It is common for publicly traded corporations to provide more than just regular salary compensation to their management and key personnel. Often, 澳洲幸运5官方开奖结果体彩网:corporate boards will decide to provide special compensation to key personnel, in order to attract and retain top talent and to help align management's interests with those of 澳洲幸运5官方开奖结果体彩网:shareholders.

Such compensation commonly takes the form of 澳洲幸运5官方开奖结果体彩网:stock option grants, in which a specified allotment of 澳洲幸运5官方开奖结果体彩网:option contracts, with an exercise date set for some point in the future, is provided to selected employees. Selected employees can also be issued new shares by the corporation. Both forms of compensation can be very lucrative and, as the value of both 澳洲幸运5官方开奖结果体彩网:common shares and stock options increases as the company's share price rises, both have the effect of aligning the economic interests of manage🌠ment and shareholders.

In other words, if management's wealth rises and falls along with the company's stock price, managers have a real incentive to make sure they do what is needed to keep the company's share price climbing. If a company's managers were instead strictly paid a fixed annual salary with no 澳洲幸运5官方开奖结果体彩网:equity compensation, they would not have as much of an ec🍸onomic motive to maximize shareholder wealth—at least, this is one of the primary arguments supporting the use of equity compensation for management and key personnel.

Automatic Allotments

For shares or options to be legally issued to employees, a corporation's board must first approve the maximum allotment and specify the terms of the allotment. Such decisions are made at periodic board meetings, but rather than go through the process of approving allotments every year, a company can adopt what is known as an 澳洲幸运5官方开奖结果体彩网:evergreen option provision, which provides for an automatic allotment of equity compensatio💜n every year.

The amount of the evergreen provision is usually based on the number of 澳洲幸运5官方开奖结果体彩网:shares outstanding at the beginning of each year. For example, if XYZ Corp. has 50 million shares outstanding and an evergreen provision for equity compensation up to 5%🍰 of outstanding shares, XYZ would be able to issue 2.5 million shares' worth of compensation in the first year. Assuming the shares outstanding at the beginning of Year 2 are 52.5 million, the firm would then be able to issue 2.625 million shares (5% of the current shares outstanding) of equity compensation in the second year.

Dilution Danger

From the investor's perspective, there are both positive and negative aspects to an evergreen provision. On the positive side, this provision ensures that your company will continue to issue equity compensation to key personnel, and hopefully keep their efforts focused on maximizing the value of your shares. On the negative side, an evergreen provision represents an automatic dilution of your shares every year. In our example, since only the executives receiving the stock options get the new shares, the share issuance ends up increasing the total number of shares outstanding, but it does not increase the share holdings of current investors. Thus, current investors end up owning a smaller proportion of the company than they used to—this is called dilution. (See also: 澳洲幸运5官方开奖结果体彩网:Stock Option Definition and 澳洲幸运5官方开奖结果体彩网:What Is Stock Dilution?)

If the benefits of equity compensation outweigh the cost of share dilution, then it is to the net benefit of shareholders to continue with the compensation system. However, evergreen provisions, unless otherwise specified, allow for equity compensation even in years when the company performs poorly, and thus can end up diluting shareholder value without providing any benefits. (See also: 澳洲幸运5官方开奖结果体彩网:A Guide to CEO Compensation and 澳洲幸运5官方开奖结果体彩网:FAS 123R.)