Page 192 - Essentials of Payroll: Management and Accounting

Benefits
option price can also be set substantially higher than the current fair
market value at the grant date, which is called a premium grant. It is also
possible to issue escalating price options, which use a sliding scale for the
option price that changes in concert with a peer group index, thereby

stripping away the impact of broad changes in the stock market and
forcing the company to outperform the stock market in order to
achieve any profit from granted stock options.Also, a heavenly parachute
stock option can be created that allows a deceased option holder’s estate
up to three years in which to exercise his or her options.
Company management should be aware of the impact of both ISO
and NSO plans on the company, not just employees.A company receives

no tax deduction on a stock option transaction if it uses an ISO plan.
However, if it uses an NSO plan, the company will receive a tax deduc-
tion equal to the amount of the income that the employee must recog-
nize. If a company does not expect to have any taxable income during
the stock option period, then it will receive no immediate value from
having a tax deduction (though the deduction can be carried forward to
offset income in future years),and so will be more inclined to use an ISO
plan.This is a particularly common approach for companies that have not
yet gone public. In contrast, publicly held companies, which are generally

more profitable and so must search for tax deductions, will be more
inclined to sponsor an NSO plan.Research has shown that most employ-
ees who are granted either type of option will exercise it as soon as pos-
sible, which essentially converts the tax impact of the ISO plan into an
NSO plan.For this reason also,many companies prefer to use NSO plans.

Stock Purchase Plans

Some companies offer stock purchase plans that allow employees to buy
company stock at a reduced price. The purchases are typically made

165