Page 669 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

654 The Complete Guide to Executive Compensation

tandem (dependent), or on top of (additive) stock options. They can also be freestanding,
namely, not connected in any way with a stock option.
Stock awards take several forms: unrestricted, time restricted, and performance restricted.
Unrestricted stock awards are taxed upon acquisition and may be sold at any time. Time-
restricted stock awards (often five to eight years) are not owned until the time restriction
lapses (assuming the individual’s is still on the payroll), at which time they are taxed.
Performance-restricted awards are of two types: accelerated or performance determined.
The former type is often called either a performance-accelerated restricted stock award plan
(PARSAP) or a time-accelerated restricted stock award plan (TARSAP). Payment is acceler-
ated if certain company performance targets are met. There is no increase in the number of
shares if performance is exceeded, nor are shares forfeited if the target is not met as long as
the person remains on the payroll for the stated number of years (typically eight). Shares are
taxed when the restrictions lapse. Performance-restricted stock awards are typically of a fixed
length (e.g., three, four, or five years), and the number of shares varies from zero to a stated
number dependent on performance. The individual is taxed at time of payment. Similar to a
performance-restricted stock award is a performance-unit plan. Instead of payment in shares
of stock, it is a cash payment, and therefore the amount is not dependent on the stock price.
Another form of cash plan is the phantom stock plan, which defines “stock” as something
other than actual company shares (publicly traded or privately held). A very common form
is the book value share, which is shareholder equity divided by the number of common
shares outstanding. Phantom stock plans can use all three forms of stock plans: options,
SARs, and awards. Such plans are independent of stock market price and reward company
financial performance.
There is little difference in tax treatment between the basic forms of long-term incen-
tives. Essentially, they are tax deductible to the company at the time they are taxable to the
individual. All plans that pay out in company stock offer the subsequent opportunity for long-
term capital gains tax treatment (beginning from the income level previously recognized
for tax purposes). Dividends paid on company stock are nondeductible to the company and
subject to income tax by the recipient. However, dividends on restricted stock are considered
compensation and therefore are tax deductible to the company.
The earnings charge is determined at time of grant for all stock-settled awards and
at time of settlement for cash-sttled awards. All stock-settled awards are a dilution to share-
holder equity.
The SEC considers stock obtained through a stock option to be a purchase at time of
grant (not exercise). It will be a disposition when sold, and there must be at least six months
between acquisition and disposition of company stock. The SEC also requires disclosure of
the company’s long-term incentive plans in the company proxy statement.

CHAPTER 9: DESIGN AND COMMUNICATION CONSIDERATIONS

A good design ensures that the pay-delivery system will do what it is intended to do, namely,
reward executives for achieving selected objectives to lead the organization to success. These
objectives must be clearly defined and the basis of measurements clearly described. The rela-
tionship among individual, group, and company must be determined. The form and balance
between short-term and long-term incentives must be identified.