Non-cash or cash-deferred remuneration such as medical insurance, vacation or retirement plans.
An alternative way to value stock options which uses company experience in lieu of market averages.
A period of time, normally preceding release of company earnings or other significant data, and during which pension fund investments may not be altered, during which insiders may not buy or sell shares.
An accounting model used to value stock options based on prior average experience of options. Factors used in the model include share price volatility, risk-free interest rate, dividend yield, forfeiture rates, and a suboptimal exercise factor. The result is stated as a percentage of the current share price and has typically ranged from 33-45%. Hence an option on a stock with a market price of $40, and a Black-Scholes factor of 35%, would be valued in financial statements at $14.
The effect whereby paying executives with additional stock (including stock options) increases the total stock outstanding for a company and thereby the percentage of the company held by another stockholder.
In the change-in-control context, "double trigger" means that in order for the executive to receive the change-in-control amount, there must be a change-in-control and the executive must lose his or her job.
Statement of Financial Accounting Standards 123R (FAS 123R) requires evaluation of restricted stock or option grants using one of several models for estimating the fair value of the grants as of the grant date. These estimated values are charged as an expense and reported in the Summary Compensation Table of proxy statements, but do not reflect actual realized value of the equity compensation. See Black-Scholes Model or Binomial Lattice Model.
Pay which takes the form of company stock or that varies with the stock price. Equity pay is frequently used as a long term award for executives since it aligns executive reward with an increase in shareholder value. Equity pay is also used in many startup operations which lack cash to attract executive or technical talent.
The price at which an option allows the holder to purchase a share of stock. The strike price is normally the market price on the date that the option is granted. Premium priced options set a strike price above the market price on the grant date.
Alternate term for equity compensation valuation. Also see Black-Scholes or Binomial Lattice Model.
Under SEC rules, information that is “filed” is subject to more stringent liability standards with regard to federal securities laws than information that is “furnished.” For example, a “filed” document is subject to Section 906 of the Sarbanes-Oxley Act of 2002, which among other things requires the information to be certified by the CEO and CFO. “Filed” documents are also subject to other SEC enforcement provisions such as the liability provisions in Exchange Act Section 18 or Securities Act Section 11.
Exchange Act Section 18 creates an express private right of action for any person who buys or sells a security based on a false or misleading statement or omission made in certain documents, at a price affected by such statement.
Securities Act Section 11 makes those responsible for a false or misleading statement liable in damages (based on the decline in value of the shares) to any and all purchasers regardless of from whom they bought.
Payment to senior executives awarded due to a merger or sale, usually when the executive's position is lost due to the change.
The date when an equity award, such as stock options, is made to an executive.
Pay for executives or other senior staff for achievement of specified company objections or for increase in shareholder value.
An individual who has access to information about a company which is not generally available to the public. Senior executives are always considered to be insiders.
Award of stock or stock options which are not included in an approved incentive compensation program or as part of an Employee Stock Option Plan. Result in different tax treatment for both the recipient and company.
A term used to define the expectation that executive pay in the form of annual bonus and long term incentives should correspond to company performance in the market place as measured by returns to shareholders relative to its peers.
Personal benefits given to executives, such as financial planning, which are in addition to standard company benefits available to salaried employees.
Stock options which have a strike or exercise price above the market price on the date of the grant. Premium priced options are used to encourage superior performance by requiring greater stock price increases to make the option of value.
An SEC and stock exchange required discussion of issues to come before a shareholder meeting and providing the opportunity for shareholders to vote on these issues. Proxy statements are required to present an extensive discussion of executive compensation and provide a vote on equity pay plans or changes thereto, along with election of Directors, selection of Independent Auditors and issues proposed either by the company or shareholders.
Grants of stock that have restrictions such as vesting periods or other performance requirements before they are owned by the recipient.
Proposals whereby shareholders are permitted to vote annually on the total compensation received by senior executives. Shareholders have proposed Say on Pay proposals for a vote at annual company meetings and are seeking legislation in the US Congress mandating such a vote.
A section of the U.S. tax code, adopted in 1993, which limits corporate tax deductions for executive compensation for the CEO and each of the top four other most highly compensated executive officers to $1 million annually unless the compensation is considered 'performance-based.' The provision is regarded by all sides as a failure at limiting executive compensation.
A section of the U.S. tax code, adopted in 1988, designed to limit the size of "golden parachute" payments made to executives in the event of a change-in-control of the company. Section 280G imposes a 20 percent excise tax on parachute payments that exceed 2.99 times the average taxable cash compensation over the last five years. Despite its aims, Section 280G established 2.99 times base and bonus as the standard change-in-control amount.
Cash pay to employees when dismissed without cause or due to a substantial reduction in duties ("for good reason"). Severance is normally seen as compensation to bridge the time until a new job can be found.
Requirements set by the Board of Directors that executives must own a minimum number of shares of stock in the company. This provision is to assure executives' and shareholders' interests are aligned.
Provisions that require executives to retain shares received through option or share grants for a period of time after options or equity awards are exercised before they can be sold.
A type of equity-related compensation in which the recipient receives pay that represents the increase in the company's stock price over a specified period of time. Like stock options, SARs have a strike price, a vesting period and carry a certain term. For example if a 500 unit SAR is granted when the current stock price is $30, and if after a 3 years vesting period, the price has risen to $50, the SAR would pay the $20 increase times the number of units or a total of $10,000. The payment could be either in cash or stock.
A stock option gives the holder the right to purchase a share of company stock at a particular price for a set period of time, usually 10 years. The price at which the options may be "exercised" is usually the price of the company's stock on the date the options are granted. If the company performs well, the stock price will increase over the exercise price, giving the options value and rewarding the executive for his role in the company's success. Typically, such options may not be exercised for a period of time, usually between one and five years, before they "vest," or can be exercised.
As an example, assume an executive is awarded 5,000 options, based on the current stock price of $30 per share, and vesting in three years. If the executive were to leave the company within the next 3 years, the options would be lost. After 3 years, the options are vested and the executive could exercise them – or exchange the options for actual shares of stock by paying the $30 exercise price -- at any time thereafter. If the stock has by that time risen to $50 per share, the executive could exercise all 5,000 options by paying $150,000 (5,000 times $30), but the shares would have a value of $250,000. Hence the executive would actually earn $100,000 if he could immediately sell the shares.
On the other hand, if the stock price has fallen to $25, the options are termed "under water" and have no value. Who would exercise an option at $30 when the stock can be purchased on the market for $25? This happened to many options during the stock market decline in 2001 and will reoccur in each market slump. With the extraordinary growth in the U.S. economy, large American companies and the stock market (the Dow Industrials rose from 1,000 in 1980 to 14,000 in 2007), stock ownership has been most rewarding and stock options granted to corporate executives have paid huge rewards.
There are many variations on the basic stock option incentive, including performance vesting, in which the company must achieve specified results for the options to vest, or premium priced options, in which the exercise price is higher than the stock price on the date of the grant.
A required table in the company's annual proxy statement setting forth pay for the CEO, principal financial officer and the top three other most highly paid executives of publicly traded companies.
The process whereby a Compensation Committee seeks to target the amount to be earned by an executive. A typical target would be for base salary to match a peer group, annual incentive target at 100% of base salary, and long term incentive value of 400% of base salary.
The amount of time or the level of performance required before an individual has an unconditional right to exercise a stock option or SAR or sell restricted stock. Vesting can be "time based", such as three years, or "performance based" in which some other objective must be met before the benefit is vested. Time vesting can be "graded" such as having 25 percent of granted stock options vest per year for 4 years or 'cliff' vesting when 100% is vested after a period of time.