Incentive Compensation Plans Flashcards
Name incentive compensation plan – Stock cannot be transferred for a period of time and is subject to substantial risk of forfeiture. The company grants stock to the employee without cost or below FMV.
Restricted stock plan
Name incentive compensation plan – A formula awards employees a benefit based either on the value of a number of shares or on the appreciation of the company’s stock.
Phantom stock plan/stock appreciation rights (SARs)
Name incentive compensation plan – option price can be lesser of 85% of FMV at grant or 85% of FMV at exercise. Options are for a maximum of five years. However, if price is not 85% of FMV at exercise, the time is limited to 27 months.
Employee stock purchase plan (ESPPs)
Name incentive compensation plan – Rights are granted to buy stock for up to 10 years at the stock’s FMV on the date of the grant.
Incentive stock options (ISOs)
Name incentive compensation plan – Rights can be granted to buy stock at any price, even below FMV, and for any period of time.
Non-qualified stock options (NSOs)
Name incentive compensation plan – employee-stockholders have voting and dividend rights during the restricted period.
Restricted stock plan
Name incentive compensation plan – no shares are actually transferred, and benefits are typically paid in cash. No employee investment is required. May be attached to incentive stock options.
Phantom stock plan/stock appreciation rights
Name incentive compensation plan – no taxes are owed until sale of the stock. Holding period is two years from grant and one year from exercise. The company gets no deduction if the holding period is satisfied.
Employee stock purchase plan
Name incentive compensation plan – holding period is two years and one year from exercise. Must be exercised within three months of termination.
Incentive stock options
Name incentive compensation plan – Rights typically vest over a period of time. No holding period requirement applies.
Nonqualified stock options
Name incentive compensation plan – after restriction lapses, FMV of stock, less employee cost, is taxed as ordinary income. Any dividends received during the restricted period are compensation.
Restricted stock plan
Name incentive compensation plan – employees have ordinary income at the time of exercise.
Phantom stock plan/stock appreciation rights
Name incentive compensation plan – if the holding period is satisfied, the excess of FMV at exercise over the option price is ordinary income, and excess of sale price over FMV at exercise is capital gain.
Employee stock purchase plan
Name incentive compensation plan – if holding period is satisfied, The excess of sales price over the option price is long-term capital gain. The company usually gets no deduction.
Incentive stock options
Name incentive compensation plan – excess of FMV at exercise over option price is ordinary income. The company gets a deduction for the amount of the employee’s ordinary income.
Nonqualified stock options