Page 456 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

442 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.
• Current market value of shares already owned is $100,000 (625 $160).
Exercise of the Stock Option
• Optionee gives the company 625 shares.
• Company gives the optionee back two stock certificates.
• One for 625 shares
• One for 375 shares
• Company also gives the employee a new stock option grant on 625 shares at the current
market price of $100 per share.
Advantages
• Both before exercise and after exercise the optionee has 1,625 shares “at work” in the market.
• Encourages early exercise of valuable options and the retention of shares because shares will be
needed for subsequent reload exercises.
• Employee has been able to exercise 1,000 stock options without using any cash.
• The entire transaction is a nontaxable event at the time it takes place.
Disadvantages
• Use will result in larger number of stock option grants reported in the company’s annual
report and proxy statement.
• Use will more quickly deplete shares available for use, both requiring a quicker return to
shareholders unless tendered shares are available for reuse.

Table 8-26. Example of a stock-for-stock provision with a reload feature

Table 8-27 highlights the before- and after-exercise positions of an optionee with and
without a reload grant.

After Exercise

Before Exercise Share Status Without Reload With Reload
625 Shares owned 1,000 1,000

1,000 Under option — 625
1,625 Total at work 1,000 1,625

Table 8-27. Before-and-after stock option exercise look

Cashless Exercise. If the optionee wishes simply to receive the after-tax appreciation in
stock price over option price, the cashless exercise is the most efficient method. As the words
imply, the optionee does not have to put up the cash to exercise the option but instead