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Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More
Formerly titled Beyond Stock Options
by Joseph S. Adams, Barbara Baksa, Daniel D. Coleman, Daniel Janich, David R. Johanson, Blair Jones, Kay Kemp, Scott Rodrick, Corey Rosen, Martin Staubus, Robin Struve, and Dan Walter
This is the print version, and shipping charges apply. It also is available in a digital version with no shipping charges.
$35.00 for NCEO members; $50.00 for nonmembers
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In the 12th edition, chapters 1 through 7 have been revised and updated (as of late 2013) where needed. Chapter 8 did not require any changes. Additionally, every plan document included with the book was reviewed and then revised when necessary.
Format: Perfect-bound book, 308 pages
Edition: Twelfth edition (February 2014)
Status: In stock
Basic Issues in Plan Design
Phantom Stock and Stock Appreciation Rights
Restricted Stock Awards, Units, and Purchases
Performance Award Plans
Direct Stock Purchases in Closely Held Companies
ESOPs, ESPPs, 401(k) Plans, and Stock Options: When the Old Standbys Still Make Sense
A Tiered Approach to Equity Design with Multiple Equity Compensation Vehicles
Appendix: Using the Model Plan Documents
About the Authors
About the NCEO
Plan Documents on the CD:
Omnibus Incentive Plan
Phantom Stock Grant Notice and Agreement
Stock Appreciation Rights Award (Cash-Settled)
Stock Appreciation Rights Award (Stock-Settled)
Restricted Stock Award and Agreement
Restricted Stock Unit Grant Notice and Agreement
Performance Unit Award and Agreement
Direct Stock Purchase Plan Agreement
From Chapter 2, "Phantom Stock and Stock Appreciation Rights"SAR grants and phantom stock awards are generally made to encourage employee retention, provide an incentive to grow shareholder value, or a combination of both.
If the employer's principal objective is to motivate the participants in the program to grow the value of the business, a SAR grant is typically more appropriate. The holder of a SAR award receives no benefit unless the underlying stock value appreciates. As a result, the holder has an incentive to improve financial performance with the expectation of growing the stock value. SAR grants are frequently made subject to a vesting schedule to encourage retention, as well as to provide an incentive to grow value. However, the vesting element of a SAR grant is successful as a retention tool only to the extent that the value of the underlying stock continues to appreciate. If the underlying stock declines in value from the date of grant so that the SARs have no value, the employee might be more willing to entertain an offer to go elsewhere because he or she forfeits no value upon departure. For example, assume an employer makes annual SAR grants with a graded five-year vesting schedule for each grant. Assume further that the underlying stock value appreciates each year during the first four years from $10 to $15, $20, $25, and then $30. If, at the end of five years, the underlying stock is valued at $40 per share, the employee would have a significant unvested build-up of the early awards. In this case, the annual SAR grants, with their five-year graded vesting schedules, become a valuable retention device. If, however, the underlying stock is more volatile and the value at the end of five years, based on the prior example, drops to $20, the retention value is more limited.
Phantom stock awards are more valuable if the objective is to promote employee retention. Phantom stock awards are typically subject to a vesting schedule for several reasons, not the least of which is to encourage retention. The vesting schedule may be designed with specific objectives in mind. If the employer's sole objective is retention, the forfeiture provisions may be based solely on the passage of time (e.g., a five-year cliff vesting schedule, meaning the award does not vest at all until the end of the fifth year, at which time it becomes 100% vested). In this case, for example, if 500 units of phantom stock are granted when the underlying stock is worth $100 per share, the initial value of the award is $50,000. Even if the value of the stock drops in half to $25 per share, the employee would forfeit significant value if he or she left the company during the five-year period before the units become fully vested. Forfeiture provisions may also be designed to assure that the employee remains in the service of the company during a critical period. For example, the vesting provisions may be tied to the repayment of the company's outstanding senior loan or until the completion of a merger or acquisition. In addition, if the objective is a combination of retention and performance, the size of the award or vesting provisions could be tied to the achievement of certain financial targets (e.g., EBITDA targets). For example, some plans use relatively long vesting schedules (e.g., six to seven years) for grants, but provide that vesting will accelerate if certain performance measures are satisfied.
Although it is a broad generalization, it would be more common to see top-level executives receiving SARs (because the executives would be perceived as making policy-type decisions more likely to affect the stock price), next-tier executives receiving a combination of SARs and phantom stock, and still lower-level executives receiving all phantom stock (to encourage retention).
From Chapter 3, "Restricted Stock Awards, Units, and Purchases"Most plans merely provide broad parameters governing grants of awards and further provide the board of directors or plan administrator with authority for determining the terms of individual awards (e.g., the actual award recipients, the number of shares underlying the awards, the effective date, or vesting provisions). Where plans are drafted in this manner, individual awards must be approved by the entity with appropriate authority under the plan and under the laws of the state where the company is incorporated.
Most plans and states allow authority for approving awards to be delegated to a subcommittee of the board, typically the compensation committee, or even to an individual board member. For awards granted to officers and directors that are subject to Section 16, it is generally advisable for awards to be approved by a committee of outside and non-employee directors, as defined under Section 16 and Section 162(m), as this can facilitate compliance with these areas of the law and also helps address corporate governance and fiduciary considerations. For awards granted to other employees and consultants, authority for approving awards can usually be delegated to a committee of officers who are also board members or a single officer that serves on the board (it is also perfectly acceptable for awards to these individuals to be approved by the full board or the same committee that approves awards to officers and directors).
Note that, under Delaware law, limited authority to approve option grants can be delegated to officers who are not board members but that flexibility has not been extended to grants of restricted stock or units. Thus, for companies incorporated in Delaware (and in many other states), awards should be approved by board members.
Where a plan specifies all the terms and conditions of awards on a non-discretionary basis, such as under a formula plan or automatic grant program, then approval of individual award grants should not be necessary. An example of such a plan might be an automatic grant program for outside directors under which all directors receive an annual grant on a specified date, for a specified number of shares, with specified vesting conditions.