. The intricacies of equity incentive plans, elaborate performance vesting, and grant valuation and expense management have profound implications on companies' operating performance, and require innovative technology to support these instruments and their related mechanics, such as:

• Complex performance (conditional) vesting configuration and tracking

• Grant valuation and expense management
  • Forfeiture Estimate Management

  • Expense Amortization and Cumulative Adjustments

• Accrual of expenses for grants, including valuation assumptions

Corporate finance staff members working without advanced tools specifically designed for equity and capitalization management will either find themselves spending more hours at the office attempting to sort out the vexing algorithms required to produce accurate reports, or resort to hiring outside consultants to do the work for them. In either event, the price is high, and consultants still need to be evaluated, engaged, managed and their work product reviewed.

There are a couple of areas in the management of share-based compensation where companies may run into difficulty. One is related to a company's grant practices, which should be reviewed and revised where appropriate to eliminate questions of option backdating. The number of companies that have been investigated for this practice continues to grow at an alarming rate, leaving one to imagine the number of finance professionals who have had their judgment and job performance questioned, or worse.

Another is the lack of expertise in the fine details surrounding conditional/performance vesting configuration, and grant valuation and expense management, which encompasses the relatively thorny concept of managing forfeiture rate estimates. Couple this with expense recognition and cumulative expense adjustments every time the rate is modified, and the task can become formidable. Stock plan professionals do themselves and their employers a service by continually updating their education and staying abreast of the best technology available in this area of practice.

It is becoming increasingly clear that spreadsheets will not stand up to most audit tests any longer, and unraveling the spreadsheet maze most certainly contributes to longer hours for the accounting staff to prepare for audits. The unpleasant task of attempting to track down all the spreadsheets that were utilized to produce the company's equity-based reports, identify which is the "final version," and which staff member made which entry or modified a formula, is all too familiar. Greater accuracy, efficiency and security are achieved with a collaborative enterprise system designed to satisfy the ever-increasing demands of today's share-based compensation reporting.

Equity administration used to be an art, and is now becoming science. It involves a constant process of staying educated on the current accounting rules and best practices, and being involved up front in plan design and plan administration procedures. Some companies may still be reluctant to convert their spreadsheet data or an old legacy system to an enterprise application intended specifically for this task. However, a careful analysis of the actual costs of their old methods will likely prove an enterprise software solution to be more efficient, secure and economical. The demands of corporate executives, the board of directors, and outside firms require a proven solution that is equipped to meet critical security and audit standards. Every accounting professional working in the area of share-based compensation should have the proper tools to perform their job and respond quickly and confidently to their company's needs.

For more information, contact Boardroom Software, Inc.

Kent Mansfield is President and COO of Boardroom Software, Inc.  He has served in various executive roles, including Chief Financial Officer, for public and private companies before co-founding Boardroom Software in 2003.