Page 481 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8. Long-Term Incentives 467

Purchase Vest Sell
Time Lapse Today Five years Seven years

Stock price
• Fair market value $100 $160 $210
• Purchase price $90 $90 $160

Individual
• Ordinary income — $70 —
• Long-term capital — — $50
gains

Company
• Tax deduction — $70 —
• Expense* $50 —
* Accrued over period of vesting
Table 8-46. Stock purchase plan—fixed cost and fixed basis for payment

and qualifies for long-term capital gains treatment on the $50 spread between current price
of $210 and the cost-adjusted price of $160.
An alternative to a loan (especially for those executives prevented by Sarbanes-Oxley
from receiving a loan) would be to use a portion of their annual incentive to purchase the
stock. It could be with the type of discount described earlier or it could be matched by the
company in stock with the person required to hold it for a prescribed period of time (e.g.,
three years). This type of restricted stock and the accounting treatment are described later in
the chapter. Table 8-47 shows an example of how this might work.
To illustrate, assume a person in grade 30 is to receive an annual incentive of $250,000
and wants to use the maximum allowable (i.e., 50 percent of $250,000) to purchase stock.
The company will match 50 percent of this amount, or $125,000, in restricted stock.

Maximum Allowable Company
Grade Bonus Deferral Match

35 100% 100%
34 90 90
33 80 80
32 70 70
31 60 60
30 50 50
29 40 40
28 30 30
27 20 20
26 10 10

Table 8-47. Company matched stock purchase