Most Popular Forms of Equity Compensation
Paying your people with equity is a great way to keep them motivated and give them part of the action. But be careful. Equity compensation is a large and somewhat technical subject. Here our expert gives us a list of the different forms of equity compensation.
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Paying your people with equity is a great way to keep them motivated and give them part of the action. But be careful. Equity compensation is a large and somewhat technical subject. Here our expert gives us a list of the different forms of equity compensation.
- Stock options: Qualified (ISOs)
Incentive stock plans are qualified to receive special tax treatment under section 421(a) of the IRS tax code.
- Stock options: Non-qualified
These options are granted outside of a qualified plan that do not meet requirements for favorable tax treatment.
- Restricted stock
The recipient is granted shares or a right to purchase shares, often at a discount, whose acquisition or sale is subject to restrictions. Restrictions may include employment tenure, personal performance requirements, or corporate performance requirements.
- Performance-based stock shares
Stock grants in which the ultimate number of shares and/or the value of the stock is based upon other performance criteria (e.g., earnings per share growth over a 3-year period).
- Stock shares
Stock grants in which there are no set performance criteria or limitations.
- Stock appreciation rights
The recipient is granted rights to receive only the appreciated value of stock at some future date.
- Phantom stock
The recipient receives “paper” units for which the value is typically based on the book value of the share of stock at the time of the grant.
- Employee stock ownership plan (ESOP)
This is a qualified, defined contribution to an employee benefit plan that invests primarily in the stock of the employer company. A company creates a trust fund for employees and funds it through contributions of stock, cash to buy stock, or cash to pay back the ESOP’s load to buy stock. The stock thus acquired by the ESOP is then allocated to employee accounts.
- Employee stock purchase plan (non-qualified)
A non-qualified plan allows employees to set aside money for a specified period into a company account, which is then used to purchase company stock at a specific price. The price is typically set below current market value or less than market value at the beginning of the plan period.
- Employee stock purchase plan (qualified)
A plan qualified to receive special tax treatment allowing employees to set aside money for a specified period into a company account, which is then used to purchase company stock at a specific price. The price is typically set below current market value or less than market value at the beginning of the plan period.
Source: Culpepper and Associates (www.culpepper.com)—Founded in 1979, they conduct worldwide salary surveys and provides benchmark data for compensation and employee benefits programs. Contact them at 3600 Mansell Road, Suite 310, Alpharetta, GA 30022; U.S.; 770-641-5400.
