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In Search of a Standard Model for Equity Plan Administration

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As some of you may know, my undergraduate background in science and engineering tends to drive many of my personal interests as well, particularly in trying to understand the universe and world around us. Perhaps this is the reason why I find the concepts and theories of cosmology and particle physics to be so interesting. These disciplines span the investigation of the largest structures known – (i.e., cosmology – the study of the nature and structure of the universe), to the smallest known – (i.e., particle physics – the study of the most fundamental constituents of matter).

So you may be asking yourself, what in the world does this have to do with equity plan administration? Well in my opinion, very much, since equity plan administration interacts with so many diverse corporate disciplines (e.g., legal, tax, finance, accounting, etc.), its practice yearns for a simple way to explain and predict these interactions. Just as the Standard Model in particle physics has yielded an elegantly simple way (mathematically) to explain everything we can experience in the observable universe, my scientific bias persuades me to believe there should be a somewhat similar predictive standard model for the administration of equity compensation plans.

At their cores, both Equity Compensation plans and the Standard Model consist of two basic elements – for equity plans it’s stock and cash, and for the Standard Model it is quarks (the components of protons and neutrons) and leptons (e.g., electrons). From these basic constituents, each component set can be elaborated to explain the totality of the nuances, varieties and complexities of their representative domains.

So how can we possibly get to a “standard model” for equity plan administration? Well, unlike the theories of particle physics, which have been discovered and refined through experimental trial and error, the practice of equity plan design continues to evolve based on forces which tend to be a bit more subject to permutation than the immutable theorems of particle physics. Unfortunately, it is this “cart before the horse” nature of plan design that has historically driven the practice of plan administration so far from standardization.

As an industry, we’ve allowed unnecessary complication to creep into the practice of equity plan administration. As Albert Einstein once stated, “The grand aim of all science is to cover the greatest number of empirical facts by logical deduction from the smallest number of hypotheses or axioms.” It is this concept of ‘elegant simplicity’ that truly should be the driver of plan design and the efficient delivery of value to plan participants.

A more practical example of this idea originated in the 1960’s when the US Navy adopted a design concept called the “KISS principle”.

The KISS principle states that most systems work best if they are kept simple rather than made complex; therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.

I suspect that this lack of design simplicity in our industry will continue to drive my search for a standard model of plan adminstration well into the future. Although my journey may continue to be a long and arduous one, my hope is to find converts along the way that share my belief in the intrinisic beauty in “keeping it simple”.

John Bagdonas

 

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