Leading companies increasingly offer stock-based compensation to motivate employees, build out their benefits plans, and stay competitive. One key challenge to managing a stock-based compensation program is developing an accurate forecasting process.
While this process can be complicated, time-consuming, and costly, there are ways to mitigate these challenges. Streamlining your company’s stock-based compensation expense forecasting can provide tangible benefits such as:
- Increased accuracy on company financial reports
- Scenario analysis for grant design choices
- Time savings for other projects and responsibilities
What Is Stock-Based Compensation Expense Forecasting?
Stock-based compensation expense forecasting refers to calculating your company’s anticipated future expense from issuing stock-based compensation awards.
This calculation is often complex and time consuming, with many moving pieces that need to be considered.
Typical Stock-Based Compensation Forecasts
There are generally three areas where forecasts apply to stock-based compensation.
- Core expense forecast. This forecast provides predictive insight into upcoming stock-based compensation expense, which can be leveraged by companies for strategic planning purposes.
- Tax benefit forecast. A tax benefit forecast estimates the likely corporate income tax deduction a company will receive from issuance of awards. This is measured as the excess value to the employee upon vest relative to the grant date fair value.
- Earnings per share dilution forecast. Companies use this forecast to predict how outstanding awards will dilute the earnings per share over time. Typically, this calculation is a subset of unamortized expense, proceeds from exercise of options, and the stock price over the forecast period.
While all three forecasts are critical for planning purposes, the expense forecast is the basis for other processes. For this reason, it should be the priority in forecasting for companies that offer stock-based compensation.
How Should Companies Approach Stock-Based Compensation Expense Forecasting?
Many companies approach stock-based compensation expense forecasting with a complex system of manual spreadsheets. While this might seem like a cost-effective approach, it can overextend finance teams and lead to errors that ultimately affect your company’s bottom line.
Adopting a fully automated data solution can help your company streamline computations and come up with an accurate forecast. It can also greatly reduce errors and the complexity of the forecasting process through:
- Rapidly refreshing source files
- Using push-button reporting to generate outputs
- Providing what-if analyses
- Testing multiple forecast scenarios with different inputs and assumptions
One important rationale for leveraging automation is that it can free up time that your financial accounting team members spend performing manual spreadsheet wrangling, allowing them to focus on the reasonableness of the forecasts review.
This can help validate that forecasting assumptions are accurate and identify areas where additional precision could be applied to improve results.