We are now firmly entrenched in the Say on Pay era and this means more varied forms of compensation than ever before. Companies will frequently offer their executives a variety of stock options – whether it’s a form of wages, give the executive a vested interest in the company or to reward management for meeting certain targets.
The type of shares issued becomes more varied and convoluted each year. An executive will have to not only understand the type of share or shares that they are receiving, but the conditions that come with these shares. From acceleration provisions to exercise dates and from strike prices to the benefits, there is a great deal to look out for and understand.
Here is a quick rundown of the 6 most common types of equity:
1) Incentive stock options (ISOs) can only be granted to employees and is the only equity option that offers favorable tax treatment. Usually, an employee is given the option to purchase stock at a predetermined price. This is the most common form of equity offered to employees.
2) Non-qualified stock options (NQSOs) are similar to ISOs but without favorable tax deductions. This means the employee is taxed on any profit made when purchasing the stock at its cheaper, predetermined price.
3) Stock Settled Appreciation Rights (SSARs) grants an employee payment in stock. The payment is equal to the amount which the value of stock has increased since the employer-employee agreement was made.
4) Phantom Stock is similar to SSARs, but the employee is paid in cash instead of stock. The payment is still equal to the amount which the value of the stock has increased, but the employee receives no actual stock.
6) Restricted Stock Units (RSUs) is when an employee is granted stock to be paid at a specified date in the future. These are also subject to forfeiture or repurchase by the company. RSUs are usually used by newer companies that are looking to grow.
Once again, it is necessary to stress the importance of understanding different types of stock. Too often, when an executive leaves a company for whatever reason, there is a messy and complicated severance package that is usually complicated by the shares owned by the executive. Clearly, it is beneficial to avoid a messy process!