Beyond The Stock Option
Trends in Executive Compensation Given the accounting scandals and irregularities over the past several years, and as a result of the Sarbanes-Oxley Act, many public corporations have ceased issuing traditional stock option plans.
These plans are being replaced with restricted stock plans that are easier to account for and presumably more straightforward to report.
Often considered golden handcuff awards, they are still powerful tools to attract an executive to join a company or entice a valued executive to stay with a company.
Income for the Executive Restricted stock grants are taxed as ordinary income when they are released to the executive.
For example, if an executive joins a company in 2002 with the provision to receive 10,000 shares of stock five years into his or her career with the company, and the company's share price is $50 per share at the time the stock is released, that executive receives $500,000 in additional taxable compensation during this calendar year regardless of the stock's original price.
A Business Expense for the Corporation To the business, this is treated as a normal business expense, while for an executive, it is typically subject to federal, state, and local income taxes when the award pays out, along with FICA and Medicare taxes.
If you are the executive earning the stock in this scenario, remember that you may need to come up with additional cash to make estimated tax payments, or pay the IRS the following April for the balance due.
The option to sell some of the stock to cover the additional income taxes is often a politically unfavorable move and also could become subject to short-term capital gains on the sale of the stock, which could be taxed at 35 percent.
Another popular addition to executive compensation plans is Performance Unit Plans, where the number of shares granted and issued can vary according to agreed-upon corporate performance measurements (net operating income, earnings per share [EPS], growth in the stock price, etc).
Oftentimes the company pays a dividend, and phantom dividend shares are awarded to the executive during the performance period in addition to their original grant.
The advantage of this type of plan from a corporate perspective is the executive is only rewarded to the extent that the company performs well.
If earnings and profit targets are not met, and shareholders are not happy with the performance of the stock price, the executives suffer alongside the shareholders Let's assume compounded EPS during the performance period was 6 percent, and according to the scale included in our executive's grant package, a 6 percent EPS growth rate would equal 80 percent of the target award being issued.
So 8,000 shares would be credited to the executive's corporate stock account on the maturation date, and dividends may be credited to the account on the 8,000 shares during the vesting period.
Whichever type of executive compensation plan you pursue, more and more companies are shifting how they compensate their executives.
Shareholders are demanding more transparency and more easily understood financial reporting.
With the proper planning, you can still easily develop executive compensation plans that can be lucrative for the companies and executives while also satisfying today's more stringent financial reporting requirements.
These plans are being replaced with restricted stock plans that are easier to account for and presumably more straightforward to report.
Often considered golden handcuff awards, they are still powerful tools to attract an executive to join a company or entice a valued executive to stay with a company.
Income for the Executive Restricted stock grants are taxed as ordinary income when they are released to the executive.
For example, if an executive joins a company in 2002 with the provision to receive 10,000 shares of stock five years into his or her career with the company, and the company's share price is $50 per share at the time the stock is released, that executive receives $500,000 in additional taxable compensation during this calendar year regardless of the stock's original price.
A Business Expense for the Corporation To the business, this is treated as a normal business expense, while for an executive, it is typically subject to federal, state, and local income taxes when the award pays out, along with FICA and Medicare taxes.
If you are the executive earning the stock in this scenario, remember that you may need to come up with additional cash to make estimated tax payments, or pay the IRS the following April for the balance due.
The option to sell some of the stock to cover the additional income taxes is often a politically unfavorable move and also could become subject to short-term capital gains on the sale of the stock, which could be taxed at 35 percent.
Another popular addition to executive compensation plans is Performance Unit Plans, where the number of shares granted and issued can vary according to agreed-upon corporate performance measurements (net operating income, earnings per share [EPS], growth in the stock price, etc).
Oftentimes the company pays a dividend, and phantom dividend shares are awarded to the executive during the performance period in addition to their original grant.
The advantage of this type of plan from a corporate perspective is the executive is only rewarded to the extent that the company performs well.
If earnings and profit targets are not met, and shareholders are not happy with the performance of the stock price, the executives suffer alongside the shareholders Let's assume compounded EPS during the performance period was 6 percent, and according to the scale included in our executive's grant package, a 6 percent EPS growth rate would equal 80 percent of the target award being issued.
So 8,000 shares would be credited to the executive's corporate stock account on the maturation date, and dividends may be credited to the account on the 8,000 shares during the vesting period.
Whichever type of executive compensation plan you pursue, more and more companies are shifting how they compensate their executives.
Shareholders are demanding more transparency and more easily understood financial reporting.
With the proper planning, you can still easily develop executive compensation plans that can be lucrative for the companies and executives while also satisfying today's more stringent financial reporting requirements.
