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Software Club 210: Light Red
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1997-01-01
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@088 CHAP 8
┌───────────────────────────────────────────────┐
│ 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
various 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 below
@IF121xx]can only be set up by a corporate entity, such as your firm,
@IF121xx]@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
option 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
employees to purchase its stock, directly from the
company, 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
consultants 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 consider 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
rewards to the employee if the stock appreciates
significantly 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
employers to establish them for employees.