What Is Stock Compensation?

Stock compensation is a way corporations use stock options to reward employees. Employees with stock options need to know whether their stock is vested and will retain its full value even if they are no longer employed with that company. Because tax consequences depend on the 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) of the stock, if the stock is subject to tax withholding, the tax must be paid in cash, even if the employee was paid by 澳洲幸运5官方开奖结果体彩网:equity compensation.

How Stock Compensation Works

Stock compensation is often used by 澳洲幸运5官方开奖结果体彩网:startup companies since they typically do not have the cash on hand to pay employees competitive rates. Executives and staff may share in the company’s growth and profits that way. However, many laws and compliance issues must be adhered to, such as 澳洲幸运5官方开奖结果体彩网:fiduciary duty, tax treatm෴ent and deductibility, registration issues and expense charges.

When vesting, companies let employees purchase a predetermined number of shares at a set price. Companies may vest on a specific date or on a monthly, quarterly, or annual schedule. The timing may be set according to company-wide or individual performance targets being met, or both time and performance criteria. Vesting periods are often three to four years, typically beginning after the first anniversary of the date an employee became eligible for stock compensation. After being vested, the employee may 澳洲幸运5官方开奖结果体彩网:e♔xercise their stock-purchasing option any time before the expiration date.

Example of Stock Compensation

For example, assume that an employee is given the right to purchase 2,000 shares of stock at $20 per share. The options vest 30% per year over three years and have a term of five years. The employee pays $20 per share when buying the stock, regardless of the 澳洲幸运5官方开奖结果体彩网:stock price, over the five-year period.

Types of Stock Compensation

There are different types of stock compensation, such as 澳洲幸运5官方开奖结果体彩网:🦩non-qualified stock options (NSOs) and 澳洲幸运5官方开奖结果体彩网:incentive stock 𝔉options (ISOs). ISOs are only available to employees and not non-employee directors or consultants. These options provide special tax advantages. With non-qualified stock options, employees are required to pay income tax based on the grant price minus the price of the exercised option.

澳洲幸运5官方开奖结果体彩网:Stock appreciation rights (SARs) let the value of a predetermined number of shares be paid in cash or shares. 澳洲幸运5官方开奖结果体彩网:Phantom stock pays a cash bonus at a later date equaling the value of a set number of shares. 澳洲幸运5官方开奖结果体彩网:Employee stock purchase plans (ES🅺PPs) let employees buy company shares at a discount.

Restricted Stock

Restricted stock and 澳洲幸运5官方开奖结果体彩网:restricted stock units (RSUs) let employees receive shares through purchase or gift after working a set number of years and meeting performance goals. 澳洲幸运5官方开奖结果体彩网:Restricted stock requires the completion of a vesting period. This may be done all at once after a certain period of time. Alternatively, vesting may be done equally over a set period of years or 澳洲幸运5官方开奖结果体彩网:any other combination management finds suitable.

RSUs are similar, but they represent the company's promise to pay shares based on a vesting schedule. This offers some advantages to the company, but employees do not gain any rights of stock ownership—such as 澳洲幸运5官方开奖结果体彩网:voting rights—until the shares are earned and issued.

Performance Shares

Companies award 澳洲幸运5官方开奖结果体彩网:performance shares to executives and managers only if certain specified measures are met. These could include metrics, such as an 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS) target, 澳洲幸运5官方开奖结果体彩网:return on equity (ROE), or the total return of the company's stock in relation to an index. Typically, performance periods are over a multi-year t🔴ime hori🏅zon.

Exercising Stock Options

Stock options may be exercised by paying cash, exchanging shares already owned, working with a stockbroker on a same-day sale, or executing a 澳洲幸运5官方开奖结果体彩网:sell-to-cover transaction. However, a company typically allows only one or two of those methods. For example, private companies typically restrict the sale of acquired shares until the company 澳洲幸运5官方开奖结果体彩网:goes public or is sold. In addition, private companies do not offer sell-to-cover or s🌸ame-day sales.