Page 473 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8. Long-Term Incentives 459

Executive
Advantages Statutory (ISOs) Nonstatutory (All Others)
If granted at fair market or more not
taxed at time of grant True True
No income tax until sold True False
Long-term capital gains at sale price
minus price when purchased if holding
requirements are met True True
Disadvantages
Demotivated if stock price does not
exceed option price True True
Need money to purchase stock
(unless stock-for-stock exercise permitted) True True
If granted at less than fair market value is
taxed at time of grant *** True
Taxed as ordinary income at time of
stock purchase False True
Spread between option price and FMV on
date of purchase taxed as tax
preference income True False
Cannot grant more than $100,000 of options
(price times number of shares) that vest
in any one year True False
Subject to downside risk while
owning the stock True True

*** ISOs must be not less than fair market value at the of grant
Table 8-40. Stock option advantages and disadvantages to the executive

Stock Appreciation Rights
The stock appreciation right, or SAR, is another feature many companies used in conjunction
with a nonstatutory option. (Attaching a SAR to a statutory option would automatically make
it a nonstatutory option). The SAR permits the optionee to receive the appreciation of FMV
over option price in stock and/or cash without providing funds to pay the option price. The end
result looks like the immaculate exercise of a stock option described earlier.

Type of SAR. The SAR may be granted in parallel (independent), in tandem (dependent),
or on top of (additive) a stock option. A tandem grant would mean the exercise of one would
proportionately reduce the other. If an individual received a stock option for 10,000 shares,
exercising 4,000 options under a tandem grant would leave 6,000 options and SARs. A
parallel grant would mean the two are independent of each other. Under a parallel grant, 6,000
options and 10,000 SARs would remain. Under an additive grant, the exercise of 4,000
options would automatically result in the additional payment of 4,000 SARs (typically in cash
to meet tax withholding requirements). A limited SAR (LSAR) is one that is in effect only
under specified circumstances. An example of a common LSAR would be as part of a golden