Page 452 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

438 The Complete Guide to Executive Compensation

Assumptions
• Optionee has 1,000 stock options.
• Option price is $100 per share.
• Cost to exercise options is $100,000 (1,000 $100).
• Optionee owns 625 shares of stock.
• Current market price of the stock is $160.00.
• Current market value of shares already owned is $100,000 (625 $160).
Option Exercise
• Optionee gives the company 625 shares.
• Company gives the optionee back two stock certificates.
• One for 625 shares
• One for 375 shares
Advantages
• Optionee has been able to exercise 1,000 stock options without using any cash.
• The transaction involving the 625 shares is a nontaxable event at the time it takes place;
the 375 shares are taxable income.
Disadvantages
• Before exercise, optionee had 1,625 shares “at work” in the market (625 owned and an
option for 1,000 shares), but after exercise optionee has only 1,000 shares (all owned).
• Does not encourage ownership of stock by employees.
Table 8-25. Example of a stock-for-stock exercise

variable accounting was not required if the reload provision was part of the original grant.
FAS 123R revised the accounting treatment however, and indicated that fair-value account-
ing is required at time of the new grant. No recognition is required simply for the plan
having a reload feature. The plan must also consider shares tendered as available for future
grants; otherwise, the optioned shares will be counted twice, more quickly depleting those
authorized by shareholders and requiring a quicker return for many shares than would have
been anticipated.
Reload features typically include the following:

• Reload price is market price at time of reload (one could premium prices in the grant
to reduce the expense).
• Reload vesting and term of grant are the same as in the original (alternatively, a new
vesting schedule and term could be lengthened or shortened).
• Reload number of shares is the same as number of shares tendered (additional shares
may be added for taxes or other reasons).
• Reload exercise may have restrictions on sale of shares.
Some will argue that reloads do not contribute to increased dilution. This is technically
correct: the number of shares in the market (375 in the example) plus the number in the
reload grant (625 in this example) are equal to the total of the original option (1,000 in this
example). However, missed in this argument is that without the reload, the dilution would
have been decreased by the number of shares tendered. In our example, of the 1,000 shares
under option, only 375 were used, thereby decreasing the dilution by 625 shares.