Page 532 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

518 The Complete Guide to Executive Compensation

To illustrate, the executive might receive 5,000 shares of a nonqualified option for
10 years and 5,000 shares of a qualified grant for 5 years—each at the same price. This would
be a parallel grant. If, however, the individual received a grant of 10,000 each but the
exercise of one would proportionately reduce the other, this would be a tandem grant. Thus,
exercising 2,000 shares as a qualified grant would lower the maximum available under each
grant to 8,000 shares.
Just as companies were warming to this approach, Revenue Ruling 73-26 rendered it
useless. It stated that whenever the action on a nonstatutory option affects the exercise rights
of a qualified grant, that qualified grant becomes a nonqualified option for all purposes
(except remaining in effect for exercise sequence issues). Pay planners giveth and the IRS
taketh away! The incentive stock option introduced the $100,000 per year maximum, which
would have made tandems of little value even if allowed.
For companies that have both stock options and qualified stock purchase plans, it is not
illogical to preclude the executive from participating in the first while in the second. After the
individual exercises all the options, they expire, or the executive voluntarily surrenders the
grants, the person is again eligible for the stock purchase plan. Such an action is plausible
if the stock has been underwater for a time; conversely, it would not seem as logical if the
company stock were experiencing strong growth, since the spread under the option would
probably exceed the 15 percent discount under the stock purchase plan. More likely is grant-
ing a stock option at time of purchasing shares in a nonstatutory purchase plan. Typical would
be granting an option on more than one share at fair market value for every share acquired
under the purchase plan. Such options might have a cliff vesting of five years and would be
forfeited as shares acquired under the purchase plan were sold prior to exercising the
stock option.

Nonmarket-Value Combination Plans
This is an example of one type of combination plan that could be set up, in this case for a newly
formed joint venture (JV), which will be staffed with key people from the two organizations.
The plan consists of restricted phantom partnership units, namely full-value units
(FVUs), appreciation units (AUs), and option units (OUs). As shown in Table 8-96, if the
joint venture “goes public,” stock options will be granted as well. They will be comparable in
number to those OUs remaining unexercised and will be in tandem with the OUs, namely,

Level FVU AU OU

President 25,000 25,000 50,000
Executive VP 20,000 20,000 40,000

Senior VP 10,000 10,000 20,000
VP 6,000 6,000 12,000

Senior director 3,000 3,000 6,000
Director 1,500 1,500 3,000

Table 8-96. Nonmarket-value combination plan