Equity-based compensation was recently discussed in a Wall Street Journal article by Emily Chasan, titled “Last Gasp for Stock Options.”
Stock option compensation for executives and employees is falling out of favor relative to restricted stock-based compensation. Restricted stock units are less complex, less risky to the employee, and potentially create less dilution for existing shareholders.
- Restricted stock units represent a safer return for the employee. Options may expire out of the money, rendering them worthless. Restricted shares give an employee the full value of the stock once vesting conditions are met.
- Restricted stock is a simpler form of equity-based compensation, subject to fewer accounting and tax complexities. Tax policies on options can vary by jurisdiction, but are more uniform for restricted stock.
- Options that linger underwater for an extended period of time can negatively affect employee morale.
- Restricted stock is typically worth more at issuance, so fewer shares are granted than when granting options. This arrangement reduces existing shareholder dilution. On the other hand, restricted stock recipients will benefit even if shareholders don’t (if the stock price declines).
Regardless of the form of equity based-compensation (options, restricted stock units, or stock appreciation rights) companies need guidance when navigating the share-based reporting requirements such as FASB ASC Topic 718 and Section 409A of the Internal Revenue Code. Topic 718 mandates that equity-based employee compensation be recognized as an expense during the period employee services are rendered based on the fair value of the award at the grant date. Timely compliance and proper adherence to the reporting requirements can lessen the stress of auditor scrutiny and IRS challenges.
For both start-up and mature companies, Mercer Capital’s fair value measurement experts assist in the measurement of equity-based compensation across a variety of industries.
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