DP Tool Club 12/CD_ASCQ_12_0294.iso/vrac/sba93_4.zip/F139.SBE

Text File | 1993-07-01 | 5KB | 100 lines

@088 CHAP 8

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        │ STOCK OPTION AND OTHER EQUITY INCENTIVE PLANS │
        └───────────────────────────────────────────────┘

STOCK OPTION PLANS.  Companies have devised, or Congress has
provided, a number of different stock option plans with var-
ious tax advantages, all of which are designed to encourage
employees to acquire a proprietary stake in the companies
they work for.

@IF120xx]PLANNING NOTE:  The stock option plans discussed below are
@IF120xx]applicable only in the case of corporations, generally. Thus
@IF120xx]these forms of compensation will not be relevant at present
@IF120xx]to @NAME, a @ENTITY.
@IF120xx]
@IF121xx]PLANNING NOTE:  The stock option option plans discussed be-
@IF121xx]low can only be set up by a corporate entity, such as your
@IF121xx]firm, @NAME.
@IF121xx]
Major types of stock option plans include the following:

  . Non-qualified stock options.  The employer usually
    grants favored employees options to acquire stock
    of the company at a bargain price during a period
    of several years, generally.  The grant of such an
    option is usually not a taxable event, although
    the excess of the value of the stock received when
    the option is eventually exercised, over the option
    price, is then taxed as ordinary compensation income
    (in most cases, unless the stock is restricted or
    forfeitable).

  . Incentive Stock Options (ISOs).  These are options
    granted under a plan that meets IRS requirements,
    where the term of the option is limited and the op-
    tion price is not less than the value of the stock
    at the day the option is granted.  That is, with an
    ISO, there is no "bargain element" built into the
    option.  If the stock is worth, say, $20 a share
    the day the option is granted to the employee, the
    option must be at an exercise price of no less than
    $20.  Thus, the employee will not stand to profit
    from exercising the option unless the value of the
    stock subsequently rises to above $20 a share --
    which is a good incentive for the employee to help
    make the company as profitable as possible, so its
    stock goes up!  If certain  requirements are met,
    the employee does not recognize taxable income when
    he or she exercises an ISO, and may qualify for
    subsequent capital gains treatment if the stock
    received from exercise of the option is sold at a
    gain. (I.R.C. Sec. 422)

  . EMPLOYEE STOCK PURCHASE PLANS.  Under a tax-qualified
    Employee Stock Purchase Plan, a company may allow em-
    ployees to purchase its stock, directly from the com-
    pany, for up to a 15% discount from the fair market
    value of the stock.  The employee is not taxed when
    exercising the right to purchase stock under such a
    plan, and may receive capital gain treatment when the
    stock is eventually sold at a gain. (I.R.C. Sec. 423)


OTHER EQUITY INCENTIVE PLANS.  Over the years, benefit con-
sultants have developed all kinds of non-qualified benefit
plans, which create employee incentives similar to owning
stock in the company. While many of these fringe benefits
have no special tax advantages, we mention them here as an
illustration of compensation approaches you may want to con-
sider if you are an owner or officer in a corporation.

Examples include:

  . "SARs," or Stock Appreciation Rights, which are granted
    to key employees, and which result in a cash payment at
    some future date, based on the appreciation (if any) in
    the value of X number of shares of the company's stock
    over that period.

  . "Phantom stock" is a similar benefit, where the company
    grants key employees "phantom" shares in the company,
    and later may pay the employee an amount to "buy back"
    the phantom shares, resulting in potentially large re-
    wards to the employee if the stock appreciates signifi-
    cantly in value.  While they "own" the phantom stock,
    employees are also often given the right to receive any
    dividends that they would have received if they held
    the actual stock, as well.

  . "ESOPs," or Employee Stock Ownership Plans, are a form
    of retirement program where the retirement plan invests
    its assets primarily in stock of the employer company.
    This type of plan is given a whole range of extremely
    generous tax benefits by the tax laws to encourage em-
    ployers to establish them for employees.