Primary	  Compensa.on	  UseTypical	  Plan	  SponsorTypical	  RecipientMain	  FeaturesKey	  Accoun.ngIssuesKey	  LegalIssue...
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Equity Compensation Design and Use Matrix: stock options, restricted stock, espp, rsu and more

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This is a quick 1-page reference tool showing the 11 most common types of equity (share-based compensation). It shows the companies and individuals most likely to each type as well as the major issues for each type (tax, legal, accounting, administration and more)

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

  1. 1. Primary  Compensa.on  UseTypical  Plan  SponsorTypical  RecipientMain  FeaturesKey  Accoun.ngIssuesKey  LegalIssuesKey  TaxIssuesKey  Communica.on  IssuesKey  Administra.on  IssuesIncen.ve  Stock  Op.ons(ISO)Attract and Motivate.Retention when stockprice is growingsteadily.Pre-IPO and Publiclytraded companies(high-tech/biotechand high growthsectors)Execs at all sizes,High-tech staff at Small toMid-size companiesPreferential tax treatment.Limits on use.HighlyLeveraged. Pays only if priceincreasesComplex valuation andamortization.Difficult marketcomparisonsLimits on Grant Price,Valueof Grant,Term of Grant andTerm of Plan. Shareholderapproval required within 12months of BOD adoption.No tax withholding at exercise. NoOrdinary income if held for qualifyingperiod.Not applicable to intlparticipants.Alternative MinimumTaxconcernsDifficult to show value ifunderwater.Leverage canbe issue in highly volatilestocks. Tax issues,Dispositions,AMTActivity peaks and valleys.Grant processing.Exerciseprocessing.Terminationrules.Intl issues.Dispositiontracking.Non-­‐Qualified  Stock  Op.ons(NQSO)Attract and Motivate.Retention when stockprice is growingsteadily.Pre-IPO and Publiclytraded companies(all sectors)Widely used,grant sizegenerally based onposition. Consultantsand Outside BODmembersHighly Leveraged.Guaranteed corporate taxdeduction when exercised.Pays only if stock priceincreasesComplex valuation andamortization.Difficult marketcomparisons. Variable FairValueaccounting for non-employeeservice providers.General plan documentation.Detailed documentationwhen used for outside BODmembers.Post-terminationrules and regulations.Ordinary Income andTax withholding atExercise.409A SupplementalWageseligible ($1MM threshold).Difficult to show value ifunderwater.Leverage canbe issue in highly volatilestocks. Tax issues atexercise.Activity peaks and valleys.Grant processing.Exerciseprocessing.Terminationrules.Intl issues.Tax atExercise.Restricted  Stock  Shares  (RSS)Attract and Retain.Motivation addedwhen awarded athigher than $0 cost toparticipantClosely Held andPublicly tradedcompanies (lessvolatile sectors)Upper and MiddleManagementValue if price drops.Minimally leveraged. Can beused to satisfy ExecutiveOwnership requirementsSimpleValuation. Value is Intrinsicvalue on award date. Costessentially equivalent to payingcash. Retirement eligibility canresult in accounting for expenseprior to vesting completion.Private companies aresubject to Blue Sky laws.Public companies are subjectto SEC regulations at thetime of award.No income or tax until vested. 83(b)election to be taxed at award date.Sell-to-Cover requires sufficient tradevolume. Withhold-to-cover requiressufficient corporate cash. Retirementeligibility can result in income and taxprior to retirement.Event-based,forcedincome and taxation.Comparison to OptionsAward processing.EventPlanning with othercorporate issues.Repurchases.83(b)elections.Dividend tracking.Share issuance at time ofaward.Restricted  Stock  Units  (RSU)Attract and Retain.Motivation addedwhen awarded athigher than $0 cost toparticipantClosely Held andPublicly tradedcompanies (maturetech,less volatilesectors)Widely used aboveoperational staffValue if price drops.Minimally leveraged.Betterinternationally than RSSSimpleValuation. Value is Intrinsicvalue on award date. Costessentially equivalent to payingcash.409A considerations.Registration of shares priorto award.No income or tax until vested.DividendEquivalents taxable unless fully restricted.Sell-to-Cover requires sufficient tradevolume. Withhold-to-cover requiressufficient corporate cash. Deferralallowed with sufficient notification.Event-based,forcedincome and taxation.Comparison to OptionsAward processing.EventPlanning with othercorporate issues.Forfeitures.DividendEquivalent tracking.Sharemovement at time of vest.Performance  Awardssee  Performance  Equity  Matrix  for  more  informa4onMotivate.Publicly tradedcompanies (maturefinance sector andbiotech)Executives,Scientists,Finance staffPreferred by shareholders,especially for Say