Page 491 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8. Long-Term Incentives 477

A variation of this would be for one-third of the shares to vest each year. The account-
ing treatment would be the same—the value at time of grant is expensed over the vesting
period. This is unaffected by any change in stock price at the time the vesting lapses.
However, the tax treatment would change. Namely, the recipient would be taxed on the value
of one-third of the shares freed from restriction, and the company would have a like tax
deduction.
Shares of time-vested restricted stock might be awarded for holding stock acquired by
option for a stated number of years. The award could be for a stated percentage of the exercise
cost (e.g., 25 percent). For example, an executive who retained $1 million of exercised stock
options for five years might receive $250,000 of stock restricted for five years.
Shares of time-vested restricted stock might also be awarded for converting cash (typically
the annual incentive) into restricted stock units for a stated period of years or until retirement,
whichever occurs first, at which time they would be converted to shares of stock.
Another variation would be career-restricted stock, which would not have restrictions
removed until retirement. Termination prior to that date would result in forfeiture of the
shares. In the meantime, the individual would receive dividends and credit for the shares
against any ownership guidelines.
Fixed Number of Shares and Variable Date (FSVD). Using the same example in the
previous section, we can introduce a performance factor as to when (possibly if) the execu-
tive will receive the shares. These plans go by either of two names: performance-accelerated
restricted stock plans (PARSAPs) or time-accelerated restricted stock plans (TARSAPs). The more
generous approach would be to allow the executive to receive stock sooner than the speci-
fied date if certain company financial goals have been met. Instead of cliff vesting after three
years, let’s assume 100 percent vesting in at least seven years—sooner if prescribed financial
targets have been met. There are numerous ways to structure such an early earn-out.
Among the choices are the following:
• Which performance measures to use: earnings per share, stock price, return on invest-
ment, return on assets, and return on total capital, to mention a few
• When to measure: prescribed date(s) and/or over a stated period of time (e.g., seven
days)
• How much stock to release from restriction: all or a stated portion
As an example, a plan may lift restrictions on the first date after three years that the stock
trades at a price equal to 150 percent of current value for a consecutive period of seven days.
Another example would begin in the second year. At that time, the plan will remove restric-
tions on 25 percent of the shares if return on total capital exceeds 20 percent for the year.
Given the different possibilities of time of payout, it may be appropriate to use an option-
end pricing model such as a binomial lattice model. The recipient of course does not have a
tax liability until the restrictions lapse, at which time the company also has a tax deduction.
This is illustrated in Table 8-57, where the payment vests after three years because the
$150 stock-price target has been achieved. The $100 expense charge is accrued over the
estimated vesting period.
A variation of the performance-accelerated stock award is the performance-vested stock
award. This type of award will not vest until stated performance expectations have been met.
For example, it might be the first time (after three years) that EPS has achieved an annual
compound growth of 10 percent. If the goal is not achieved by seven years, the award is