Equity Compensation Design and Use Matrix: stock options, restricted stock, espp, rsu and more

The Equity Compensation Design and Use Matrix Primary Key Key Key Key Key Typical Typical Compensation Main Features Accounting Legal Tax Communication Administration Plan Sponsor Recipient Use Issues Issues Issues Issues Issues Equity Compensation for High Performance Companies Incentive Stock Options (ISO) No tax withholding at exercise. No Pre-IPO and Publicly Limits on Grant Price,Value of Difficult to show value if Activity peaks and valleys. Grant Attract and Motivate. Execs at all sizes, High- Preferential tax treatment. Ordinary income if held for qualifying traded companies (high- Complex valuation and amortization. Grant, Term of Grant and Term of underwater. Leverage can be processing. Exercise processing. Retention when stock tech staff at Small to Mid- Limits on use. Highly Leveraged. period. Not applicable to int'l tech/biotech and high Difficult market comparisons Plan. Shareholder approval required issue in highly volatile stocks. Termination rules. Int'l issues. price is growing steadily. size companies Pays only if price increases participants. Alternative Minimum Tax growth sectors) within 12 months of BOD adoption. Tax issues, Dispositions, AMT Disposition tracking. concerns Non-Qualified Stock Options Widely used, grant size (NQSO) Attract and Motivate. Highly Leveraged. Guaranteed Complex valuation and amortization. General plan documentation. Difficult to show value if Activity peaks and valleys. Grant Pre-IPO and Publicly generally based on Ordinary Income and Tax withholding corporate tax deduction when Difficult market comparisons. Variable Detailed documentation when used underwater. Leverage can be processing. Exercise processing. Retention when stock traded companies (all position. Consultants at Exercise. 409A Supplemental Wages exercised. Pays only if stock Fair Value accounting for non- for outside BOD members. Post- issue in highly volatile stocks. Termination rules. Int'l issues. Tax price is growing steadily. sectors) and Outside BOD eligible ($1MM threshold). price increases employee service providers. termination rules and regulations. Tax issues at exercise. at Exercise. members Restricted Stock Shares No income or tax until vested. 83(b) Simple Valuation. Value is Intrinsic election to be taxed at award date. Award processing. Event Planning (RSS) Attract and Retain. Closely Held and Value if price drops. Minimally Private companies are subject to value on award date. Cost essentially Sell-to-Cover requires sufficient trade Event-based, forced income and with other corporate issues. Motivation added when Publicly traded Upper and Middle leveraged. Can be used to Blue Sky laws. Public companies are equivalent to paying cash. Retirement volume. Withhold-to-cover requires taxation. Comparison to Repurchases. 83(b) elections. awarded at higher than $0 companies (less volatile Management satisfy Executive Ownership subject to SEC regulations at the eligibility can result in accounting for sufficient corporate cash. Retirement Options Dividend tracking. Share issuance cost to participant sectors) requirements time of award. expense prior to vesting completion. eligibility can result in income and tax at time of award. prior to retirement. Restricted Stock Units No income or tax until vested. Closely Held and Dividend Equivalents taxable unless Award processing. Event Planning (RSU) Attract and Retain. Publicly traded Value if price drops. Minimally Simple Valuation. Value is Intrinsic fully restricted. Sell-to-Cover requires Event-based, forced income and with other corporate issues. Motivation added when Widely used above 409A considerations. Registration companies (mature leveraged. Better internationally value on award date. Cost essentially sufficient trade volume. Withhold-to- taxation. Comparison to Forfeitures. Dividend Equivalent awarded at higher than $0 operational staff of shares prior to award. tech, less volatile than RSS equivalent to paying cash. cover requires sufficient corporate Options tracking. Share movement at time cost to participant sectors) cash. Deferral allowed with sufficient of vest. notification. Performance Stock Units Very complex accounting and (PSU) Publicly traded Possible challenges from Income and taxes due at vesting. Due Understanding and Preferred by shareholders. valuation. Value of market-based goals Monitoring goals against awards. companies (mature Executives, Scientists, shareholders and recipients to nature of performance tax event is management of performance- Motivate. Payout only if goals are met. cannot be reversed if missed. Non- Processing with limited pre- finance sector and