The Devil's in the (Flux Analysis) Details

The Devil's in the (Flux Analysis) Details

In my last blog post, we discussed the six most common reasons for equity compensation expense to vary from reporting period to reporting period. But... what if you have a grant that falls into one of those categories and the "flux" (variance) is not the variance you expect?

For example, what if you have a grant that was granted last period. You expect the expense to be higher for the current reporting period because it is the first complete period of expense. But what if the opposite is true? The prior period's expense is higher than the current? 

Hence my list of "exceptions" to the "rules" from the last post - we expected higher and we got lower, or we expected lower and got higher, OR we expected lower and it was about the same... 

(Please note that not all stock plan systems calculate expense in the same way, so these exceptions may or may not pertain to the expense shown on your expense report.) 

Reason for Variance	Impact on Expense	Explanation
Prior Grant - Catch Up on Grant Date	Decrease	In some systems, when grants are made in the prior quarter but they have more expense in the prior quarter than the current quarter, that is usually due to a catch up of expense on the grant date for grants with a Vest Start Date (sometimes called a Vest Base Date) prior to the grant date.
Termination - Extended Time to Cancel	Not much variance	When grants with terminations in the prior or current periods do not show a reversal of expense in the period of termination, this is sometimes due to a continued vesting due to an employee status change to consultant.  Expense will continue, as is correct, but for flux analysis purposes, these grants do not produce “expected results” for terminations and so should be categorized differently.
ISO / NQ Split	Increase or Decrease	When expense is very different from period to period and it is not due to one of the reasons above, it may be from a grant that was part of an ISO/NQ split (ISO grants in excess of the $100K ISO exercisability limitation are split into an ISO and a NQ grant in some systems). In these cases, the vesting can be very uneven, which may result in very uneven expense as well. The variance can be positive OR negative. However, just because a grant is an ISO/NQ split does not mean it should immediately fall into this category. If it is a new grant or a current termination, generally those factors will be the main cause of the expense variance, not the fact that it is an ISO/NQ split. So this should be one of the last categories analyzed.

In my next post we'll discuss some common excel tips and tricks for completing your flux analysis quickly and easily.