Equity Compensation for Key Employees: An Overview

October 9, 2014

By HunterMaclean Attorneys, Special to Business in Savannah

Employers often use equity compensation awards to incentivize employees. Equity compensation is a form of employee compensation representing an ownership interest in the employer and can take many forms depending on the needs and objectives of the company. Companies use equity compensation as both a means to align the interests of employees and stockholders and an incentive for employees for future performance. This article is a brief overview of the different types of equity compensation available to employers, and describes how they are typically structured.

Stock Options. Employee stock options are a type of equity compensation that provides the employee with the right to buy employer stock at a specified exercise price at the end of a specified vesting period. The exercise price is typically the fair market value of the share of stock at the time the option is granted. Options are exercisable for a specified exercise period after the option vests, typically for five to ten years.

Restricted Stock. Restricted stock is a grant of stock to employees that is subject to certain restrictions. On the grant date, employees become the owners of record of the shares and have stockholder rights. However, the shares are non-transferrable and subject to forfeiture until the restricted stock vests, which typically occurs when there is a completion of specific time-based employment service requirements, or an achievement by the company and/or the employee of certain performance-based conditions.

Restricted Stock Units. Restricted stock units (RSUs) are awards that represent a promise to transfer shares of a company’s stock in the future if certain vesting criteria are met. The RSUs ordinarily have no purchase or exercise price. After vesting, RSUs are customarily settled in stock but may also be settled in cash. They do not represent actual ownership interests in the underlying shares.

Stock Appreciation Rights. A stock appreciation right (SAR) is a contractual right which allows an employee to receive cash or stock equal to the appreciation in value of a share of employer stock from the grant date until the date the SAR is exercised. SARs differ from RSUs because of this built-in purchase or exercise price.

Phantom Stock. Phantom stock is a type of equity compensation that is linked to employer stock. The recipient is not issued actual shares of stock on the grant date but instead receives an account credited with a certain number of hypothetical or “phantom” shares.

Equity compensation, when tailored for a specific situation and designed to accomplish certain goals, can be a valuable component of an employee’s total compensation package and contribute to the long-term success of a company. The decision to offer equity compensation should be made with input from your legal and tax counsel.

For more information on Equity Compensation:

Pure Business Essential Advice Series

Pure Business brings together a panel of seasoned practitioners from prominent professional service firms to address diverse aspects of important business topics.

What: Equity Compensation: Navigating the crucial and highly charged area of equity options and grants for key employees.

When: Wednesday, November 5, 11:30 – 1:00. Lunch served at 11:30, program 12:00-1:00

Where: Savannah Golf Club, 1661 E. President Street

Daniel R. Crook, HunterMaclean
Tony Martin, Martin Financial Group
G. Forbes Buck, KRT CPAs
Brad Whitfield, Coastal Consulting Management Group

Cost: Attendance is free, but space is limited and RSVP is required.

RSVP: Please click here to RSVP.

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