Beyond Stock Options

Phantom Stock, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, and Other Equity Alternatives

A required text for the Certified Equity Professional program

6th ed. (February 2008). 346 pp. (6" x 9"), softcover. Includes CD with model plans. $35 for NCEO members; $50 for nonmembers.

In today's world, stock options are still important, but other equity compensation plans are rapidly assuming greater importance. Companies such as Amazon.com and Microsoft are moving from stock options to restricted stock, and still other companies both large and small are doing more with phantom stock, stock appreciation rights, or direct stock purchases. This book/CD combination is an essential toolkit for everyone who needs to research or implement such a strategy. The book includes eight chapters on what the plan alternatives are, how they work, how to combine them, and the legal and accounting issues they raise. The authors include leading authorities from law firms, Deloitte & Touche, NASPP, and the NCEO. The book also includes a set of model plan documents, most of them annotated, prepared by law firms. The plan documents are included in word processing formats (Microsoft Word and Rich Text Format) on the CD that comes with the book, so you can open and edit them.

In the sixth edition, most of the chapters have been revised (as of late 2007) to account for new developments and to explain various matters in greater detail. Chapter 8 (on using multiple plans) did not need to be revised because it is still current, having previously been updated as needed. All of the model plans except the direct stock purchase plan have been replaced with an updated set of plans structured around an omnibus incentive plan document. There are now separate award documents for cash-settled and stock-settled SARs. In addition, a restricted stock unit plan has been added. The direct stock purchase plan itself has been updated for 2008.

Introduction
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
Accounting Issues
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
Appendixes:
A. Using the Model Plan Documents
B-1. Omnibus Incentive Plan
B-2. Phantom Stock Grant Notice and Agreement
B-3. Stock Appreciation Rights Award (Cash-Settled)
B-4. Stock Appreciation Rights Award (Stock-Settled)
B-5. Restricted Stock Award and Acknowledgement
B-6. Restricted Stock Unit Grant Notice and Agreement
B-7. Performance Unit Award and Acknowledgement
C. Direct Stock Purchase Plan Documents
Index
About the Authors

Excerpts

From Chapter 2, "Phantom Stock and Stock Appreciation Rights"

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 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.

From Chapter 3, "Restricted Stock Plans"

Where the restricted shares have been purchased at the full fair market value of the company’s stock on the date of grant, generally the employee will make this election and recognize zero compensation income. If the restricted stock was awarded at no cost to the employee or purchased at a discount, filing a Section 83(b) election causes the employee to recognize compensation income equal to the full fair market value of the stock on the date of award or the amount of the purchase discount. This compensation income is subject to taxation at ordinary income tax rates and must be included in the employee’s ordinary income calculation for the year. In the absence of an election, the compensatory element of the arrangement is not determined until the date of vesting, as described above. If a Section 83(b) election is filed and the employee subsequently leaves the company before the restricted shares have been fully earned, the employee is not entitled to a refund of the taxes paid at the time of award or purchase, nor is the employee entitled to take a loss deduction for the amount, if any, previously included in income. Likewise, if the stock declines in value after the award or purchase so that the fair market value of the stock upon vesting is less than the fair market value of the stock when the award or purchase occurred, the employee is not entitled to claim a loss deduction unless the shares are sold at the lower value. Thus, where the stock is purchased at a discount or awarded at no cost, filing a Section 83(b) election could cause employees to pay a higher amount of tax than if the election were not filed; few employees choose to file a Section 83(b) election in this situation. But where the employee is paying full fair market value to acquire the restricted stock, many employees do choose to file the Section 83(b) election, since, in this situation, it eliminates any compensation income associated with the arrangement.

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