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Managing equity compensation plans, including employee stock purchase plans (ESPPs), can be a complicated process, even for companies that have been issuing equity compensation for some time. ESPP reporting and tracking, in particular, is especially challenging, and the cost of getting it wrong can be substantial. That’s why many growing companies turn to equity management software to streamline and automate their ESPP reporting and equity management in general—tightening compliance, minimizing risk, and improving their overall productivity.
Let’s look at four ways in which companies can reduce the friction associated with ESPP reporting using the right equity management software and services.
What Makes ESPP Reporting So Complicated?
As an employer, ESPPs offer a great means of incentivizing current employees and prospective hires. Unfortunately, managing an ESPP can be far more complicated than other types of stock plans. Proper ESPP reporting requires that employers track plan enrollments, stock purchases, and terminations of employment. In addition, you must estimate future purchases and reconcile them with the actual purchases that follow.
There are also numerous variations of ESPP programs, some of which are more complex than others. Plan designs and reporting requirements typically vary from one country to the next. The specific design of your ESPP will have different implications that impact your company’s financial statements.
Meticulous recordkeeping is critical to ensure that tax filings and ASC 718 reporting are fully in compliance. You must record stock purchases routinely to keep records up to date. You must also update contribution rates promptly and record terminations and withdrawals recorded in a timely manner, calculating and the necessary reversals. You must track prices to determine whether a modification has been triggered.
An error or omission in any of these steps can lead to a series of amended reports and headaches, not to mention the reputational damage that results from such mistakes.
You can minimize the pain and simplify ESPP reporting with these proven measures:
1. Automate ESPP Processes
Early-stage startups frequently begin the process of managing equity compensation using manual processes. The challenge is that things can get enormously complicated very quickly. By the time a company goes public, employee participation in equity programs has typically expanded to the point that it has become unwieldy to manage those processes by hand.
Unlike many incentive stock option (ISO) programs, ESPPs typically involve more employees, more transactions, and complicated tax implications. Stakeholders expect to have ready access to information through an employee portal, an administrative console, industry-standard security, and more. Onboarding new employees or terminating existing employee relationships require substantial effort. Adding ESPP tax calculations to that mix creates a new layer of complexity on top of that.
Equity management software streamlines and automates those processes, ensuring accuracy and simplifying workflows. Unlike the custom spreadsheets you might develop in-house, equity management software is routinely updated to accommodate changes to ESPP reporting requirements and accompanying tax law. This ensures accuracy in a way that spreadsheets simply cannot.
2. Reduce Time-Consuming Paperwork
Meeting SEC, FASB, and IFRS regulatory requirements requires significant effort. As with most other compliance requirements, reporting errors can have serious, negative implications. To make matters worse, the job often falls to a single person with specialized knowledge of the systems and processes involved with ESPP record-keeping. Compliance requirements are often tied to rigid timetables, which means that you must do much of the work in a very short period of time.
When a company and its workforce is growing rapidly, manual ESPP reporting processes can quickly become overwhelming. Using equity management software to handle the election and enrollment process can ease the paperwork burden. Plan administrators can ensure accuracy, improve the timeliness of reports, and lighten the workload associated with ESPP tax administration. Stock plan administrators who use Certent Equity Management software indicate that they can typically generate administrative reports 75–85 percent faster than with manual methods. In addition, they cut the time it takes to collect enrollment information by an average of 80-90 percent.
3. Eliminate the Risk of Spreadsheet Errors
Many companies rely on manual systems and processes for equity plan administration, capitalization management, and disclosure filings. Spreadsheets have many virtues, but for administering equity plans, cap tables, and financial disclosures, spreadsheets have significant drawbacks.
Managing critical ESPP data in a spreadsheet is time-consuming and has the potential to introduce errors—for example, if you enter a formula incorrectly, key in the wrong data, or place a copy/paste process in the wrong location. Managing ESPP information in a spreadsheet quickly becomes unsustainable as the number of employees in your ESPP grows.
Lack of integration between external systems and ESPP spreadsheets results in multiple documents and potential version-control issues. In addition, spreadsheets lack the necessary audit trails to ensure accuracy and trust. Finally, because spreadsheets lack proper security constraints, sensitive ESPP data and compensation information could fall into the wrong hands. In combination, these factors make security and auditing a nightmare when you’re managing ESPP data in a spreadsheet.
As we have already noted, spreadsheets lack the automatic statutory updates users of top ESPP equity management software solutions enjoy.
4. Plan for Scale
Many late-stage private companies make do with manual processes to manage financial reporting. As they prepare to go public, however, manual processes become increasingly untenable. Preparing for new types of equity compensation (such as ESPPs) once they go public introduces more complexity and makes the process of financial reporting more challenging than it has been in the past.
It is at this stage that company resources are often stretched too thin. The same people responsible for managing equity plans are deeply involved with advanced preparations for an IPO, preparation of financial statements, and more.
Company acquisitions add even more complexity to ESPP reporting, as the challenges of integrating data from acquired companies into your stock plan database consumes valuable resources at a time when finance and HR staff are already stretched very thin.
As companies grow, their reporting needs become more complex. That added complexity often requires an investment in purpose-built software that enables organizations to scale ESPP programs effectively and efficiently and get their equity management reporting under control without exposing their business to unnecessary risk.
Whether your company is still privately held or has already gone public, Certent Equity Management software and services from insightsoftware offer everything you need to manage, administer, account for, and report on equity compensation plans, including ESPP calculations. Streamline your equity management, tighten compliance, minimize risk, and improve your productivity. To learn more about Certent Equity Management, contact us today for a free demo.
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By: insightsoftware
Title: Reduce ESPP Reporting Friction with Equity Management Software
Sourced From: insightsoftware.com/blog/reduce-espp-reporting-friction-with-equity-management-software/
Published Date: Thu, 30 Mar 2023 15:52:29 +0000