on Payconsiderations.Payoutearned or modified if goalsare met.Complex designissuesVery complex accounting andvaluation.Value of market-basedgoals cannot be reversed ifmissed.Non-market-based goalsrequire probability calculationsPossible challenges fromshareholders and recipientsregarding meeting andissuing of performance goals.Income and taxes due at vesting. Due tonature of performance tax event isdifficult to plan for.Deferral allowed withsufficient notificationUnderstanding andmanagement ofperformance-criteria.Event-based income andtaxationMonitoring goals againstawards. Processing withlimited pre-notification.Standard RSU issueStock  Apprecia.on  Rights  (SAR)Attract and MotivatePrivately heldcompaniesUpper and MiddleManagementCan be settled in cash orstock.Provides option-likefeaturesStock-settled treated like options(fixed,FairValue accounting).Cash-settled require variableaccounting (quarterly adjustmentof FairValue)Possible ERISA issues withlong-term holding period onbroad-based plans.Generallynot deemed "stock" for SCorpsTaxed at time of exercise. OrdinaryIncome andTaxes must be withheld.Comparison to options(stock value no/no stock).Delivery of only theappreciation rather thanwhole grantLimited support frombrokers at exercise (unlikeoptions).Limited overallsoftware capabilitiesIRC  423  Employee  Stock  Purchase  Plan  (ESPP)Retain,Motivate andcreate ownershipPublicly tradedcompanies andthose in the processof IPOBroad-based (requiredby law)Preferential tax treatment.Very flexible.Requires "skinin the game" fromparticipants.Excellentcommunication toolFeatures drive valuation.Discount of 5% or less,and nolook-back = no expense.Option-like element (look back) ordiscount of greater than 5%requires option valuation andexpense underASC 718Limits on participantinclusion/exclusion. Limitson Discount,Term ofOffering,Value of sharepurchased in each calendaryear. Shareholder approval isrequired within 12 monthsof BOD adoption.No Ordinary Income or Capital Gain/lossuntil first transfer.Grant Date Discount isminimum amount of Ord.Income.Musthold shares for 2 yrs from grant and 1 yrfrom purchase to receive preferentialtreatment.Comparison to 401K.Enrollment andcontributions.Dispositions and taxconsequences. Great toolfor Exec CommunicationCoordinating HR andPayroll systems and staff.Quick turn-around atpurchase date. Surveys untilall shares are transferred,even for terminated.Non-­‐Qualified  Stock  Purchase  Plan(NQ-­‐ESPP)Retain and createownershipMature publiclytraded companies(non tech sector)Management-only orbroad-basedEase of purchase and admin.Low cost.Limitedshareholder impactExpense only if purchase is madeat a discount.Possible 409A issues ifshares are restricted afterpurchase.Ordinary Income and tax withholding atPurchase for any discount amount.Comparison to purchaseson open market.Understanding companyroleCoordinating HR andPayroll systems and staff.Quick turn-around atpurchase date.Ifdiscounted,taxation atpurchase.Deferred  Stock  Units(DSU)Retain and createownership. RetirementMature publiclytraded companies(non tech sector)Executives (C-Suite)Income andTax deferral.Flattens volatile pay cycles.Creates retirement incomeSimpleValuation. Value is Intrinsicvalue on award date. Costessentially equivalent to payingcash.Deferral Election must bemade within strictly definedperiod. Payout restrictionsmust be clearly defined tomeet tax rules.162(m)considerationsEmploymentTax (FICA/FUTA) due atorig.vest date. Ord.Inc.and taxwithholding at end of deferral period.Complex 409A issuesComplex tax issues.Complex release timingrules.Dividend incomeSeparating EmploymentIncome from OrdinaryIncome.Limited softwaresupport. Long-termtracking issues.Phantom  Stock  Awards(PSA)Attract and Retain(may replace stocksettled RSS an RSU)Privately held andmature publiclytraded companiesUpper and MiddleManagementCan be settled in cash orstock.Provides restrictedstock unit-like featuresIf award can be settled in cashvariable accounting is required(quarterly adjustment of IntrinsicValue)Possible ERISA issues withlong-term holding periodson broad-based plans.Generally not deemed"stock" for S Corps.No income or tax until vested. Taxesgenerally withheld from final cashpayment.Comparison to RSS/RSU(stock value no/no stock).Delivery of only theappreciation rather thanwhole awardLimited software support.Coordination with Payrolland treasury at payout.Standard RSU issuesThe Equity Compensation Design and Use Matrix©2012  -­‐  Performensa0on  Consul0ng Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406email:  info@performensa0on.comweb:  www.performensa0on.comEquity  TypesIssues  and  Features
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