Exam 12: Compensating Executives

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Incentive stock options provide executives with the opportunity to purchase company stock,often at a discounted price.As a result,executives realize capital gains with their purchase.Additionally,the federal government accords favorable tax treatment to these purchases in that these gains are not taxed until the disposition of the stock.
Nonstatutory stock options are similar to incentive stock options.However,the capital gains are taxed at the time of purchase.Despite this cost,executives' tax liability over the long term is lower.
Restricted stock provides ownership control to the executive after a predetermined period,often 5 to 10 years.A further restriction is that if executives terminate their employment prior to the end of the designated period,they must sell the stock back to the company at the original discounted price.However,similar to incentive stock options,the executive does not pay tax until the restriction period ends.
Phantom stock provides executives with "hypothetical" company stocks rather than actual shares of company stock.Like restricted stock,these shares are converted into company stock after a predetermined period.Executives must meet two conditions:
1)executives must remain employed for a specified period,and 2)executives must retire from the company.Upon meeting these requirements,executives will receive income equivalent to the value of the increase in stock to the date the phantom stock was first granted.As with several of the other deferred stock options,executives will pay a capital gains tax after they convert the phantom shares to real shares.
Discount stock option plans are similar to nonstatutory stock option plans.However,the company grants stock options at rates far below the stock's fair market value on the date the option is granted.
Stock appreciation rights grant the executive income at the end of a designated period without actually having to exercise their stock rights.Rather,the company grants the difference in price between the time the stock was granted and its current fair market value.Executives then pay tax on any income from gains in stock value when they exercise their stock rights.