Page 492 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

478 The Complete Guide to Executive Compensation

Award Payment Vest Stock Sold
Three to
Time Lapse Today Two years later
Seven years
Stock price
• Fair market value $100 $150 $200
• Share price 0 0 —
Individual
• Ordinary income 0 $150 —
• Long-term capital — — $50
gains
Company
• Tax deduction 0 $150 —
• Expense* $100 —

* Accrued over period of vesting
Table 8-57. PARSAP/TARSAP example

forfeited. This type of plan lends itself better to an open fair-value pricing model such as
the binomial lattice formula than a closed model such as Black-Scholes. Table 8-58 is an
example of this type of award. Here the performance target has not been met and therefore
no award given (N.A. means not applicable), but the earnings charge is reversed because
stock price was not involved.
Another form of the restricted award is career stock. These are shares the individual
cannot sell while with the company. Only after leaving are the shares released from restriction.

Payment
Award Stock Sold
Vest
Time Lapse Today ?
Stock price
• Fair market value $100 N.A.
• Share price 0 N.A.

Individual
• Ordinary income $100 — —
• Long-term capital
gains — —
Company
• Tax deduction — 0 —
• Expense* — 0 —

* Accrued over period of vesting
Table 8-58. Performance-vested award example