Equity Compensation – California Rating Bureau WCIRB Provides New Rules
The California Rating Bureau WCIRB recently published an article which has been the basis for many debates among carriers, rating bureaus, and premium auditors.
When I attended the IAASE Conference last year in Columbia, SC, a part of the NCCI presentation was on this very subject.
Many large companies that had IPO’s in California decided to provide their employees with equity compensation. The big debate here involves where or not to include this in an employer’s payroll figures during the premium audit process.
Equity-based compensation – which can include stock options, restricted stock, restricted stock units, phantom stock plans and stock appreciation rights – will in some cases receive very large amounts of money in connection with these IPOs.
California’s rating bureaus WCIRB recently enacted new rules for these situation. Effective January 1, 2019, the USRP was amended to include rules that direct when equity-based compensation may be excluded from reported payroll.
Almost all of the WCIRB articles on how any type of remuneration (payroll) would be handled was to add the benefit to the payroll. The WCIRB decided to publish an article on a type of compensation that was considered a non-payroll item
I was going to write the next sections on equity compensation. I decided just to quote California Rating Bureau WCIRB’s take on the matter. This quote will lessen any confusion on the new rules.
Counted as Payroll (Remuneration) – California Rating Bureau WCIRB
Some equity-based compensation vests or is paid on a scheduled or annual basis or based on the achievement of performance goals or milestone anniversaries. These payments can represent a recurring portion of an employee’s overall compensation and, similar to a bonus, are included as reportable remuneration. Employee payroll-based contributions to fund equity-based compensation plans are similar to employee payroll-based contributions to fund pensions or deferred compensation plans and also must be included as reportable remuneration.
Not Counted as Payroll
Payment of equity-based compensation due to accelerated cliff vesting triggered by an IPO of stock, or a change in majority ownership, is typically a nonrecurring, infrequent event that can produce very large increases in payroll that can result in volatility in reported payrolls from year to year without similar shifts in underlying loss exposure. These amounts are not a regular or recurring portion of an employee’s overall compensation and are therefore not a reasonable proxy for workers’ compensation exposure during an individual policy period. Equity-based compensation that is triggered by an IPO of stock, or a change in majority ownership, is not included as reportable remuneration.
The remuneration is counted if it is:
- Similar to a bonus
- Pensions or Deferred Compensation Plan
The remuneration is not counted if it is:
- Very infrequent
- Triggered by an IPO or
- Change in majority ownership – (interesting one)
Sometimes IPO stock given to an employee can be a very large sum of money. Thanks to California’s Rating Bureau WCIRB for a clarification.
©J&L Risk Management Inc Copyright Notice