Mandatory Holding Periods after Vesting


Mandatory holding periods after vesting are fantastic provisions with many unknown benefits. More simply, a mandatory holding period is a provision within an equity security that requires holding after ownership. Therefore after vesting – regardless of employment status – an owner is required to hold a minimum period of time, generally 1 or 2 years. We can help you realize the value of mandatory holding periods:

    • Lower Compensation Expense under ASC718 – ASC718 requires that restrictions after vesting to be considered in the initial grant date valuation. Illiquid shares are inherently less valuable than freely tradable shares. There are theoretical approaches for calculating this discount based on empirical data in the marketplace that can provide auditable support for applying the appropriate discount.
    • Improve Your Governance Scores – Influential proxy advisory firms like ISS and Glass Lewis rate the presence of mandatory holding periods positively in their equity plan evaluation scorecards. Further, the use of a holding period is viewed as a risk mitigating pay practice in say on pay evaluations. However, not all holding periods are treated equally and vary dependent on the length of the holding period as well as other governance concerns.
    • Clawback Policies – Companies generally have clawback policies that are designed to recover incentive compensation in the event of governance or financial failing. A mandatory holding requirement is a mechanism to ensure that the incentive payment is recoverable in the event of a clawback.
    • Improve tax positions – Qualified incentive programs like ESPP plans or Incentive Stock Options (ISO’s) have favorable tax treatment if the employee holds an underlying share after vesting. Mandatory holding periods are a great opportunity for employees to maximize their tax efficiency.

Our technical equity experts work with human resource and finance leaders on a regular basis to assist them with the design and valuation of mandatory holding periods.

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