Page 489 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)
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Chapter 8. Long-Term Incentives                   475


           These four combinations are illustrated in Figure 8-5.
                      N
                      u
                      m  S   Variable       VSFD                  VSVD
                         h
                      b
                         a
                      e
                         r
                      r
                         e
                             Fixed          FSFO                  FSVO
                         s
                      o
                      f
                                            Fixed                Variable
                                                    Date Received
           Figure 8-5. Number of stock awards and when received
           Fixed Number of Shares and Fixed Date (FSFD). Let’s assume eligible executives are given
           stock awards every three years that vest after three years in accordance with the schedule in Table
           8-54. Using Table 7-30 (Chapter 7) let’s assume the CEO is in grade 35 with a current salary of
           $1 million. Using the Table 8-49 value of 1.5 would require a restricted stock award worth $1.5
           million. If the stock were currently selling at $100 a share, the CEO would receive 15,000 shares
           (i.e., $1.5 million   $100). The tax and accounting treatment is shown in Table 8-55.


                           Grade            Award Multiple      Shares of Stock
                            35                   1.5                15,000
                            34                   1.4                14,000
                            33                   1.3                13,000
                            32                   1.2                12,000
                            31                   1.1                11,000
                            30                   1.0                10,000
                            29                   0.9                 9,000
                            28                   0.8                 8,000
                            27                   0.7                 7,000
                            26                   0.6                 6,000
                            25                   0.5                 5,000
           Table 8-54. Stock award multiple by grade example

               If the restrictions are only contingent upon continued employment, it is logical to assume
           the charge to earnings is based on the value at time of grant. Under FAS 123R, this full-value
           award is expensed on the underlying value of the stock over the period of vesting. In this
           example, the charge would be $100 for each share spread over the three-year vesting period. The
           individual has no income liability until the shares vest after the third year. Since the stock is sell-
           ing at $130 a share, the person has income of $130 on each share and the company has a like tax
           deduction. The company also has a tax deduction for dividends paid on restricted stock. When
           the individual sells the stock two years later, assumedly having met long-term capital gains hold-
           ing requirements, the $30 gain (i.e., $160   $130) for each share would be at the LTCG rate.
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