Finance staff regarding meeting and issuing of difficult to plan for. Deferral allowed criteria. Event-based income Complex to design market-based goals require probability notification. Standard RSU issues biotech) performance goals. with sufficient notification and taxation calculations Stock Appreciation Rights Stock-settled treated like options Possible ERISA issues with long- Comparison to options (stock (fixed, Fair Value accounting). Cash- Limited support from brokers at (SAR) Large privately held Upper and Middle Can be settled in cash or stock. term holding period on broad-based Taxed at time of exercise. Ordinary value no/no stock). Delivery of Attract and Motivate settled require variable accounting exercise (unlike options). Limited companies Management Provides option-like features plans. Generally not deemed "stock" Income and Taxes must be withheld. only the appreciation rather (quarterly remeasurement of Fair overall software capabilities. for S Corps than whole grant Value) IRC 423 Employee Stock Limits on participant Features drive valuation. Discount of No Ordinary Income or Capital inclusion/exclusion. Limits on Comparison to 401K. Coordinating HR and Payroll Purchase Plan Preferential tax treatment. Very 5% or less, and no look-back = no Gain/loss until first transfer. Grant Publicly traded Discount, Term of Offering,Value of Enrollment and contributions. systems and staff. Quick turn- (ESPP) Retain, Motivate and create companies and those in Broad-based (by law) flexible. Requires "skin in the expense. Option-like element (look share purchased in each calendar Date Discount is minimum amount of Dispositions and tax around at purchase date. Surveys ownership game" from participants. back) or discount of greater than 5% Ord. Income. Must hold shares for 2 the process of IPO year. Shareholder approval is consequences. Great tool for until all shares are transferred, Excellent communication tool requires option valuation and expense yrs from grant and 1 yr from purchase required within 12 months of BOD Exec Communication even for terminated. under FAS 123R to receive preferential treatment. adoption. Non-Qualified Stock Purchase Plan Coordinating HR and Payroll Mature publicly traded Ease of purchase and admin. Comparison to purchases on (NQ-ESPP) Retain and create companies (non tech Management-only and Low cost. Limited shareholder Expense only if purchase is made at a Possible 409A issues if shares are Ordinary Income and tax withholding open market. Understanding systems and staff. Quick turn- ownership broad-based discount. restricted after purchase. at Purchase for any discount amount. around at purchase date. If sector) impact company role discounted, taxation at purchase. Deferred Stock Units Deferral Election must be made (DSU) Employment Tax (FICA/FUTA) due at Separating Employment Income Mature publicly traded Income and Tax deferral. Simple Valuation. Value is Intrinsic within strictly defined period. Complex tax issues. Complex Retain and create orig. vest date. Ord. Inc. and tax from Ordinary Income. Limited companies (non tech Executives (C-Suite) Flattens volatile pay cycles. value on award date. Cost essentially Payout restrictions must be clearly release timing rules. Dividend ownership. Retirement withholding at end of deferral period. software support. Long-term sector) Creates retirement income equivalent to paying cash. defined to meet tax rules. 162(m) income Complex 409A issues tracking issues. considerations Phantom Stock Awards (PSA) Possible ERISA issues with long- Comparison to RSS/RSU (stock Limited software support. Privately held and Can be settled in cash or stock. If award can be settled in cash variable No income or tax until vested. Taxes Upper and Middle term holding periods on broad- value no/no stock). Delivery of Coordination with Payroll and Attract and Retain mature publicly traded Provides restricted stock unit- accounting is required (quarterly generally withheld from final cash Management based plans. Generally not deemed only the appreciation rather treasury at payout. Standard RSU companies like features remeasurement of Intrinsic Value) payment. "stock" for S Corps. than whole award issues toll free 877-803-9255 | office and mobile +1-917-734-4649 email - info@performensation.com ©2010 - Performensation Consulting web - www.performensation.com

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Equity Compensation Design and Use Matrix: stock options, restricted stock, espp, rsu and more

by Performensation on Jun 02, 2010

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Equity Compensation Design and Use Matrix: stock options, restricted stock, espp, rsu and more — Presentation Transcript