Page 436 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

422 The Complete Guide to Executive Compensation

Time to Exercise (in months)
Modest Reasonable Liberal

Disability
• But still on payroll (STD) FT FT FT
• Off the payroll (LTD) 3 12 60

Death
• While on payroll 3 12 FT
• While retired
– Retired 12 60 12
– Other 3 6 FT

Retirement 12 60 FT
Termination
• Involuntary
– For cause 0 0 0
– Other 1 3 6
• Voluntary
– Company concurrence 1 6 12
– Solely individual initiative 0 1 3
FT full term
* All time periods assume such time shall be available to exercise. If less time exists, that would control.
Table 8-12. Permitted exercise period for change in status condition

the fair market value equals $100. This makes it look like a stock purchase plan defined by
Section 423 of the IRC (see Chapter 6).
This type of discount is used when a company wants an option to have immediate value.
Discounts, which are calculated during the term of the option, use a formula prescribed in
the grant. As an example, a $100 option price might be reduced by $1 for every increase in
fair market value over $100. Thus, if the FMV were $150 five years into the grant period, the
option could be exercised at a cost of $50 per share. If the FMV were $200 or greater, there
would be no cost to exercise the shares, making it look like a stock award. This is sometimes
referred to as a yo-yo option due to its up-and-down adjustments. Discounted stock options
will require a charge to earnings amortized over the vesting period. However, if the IRS
considers the discount too deep, it may deem it a stock award, not an option to buy. Even a
50 percent discount may raise questions. If deemed an award and not an option, it may be
taxed when the vesting requirement had been met even if not exercised.
As was described in Chapter 3, discount stock options are subject to Section 409A of the
Internal Revenue Code. The amount of discount is included in gross income in the year in
which granted and also subject to a 20% penalty tax.
Another variation to the discounted option is the purchased option, where the optionee
pays the company on date of grant an amount equal to a desired discount. For example, to
receive a 15 percent discount on stock price, the optionee pays the company an amount equal