D&O Duty to Defend vs. Reimbursement PoliciesCalculations for workers’ compensation may become more complicated when employers offer alternative forms of compensation. A growing number of companies offer employees equity in the company via restricted stock units (RSUs). This strategy is especially popular among tech companies as well as PE- and VC-backed companies. However, recent clarification from the National Council on Compensation Insurance (NCCI) may force these employers to allocate more to workers’ compensation premiums.
The Rise of RSUs
RSUs are awards of stock shares that employers may give as employee compensation. They are typically subject to a vesting period before the employee receives the shares, a practice that encourages employee loyalty.
According to Investopedia, RSUs became more popular after the accounting-related scandals of the mid-2000s that involved companies like Enron and WorldCom. Employers were looking for new stock awards to help them recruit and retain talent; RSUs emerged as a practical option. Between 2003 and 2005, the median number of stock options granted individually by Fortune 1000 companies dropped by 40% and RSU awards increased by 41%.
The Workers’ Compensation Implications
Workers’ compensation premiums are calculated using several factors, one of which is the employer’s payroll. For this reason, accurately calculating payroll is a critical part of determining workers’ compensation premiums.
RSUs and similar equity-based compensation strategies add a new wrinkle to the process. When a company offers RSUs, its value is estimated based on the current value of the company’s stock. However, by the time the RSUs are fully vested, the stock value may have changed considerably. Since the vesting process may take several years, there’s a lot of time for stocks to increase (or decrease) in value. This may lead to difficult workers’ compensation premium calculations.
New Guidance from the NCCI
The NCCI found that the inclusion of equity-based compensation has become increasingly common. Research found that additional rules are needed in the Basic Manual for Workers Compensation and Employers Liability Insurance to clarify issues of payroll inclusions and exclusions.
Effective from January 1, 2024, the NCCI says the value of equity-based compensation plans (other than stock options and stock purchase plans) should be included at the time of vesting. Equity-based compensation plans subject to this ruling include RSUs as well as stock transfers, stock warrants, and restricted stock.
The vesting schedule may take many forms, such as graded, scheduled cliff, performance goals, or milestone anniversaries vesting. However, the NCCI says the market value of equity-based compensation plans should be excluded from payroll when accelerated cliff vesting is triggered by an IPO of stock or a change in majority ownership where the owner or owners before the change own less than one-half interest after the change.
Who Does This Affect?
The NCCI guidance applies to employers in Alaska, Alabama, Arkansas, Arizona, Colorado, Connecticut, D.C., Georgia, Hawaii, Iowa, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Maine, Missouri, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, Nevada, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Vermont, and West Virginia.
The ruling does not apply to California. However, California previously released guidance on equity-based compensation. Effective since January 1, 2019, the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) amended its rules to clarify when equity-based compensation could be excluded from payroll. According to the WCIRB’s Learning Center, payment of equity-based compensation that is due to accelerated cliff vesting triggered by an IPO or change in ownership is typically nonrecurring and infrequent but may result in a large increase in payroll. These increases may produce volatility in payroll that does not reflect volatility in the underlying loss exposure. To offset this, equity-based compensation triggered by an IPO or change in ownership is not included as reportable remuneration – this is similar to the new guidance from the NCCI.
What This Means for Your Next Renewal
Workers’ compensation insurers are catching up with the widespread use of RSUs. If you offer RSUs as part of your compensation package, you may see changes in the way these benefits are treated during your workers’ compensation premium calculations, which could result in higher rates.
Do you need help controlling your workers’ compensation insurance rates? Heffernan Insurance Brokers can help. Contact us.
