Page 487 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8. Long-Term Incentives 473

The advantages and disadvantage to the company of stock purchase plans are shown in
Table 8-53. The major advantage is an increase in cash flow; the major disadvantage is
increased dilution.

Company
Advantages FCFBP FCVBP VCFBP VCVBP
No cash outlay true true true true
Positive cash flow from
purchase price true true true true
Fixed grant dated cost
if discounted true true true true

Disadvantages
Increased dilution with
stock awarded true true true true

Table 8-53. Stock purchase advantages and disadvantages to the company

Stock Awards

Essentially, a stock award is a stock purchase with a 100 percent discount. It too can either be
given immediately or restricted, with ownership deferred to a future date or dates with much
the same treatment as outlined for stock purchases. Some companies choose to use stock units
rather than stock awards. A stock unit is the right to receive a share of company stock at a
specified time in the future. Typically, this is to simplify SEC reporting and avoid possible
insider trade violations. There is no tax liability until the stock is received by the person.
Until then it is a promise to receive shares of stock. However, Section 409A of the IRC may
be an issue. Since settlement will be in shares of stock, it is an equity plan subject to fair-value
accounting. Because it is a deferral, Section 409A of the IRC should be reviewed.
Awards that are paid immediately could be in recognition of a special accomplishment, a
feature of the annual incentive plan, or part of a package designed to attract an executive to
the company. If the award is deferred to a future date, this decision could be by individual
choice or plan design. The process for an individual successfully deferring compensation
without triggering either constructive receipt or economic benefit was reviewed in Chapter 3.
This section covers plan-designed deferrals that are under some form of restriction
(typically, the person must still be employed when the restrictions lapse).
Restricted stock plans are not to be confused with restricted stock not registered with the
SEC (as described in Chapter 4). The restrictions on the plans described here are imposed
by the company not the SEC and Rule 144, although they may also be subject to Rule 144.
A restricted stock award is structured around a conditional transfer of company stock to the
executive. While the individual is prevented from assigning, transferring, or selling the stock
without a tax liability, the executive has the right to vote the stock, receive dividends, and
even possess the stock certificate (although it is noted on its face as being restricted in sale).
The restrictions lapse over time, either on a set schedule or one accelerated by the attainment
of prescribed financial goals. The time-only type of restricted stock award has been labeled
a survival stock award (namely, stay employed) or pulse award (namely, stay alive). Restricted