Planning for Executives - 5 Equity compensation plans (restricted stock, phantom stock, and performance share plans), Flashcards
What is a restricted stock?
Shares in a company issued to employees as part of their pay, but which cannot be fully transferred to them until certain conditions have been met.
What is phantom Stock?
A phantom stock plan, or ‘shadow stock’ is a form of compensation offered to upper management that confers the benefits of owning company stock without the actual ownership or transfer of any shares.
By simulating stock ownership, without actually providing it, management ensures that equity does not become diluted for other shareholders.
Large cash payments to employees, however, must be taxed as ordinary income rather than capital gains to the recipient and may disrupt the firm’s cash flow in some cases.
What is a performance share plan?
A Performance Share Plan allows employees to earn actual stock in their company. The company establishes specific financial objectives which, once achieved, will trigger the awarding of stock grants to employees. Financial targets might include such measures as earnings per share or EBITDA.
How do you evaluate restricted stock, phantom stock, and performance share plan in different scenarios?
The main difference between restricted stock and performance shares is that restricted stock is typically awarded to employees with the condition that they remain with the company for a certain period of time, while performance shares are awarded to employees based on the company’s performance.
Phantom stock units are tied to the value of your company’s stock and generally vest over a set period. Instead of giving unitholders the right to acquire company shares, however, phantom stock gives them a cash payout on settlement.Jul 21, 2022
What are the tax implications of a restricted stock?
When you receive an RSU, you don’t have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
What are the tax implications of phantom stock?
There are generally no tax consequences to the employee upon the grant of phantom shares as the receipt of a contractual right to payment is not taxable to an employee. An employee is taxed as and when payments are received, such tax being imposed at ordinary income tax rates.
What are the tax implications of performance share plan?
No tax consequences (unless payment of performance shares coincides with end of performance period). At payment. The amount received in cash and/or the fair market value of stock received upon settlement of performance shares is taxable as ordinary income.
What tax implications happen at grant date for restricted stock awards?
If 83(b) filed, ordinary tax on FMV. Otherwise, none.
What tax implications happen at vesting date for restricted stock awards?
None if 83(b) filed; otherwise, ordinary tax on FMV of vested portion.
Depict the specific dates that apply to restricted stock units?
What tax implications happen at sale date for restricted stock awards?
Long-term capital gains on gain if held 1 year past when takin into income. Otherwise, ordinary tax including immediate sale).
