Page 344 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

330 The Complete Guide to Executive Compensation

Same Number for Everyone (Example 50 shown)
Cost as a % of Salary
Number of
Salary Exercise Cost
Shares
1 Year 10 Years
$50,000 50 $5,000 10.0% 1.0%

$100,000 50 5,000 5.0% 0.5%
$150,000 50 5,000 3.3% 0.3%
Share for every Increment of Salary (Example 1 for every $2,000)

$50,000 25 $2,500 5.0% 0.5%
$100,000 50 5,000 5.0% 0.5%

$150,000 75 7,500 5.0% 0.5%
Table 6-34. Stock option grant formulas compared at $100 a share

this requires the discipline to set enough money aside annually to permit exercising the grant
without immediately selling the shares.
In determining which approach to use and the number of shares or salary increments, it
is important to determine how frequently options will be granted. If this is a one-time event
because the company has achieved a significant milestone (e.g., 100th anniversary), the sim-
plest approach is probably the same number of shares for everyone. Granting 100 options for
a 100th anniversary has a nice ring to it. Conversely, if grants are going to be made on a more
regular basis, using the salary increment may make more sense because other retirement
forms are related to pay in some form. As grant frequency increases, the number of shares
granted per cycle decreases proportionately. One could grant 500 options once every 10 years
or 50 options per year. Annual grants have the advantage of dollar averaging the stock price.
They also better accommodate new hires.
To facilitate accumulating sufficient funds to exercise the stock option, the company may
not only offer payroll deductions (with some type of interest factor) it may choose to mandate
such deductions. In the earlier example, the person earning $100,000 is told he or she may
receive an option up to 50 shares at $100 a share. To do so, the employee must authorize a
payroll deduction of $0.20 per week for each share. At $10.40 a year, plus credited interest,
the account will accumulate the required $100 before the end of the 10-year exercise period.
Because of other obligations, the employee chose to authorize $8 per pay period. At $0.20
per share, this will only protect 40 shares and, therefore, he or she is given an option of 40
not 50 shares. Any withdrawals or cutbacks in the authorized deduction will result in the
proportionate forfeiture of unprotected shares.
Some of the differences between a stock purchase plan and a stock option plan are as
follows:
• Stock option plans allow the company to pick and choose participants, but stock
purchase plans require that essentially all employees be eligible to participate.
• Stock option plans usually set the price as of grant date, but some stock purchase plans
set the price at time of purchase.