Employee share incentive plans are almost globally commonplace with the accounting cost of these being measured under the accounting standard IFRS 2. This cost can be a key issue, particularly where awards may be cash-settled, and can represent a significant proportion of a company's earnings and so an accurate valuation should be sought. For example, many companies are unaware that where market conditions (such as TSR), withholding provisions (such as clawback) or holding periods are applied to an award discounts can be taken for all these factors.
Preferably these calculations should be independently carried out and verified in order to justify the charge to auditors and ensure that the correct accounting guidelines have been adhered to.
Our highly experienced team of accountants, actuaries and modelling specialists provide best-in-class valuation services for over 100 companies taking the guesswork out of valuing incentive awards — from share options to complex value creation plans. This service also goes beyond just the calculation of the fair value, with consulting support provided to ensure final audit compliance and sign-off is achieved.
We also remain at the forefront of developing novel valuation techniques and ensuring that IFRS 2 is correctly interpreted to fit the ever evolving incentives market.
Our services include:
- Developing required assumptions for option pricing models, including expected option life, forfeiture rates and historical volatilities
- Assessing the impact of various modelling approaches on expected share-based payment expense, including the Black-Scholes formula, Binomial Lattice model and Stochastic/Monte Carlo simulations
- Detailing how the accounting charge should be spread over financial years, taking into account expected performance and forfeiture rates
- Measuring the potential cost of proposed new incentive plans or modifications to existing plans
- Providing valuation guidance to private companies with limited internal and external benchmark data offering cash-settled incentive plans or considering an initial public offering
- Navigating clients through key tax and accounting requirements under IFRS 2 and ASC Topic 718
Where a new incentive plan is being sought, our valuation team works alongside the implementation team to ensure that the scheme is cost-efficient whilst also delivering the key strategic goals of your company.
Almost all long-term incentive plans for executives incorporate performance conditions which are factored into our valuations. In the UK these conditions are often based on a company's total shareholder return (share price growth and dividends) performance relative to a peer group or on it's earnings per share growth.
A key part of ensuring that these plans remain relevant, are valued by executives and the company's return on investment into a scheme can be measured, is to provide regular, clear communication of on-going performance against these conditions. Remuneration Committees also generally require independent verification of performance and the extent to which awards can vest. Our team can provide assistance with updates as to performance, in particular for TSR where our online performance monitoring service, PeerTracker, is unparalleled in the market. Further information on PeerTracker can be found here.
Aon Consulting Limited is authorised and regulated by the Financial Conduct Authority.