Add 'Intended Value Vs FMV: should you Care?'

7 days ago · c6a8f30734
1 changed files with 58 additions and 0 deletions
--- a/Intended-Value-Vs-FMV%3A-should-you-Care%3F.md
+++ b/Intended-Value-Vs-FMV%3A-should-you-Care%3F.md
@ -0,0 +1,58 @@
 <br>When the Comp Committee [approves](https://canaryrealty.com) an RSU grant, the number of shares is typically based on an intended value divided by a price formula, such as the 20-trading-day average closing price. But when the grant is recorded, the fair market value ("FMV") reflects the closing price that day.<br>
 <br>As a result, the intended value set by the compensation team varies from the [fair market](https://realtorpk.com) value recorded.<br>[ask.com](https://www.ask.com/news/step-step-guide-replacing-tv-remote-home?ad=dirN&qo=serpIndex&o=740004&origq=estateagents)
 <br>Should you care?<br>
 <br>Most comp leaders would say yes - we should stick to intended value because that methodology aligns with how we set targets.<br>
 <br>But how much does it really vary, and when does it matter?<br>
 <br>I experimented with analyzing stock data from 10 public companies to find out. And the answer is, as every consultant says, it depends:<br>
 <br>- SBC expense and RSU budgets - yes, you should care, especially for the annual refresh grants
 <br>- Employee expectations - yes, if your stock is highly volatile
 <br>- Market data methodology - no, the variance is de minimis
 <br><br>
 <br>Analysis of 10 companies in 2024 YTD<br>
 <br>I looked at 10 tech companies in the data [security industry](https://www.naree-siam.properties) to see how big the gap gets:<br>
 <br>- Cloudflare, Crowdstrike, Datadog, F5, Fortinet, Okta, SentinelOne, Snowflake, Twilio, and ZScaler
 <br>
 I picked this group of stocks because they were highly volatile in 2024, maximizing differences between FMV and intended value:<br>
 <br>Using historical stock price data from NASDAQ, I built an analysis of year-to-date (through November 20th) variance in the 20[-day average](https://www.cinnamongrouplimited.co.uk) closing price (Intended) and actual closing price (FMV) for each company, then assumed a grant date on the start of each month.<br>
 <br>Here are the results:<br>
 <br>This analysis shows that most of the time the variance between FMV and intended value was minimal - 70% of all observations were less than +/-5%.<br>
 <br>The [average variance](https://phineek.com) for all events was -0.76%, and in absolute terms was 4.50%.<br>
 <br>But in any given month, the difference can get pretty big, like Snowflake at -15.93% in March, or Twilio at 18.66% in November. 7 out of 10 companies had at least one grant date month where the difference was greater than 10%.<br>
 <br>So does this variance between fair market value and intended value matter for comp?<br>
 <br>Let’s start by looking at everyone’s  right now: SBC expense.<br>
 <br>SBC expense and RSU budgets - you should care<br>
 <br>If your stock has a big swing before you make a large set of grants, like getting your annual refresh grants approved, then FMV versus intended value can cause big headaches.<br>
 <br>For an illustrative example, take Okta - imagine they granted their refresh grants on March 1, 2024, when the 20-day average closing price was $87.24 and the fair market value price was $108.49.<br>
 <br>This is a windfall for employees (more on that later), but it’s a problem for the CFO.<br>
 <br>Let’s say they intended to spend $150 million that day, an average refresh grant of about $25k for their 6,000 employees. Since the FMV was 24% higher, their SBC expense recognized over the total vesting period will reflect closer to $186 million, for a difference of +$36 million. 😱<br>
 <br>Notice the stock volatility impacts your RSU budget and share dilution, too. In this illustrative example, sticking with the 20[-day average](https://cyprus101.com) closing price results in [spending](https://realtorpk.com) 1.72 million shares, whereas the FMV implies spending 1.38 million shares, 20% fewer.<br>
 <br>Philosophical aside: if the gap between a 20-day average closing price and the FMV is big - which methodology do you think more closely reflects "intended" value?<br>
 <br>If I’m spending an extra $36 million in SBC expense and an extra 340,000 shares, I hope I’m doing it intentionally…<br>
 <br>So if you have a big list of grant approvals at your next Comp Committee meeting and your stock price has shot up in the last month, you better have a conversation with your CFO first.<br>
 <br>Employee expectations - yes, it matters<br>
 <br>If your stock price suddenly changes, employees can get a big windfall (or haircut) on the day of the grant.<br>
 <br>For example, if you joined Crowdstrike in August, you might be a little annoyed: the stock dropped 43% over the previous 20 trading days, resulting in a FMV 28.6% lower than the 20-day trading average. Meaning, if you were promised a $100k new [hire grant](https://gornitsahotel.ru) in your offer letter, you got 318 RSUs now worth only $71k.<br>
 <br>Whether your comp team wants to remediate that unlucky timing is a question of [compensation philosophy](https://ladygracebandb.com) and talent strategy. But every team should at least be prepared for a surge of complaints from unhappy employees who received a fraction of what they expected, despite the language they signed in their offer letter.<br>
 <br>Can’t help myself - gotta raise my philosophical aside again: if the gap between 20-day average and FMV results in a 29% haircut for employees that month… which valuation feels more "intended"?<br>
 <br>Market data methodology - not much 🤷<br>
 <br>For individual companies and specific grants, FMV versus intended value can vary meaningfully when your stock price is volatile.<br>
 <br>But in aggregate, it appears de minimis.<br>
 <br>The average FMV/Intended variance across these 10 companies’ 2024 grant dates is 4.50% in [absolute](https://amlaksiyahkal.ir) terms, but it washes out to -0.76% taking into account positive and negative swings.<br>
 <br>That’s a rounding error.<br>
 <br>Consider the variance compared to the difference in market percentile for a P4 software engineer:<br>
 <br>- 50th percentile new hire grant is $300k
 <br>- 75th percentile is $450k
 <br>- A grant 4.5% higher than the median interpolates to the 52nd percentile
 <br>
 50th versus 52nd percentile is pretty uninteresting.<br>
 <br>Target vs actual - the real conversation<br>
 <br>I get why we want to use intended value for stock comp benchmarking:<br>
 <br>- It reflects target value, paralleling construction with target bonus so we can build up to a target TDC
 <br>- It reflects policy when we use market data to construct ranges
 <br>- We’re used to getting our data this way, and it needs to be apples-to-apples
 <br>
 But the real conversation about stock comp is the actual value the employee experiences: realized value and current unvested value.<br>
 <br>Realized value: the vested amount that shows up on your W2 - am I making more money this year than last year?
 <br>Current unvested value: the value of all unvested shares at today’s price - do I have more unvested stock than what I could get by moving to a competitor?
 <br>
 Whether an employee feels valued and whether you’re protected against attrition are the outcomes of your compensation strategy. I think most comp teams give this far too little attention, mostly because it’s historically been hard to analyze.<br>[smarter.com](https://www.smarter.com/fun/purchase-dunkin-donuts-gift-cards-conveniently-online-store?ad=dirN&qo=serpIndex&o=740011&origq=estateagents)