Intended Value vs FMV: should you care?

When the Comp Committee approves 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.

As a result, the intended value set by the compensation team varies from the fair market value recorded.

Should you care?

Most comp leaders would say yes — we should stick to intended value because that methodology aligns with how we set targets.

But how much does it really vary, and when does it matter?

I experimented with analyzing stock data from 10 public companies to find out. And the answer is, as every consultant says, it depends:

• SBC expense and RSU budgets — yes, you should care, especially for the annual refresh grants
• Employee expectations — yes, if your stock is highly volatile
• Market data methodology — no, the variance is de minimis

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Analysis of 10 companies in 2024 YTD

I looked at 10 tech companies in the data security industry to see how big the gap gets:

• Cloudflare, Crowdstrike, Datadog, F5, Fortinet, Okta, SentinelOne, Snowflake, Twilio, and ZScaler

I picked this group of stocks because they were highly volatile in 2024, maximizing differences between FMV and intended value:

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Using historical stock price data from NASDAQ, I built an analysis of year-to-date (through November 20th) variance in the 20-day average closing price (Intended) and actual closing price (FMV) for each company, then assumed a grant date on the start of each month.

Here are the results:

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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%.

The average variance for all events was -0.76%, and in absolute terms was 4.50%.

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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%.

So does this variance between fair market value and intended value matter for comp?

Let’s start by looking at everyone’s favorite topic right now: SBC expense.

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SBC expense and RSU budgets — you should care

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.

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.

This is a windfall for employees (more on that later), but it’s a problem for the CFO.

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. 😱

Notice the stock volatility impacts your RSU budget and share dilution, too. In this illustrative example, sticking with the 20-day average closing price results in spending 1.72 million shares, whereas the FMV implies spending 1.38 million shares, 20% fewer.

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?

If I’m spending an extra $36 million in SBC expense and an extra 340,000 shares, I hope I’m doing it intentionally…

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.

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Employee expectations — yes, it matters

If your stock price suddenly changes, employees can get a big windfall (or haircut) on the day of the grant.

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 in your offer letter, you got 318 RSUs now worth only $71k.

Whether your comp team wants to remediate that unlucky timing is a question of compensation philosophy 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.

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”?

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Market data methodology — not much 🤷

For individual companies and specific grants, FMV versus intended value can vary meaningfully when your stock price is volatile.

But in aggregate, it appears de minimis.

The average FMV/Intended variance across these 10 companies’ 2024 grant dates is 4.50% in absolute terms, but it washes out to -0.76% taking into account positive and negative swings.

That’s a rounding error.

Consider the variance compared to the difference in market percentile for a P4 software engineer:

• 50th percentile new hire grant is $300k
• 75th percentile is $450k
• A grant 4.5% higher than the median interpolates to the 52nd percentile

50th versus 52nd percentile is pretty uninteresting.

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Target vs actual — the real conversation

I get why we want to use intended value for stock comp benchmarking:

• It reflects target value, paralleling construction with target bonus so we can build up to a target TDC
• It reflects policy when we use market data to construct ranges
• We’re used to getting our data this way, and it needs to be apples-to-apples

But the real conversation about stock comp is the actual value the employee experiences: realized value and current unvested value.

• Realized value: the vested amount that shows up on your W2 — am I making more money this year than last year?
• 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?

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.

FMV, on the other hand, appears to be such a close proxy for intended value that focusing concern here often feels pedantic.