On Nov. 29, 2021, the staff of the U.S. Securities and Exchange Commission (SEC)’s Office of the Chief Accountant and the Division of Corporation Finance released Staff Accounting Bulletin No. 120 (SAB 120), which is effective immediately and provides guidance on how to properly recognize and disclose the compensation cost for “spring-loaded” awards made to executives of public companies subject to reporting requirements under US securities laws. SAB 120 describes spring-loaded awards as share-based compensation arrangements granted “when a company is in possession of material nonpublic information (MNPI) to which the market is likely to react positively when the information is announced.”  An example of a spring-loaded award, according to the SEC press release announcing the issuance of SAB 120, is where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction. Share-based compensation arrangements include all share-based payments that a company is required to recognize for accounting purposes and disclose under applicable securities disclosure requirements, including stock options and full value awards such as restricted stock units. SAB 120 effectively modifies and supplements SEC staff interpretive guidance for estimating the fair value of share-based payment transactions under ASC Topic 718 – which governs the accounting for stock-based compensation.  The interpretive guidance specifically addresses the determination of the current price of the underlying shares and the estimation of the expected price volatility that should apply when the company grants awards that are “spring-loaded.”  SAB 120 articulates the SEC staff’s view that when companies grant non-routine awards while in possession of positive MNPI, in estimating fair value, the companies should consider making adjustments to the current price of the underlying shares and/or the expected volatility of the price of the underlying shares for the expected term of the award.  SAB 120 also sets forth a number of expected financial statement footnote disclosures that should be included in addition to the ASC Topic 718 requirements where a company grants spring-loaded awards: how the company determined the current price of shares underlying awards for purpose of the grant date fair value of the awards; the company’s accounting policy related to how it identifies when an adjustment to the closing price is required, and in such case, the amount of the adjustment, including any significant assumptions used to determine such adjustment; and the characteristics of the awards, including their spring-loaded nature (potentially necessitating the separate disclosure of the spring-loaded awards from other share-based payment arrangements to best describe the company’s use of share-based compensation).

From a governance perspective, the SEC staff took the opportunity under SAB 120 to remind companies of “the importance of strong corporate governance and controls in granting stock options, as well as the requirements to maintain effective internal control over financial reporting and disclosure controls and procedures.” In this regard, SAB 120 suggests that prior to granting a spring-loaded award, companies should consider whether the award is consistent with the company’s policies and procedures, including its compensation plan approved by shareholders, other governance policies, and legal requirements.

Compensation and audit committees of public companies subject to US securities law reporting requirements will need to consider the impact of SAB 120 on their granting practices, and, in particular the feasibility of granting non-routine awards while the company is in possession of MNPI in light of the challenging accounting requirements for measuring the compensation cost and additional disclosure obligations imposed under SAB 120. 


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.