Stock Options still Hot

Descriptions of Each Type of Compensation Vehicle:

Incentive Stock Options (ISO):

• A stock option that qualifies for favorable tax treatment (no tax at exercise and long-term capital gains treatment, if shares are held for one year after exercise and two years after grant of sale) and which meets the other rules as specified by legislation.

Non-Qualified Stock Options (NQSO):

• A stock option that does not qualify for special tax treatment under Section 422 of the IRC or which is designated by the company as not being as ISO.

Restricted Stock:

• Stock is given (or sold at a discount) to an employee, who is restricted from selling or transferring it for a specified time period (usually three to five years). The executive receives dividends or equivalents, but must forfeit the stock if he/she terminates employment before the restriction period ends. Typically, if the employee remains an employee of the company through the restricted period, the shares will vest, irrespective of employee or company performance.

Phantom Stock:

• A long-term incentive plan in which the participant receives a payment in cash (or equity) based on a formula. Under a full value plan, the full value of the formula is paid. The formula may not involve the actual stock price.

Employee Stock Ownership Plans (ESOPs):

• An ESOP is a qualified employee benefit plan that is designed to make employees into shareholders of the company.

Unit/Share Plans:

• A compensation plan in which financial and/or operational objectives are established by the company. Executives receive awards based on the level of objectives achieved over a set period of time (e.g., 5 to 10 years). These awards can be paid out in cash and/or stock.

Employee Stock Purchase Plans (ESPP):

• An ESPP is a qualified stock plan that allows employees to use after-tax monies to buy company stock usually and a discount up to 15%.

Stock Appreciation Rights:

• An incentive plan in which the corporation grants an executive the right to receive a dollar amount equal to the future appreciation of its stock. SARs are not used much except by U.S. companies operating in some foreign countries where tax and other laws preclude

SERPs:

• A form of nonqualified pension plan that need not be funded and can be lost if the corporation goes bankrupt. It offers the organization the ability to grant more liberal benefits and to ensure the retirement amount beyond those authorized under the ERISA can be provided to the highly paid employee.

Other Cash Based LTI:

• A multi-year compensation plan in which awards are paid out in cash based on achievement of pre-established objectives.