This presentation will bring clarity to common complications and conflicts in equity compensation, including the basics of acronyms, tax rules, differences between core practice rules and regulations, benefits to employee and more. Learn how to translate equity-specific acronyms and terms into plain English Learn how participants make money from Appreciation Only, Full Value and Stock Purchase plans and how each can be a great or poor solution. Learn the pros, cons and differences between commonly used equity compensation instruments. You will be surprised how similar and different they can be!

1. Equity Compensation for
Compensation Professionals
Ending the State of Confusion
Marianne Snook, CEP: CEO, Stock & Option Solutions
Dan Walter, CEP: President and CEO, Performensation

3. Dan Walter
President and CEO
Performensation
Marianne Snook
CEO
Stock & Option Solutions
Tel: +1 415 625-3406
dwalter@performensation.com
www.performensation.com
Tel: +1 408 979-8700
msnook@sos-team.com
www.sos-team.com
Dan Walter, CEP, is the President and CEO of
Performensation. Dan has assisted companies with both
executive and broad-based compensation programs since
1994. Dan’s expertise includes equity compensation,
performance-based pay, and talent management issues.
His experience with these programs includes philosophy,
diagnosis, design, communication, administration, and
reporting. Dan is considered an industry thought-leader for
all forms of equity, including stock options, restricted shares
and units, stock purchase plans, and performance-based
programs. In addition to his focus on plan design, he has
architected software solutions, administrative and
technological best practices for these programs.
With experience in human resources, payroll, and equity
administration, Marianne offers a unique background that has
given her the tools to identify and implement creative solutions
for SOS clients. In her over 25 years in equity plan
management, she has held positions as a director of a major
outsourcing provider, an independent consultant, and an
internal stock administrator. These experiences allow her to
view all the advantages and disadvantages of various stock
administration solutions. Marianne speaks on both a local and
national level on various facets of stock program
administration. A Certified Equity Professional, she is also an
active member of the National Association of Stock Plan
Professionals and the National Center of Employee
Ownership.

4. Total Rewards Model
LET’S PUT THEM IN FAMILIES BY SIMILAR QUALITIES
Courtesy of World at Work

5. Performensation / SOS
Total Equity Compensation Model

6. THESE ARE THE
ACRONYMS YOU
HEAR
IN
MEETINGS
AND
READ IN ARTICLES

7. SSAR
CSO
MSU
ISO PA
PSA DPP PUA
NQSO MUA SA
NQESPP ESPP
RSU DSA RSS
SAR

8. IF YOU’RE LUCKY
YOU MAY ACTUALLY
GET WORDS AND
NAMES FOR EQUITY
COMPENSATION
INSTRUMENTS

9. PERFORMANCE
PHANTOM STOCK
AWARDS
DIRECT PURCHASE PLANS
CAPPED STOCK
OPTIONS
MARKET STOCK
UNITS
INCENTIVE STOCK OPTIONS
NONQUALIFIED STOCK OPTIONS
MEMBERSHIP UNIT AWARDS
RESTRICTED STOCK SHARES
STOCK SETTLED SARS
IRC 423 ESPP
STOCK APPRECIATION RIGHTS
RESTRICTED STOCK UNITS
DEFERRED
STOCK
PERFORMANCE UNITS
STOCK AWARDS
NONQUALIFIED ESPP

10. EVEN
THOSE
MAY NOT BE
VERY HELPFUL
LET’S
PUT
THEM
IN
FAMILIES
BY
SIMILAR
QUALITIES

11. APPRECIATION ONLY
STOCK OPTIONS
STOCK APPRECIATION RIGHTS
FULL VALUE
RESTRICTED STOCK
SHARES
RESTRICTED STOCK UNITS
PHANTOM STOCK
PERFORMANCE UNITS
DEFERRED STOCK
STOCK PURCHASE
IRC 423 ESPP
NQ ESPP
DIRECT PURCHASE

12. Three Main Equity Families

13. Three Main Equity Families
Full Value
Appreciation
Purchase
Restricted Stock
Incentive Stock Options
IRC 423 Qualified ESPP
Restricted Stock Units
Non-Qualified Stock Options
Non-Qualified ESPP
Phantom Stock
Stock Appreciation Rights
Direct Purchase
Deferred Stock

14. STRUCTURE
STRUCTURE
STRUCTURE
No purchase cost to
participants
Purchase cost set at grant
date. Usually equal to stock
price
Purchase price based on
either grant date or
purchase date
Generally taxed when
purchase / exercise is
elected, unless tax qualified
Discount commonly applied
to purchase price
Generally taxed when
restrictions end
If time-based vesting:
Compensation Expense =
Intrinsic Value at Award Date
Built-in gain works well with
performance-based vesting
If time-based vesting:
Compensation Expense =
Black Scholes value
Tax qualified status available
under IRC 422
Generally taxed at time of
purchase, unless tax
qualified
Compensation Expense =
Black Scholes Value of
estimated shares to be
purchased

15. COMPENSATION
PRIORITY
COMPENSATION
PRIORITY
Provide tangible
compensation beginning
the date of award
Provide potential
compensation beginning
at grant date
Provide simplified
method to augment pay
by purchasing shares
Less dilution than
appreciation grants, but
same compensation cost
Requires higher dilution
to deliver same modeled
value as full value
awards
Dilution can be controlled
via limits, but more
difficult with large
companies
Risk of no immediate
value upon vest, or ever
Low risk, generally
conservative reward
Potential to allow move
of ordinary income to
capital gains
Potential to allow move
of additional ordinary
income to capital gain
Retention focus, but only
for 3-5 years
No ordinary income
avoidance, limited
deferral opportunities
COMPENSATION
PRIORITY

16. FIRST SOME TERMS
AND
DEFINITIONS
TO KEEP ALL OF US
ON THE SAME PAGE

17. Option
Provides the participant the option to
exercise (purchase) stock at a later,
generally at a price set on the grant date

18. Restricted
The holder possesses stock or units
(synthetic stock) that is not entirely
controlled by them until the restrictions
lapse (vest)

19. Disqualified
Any type of equity that had a tax benefit under IRC
421-424, where the participant chose to transact
the underlying shares BEFORE the prescribed tax
benefit period had been met
Tax benefit period is 2 years from the date of
grant and 1 year from the date of exercise or
purchase

20. Qualified
Any type of equity that had a tax benefit under
IRC 421-424, where the participant chose to
transact the underlying shares only AFTER the
prescribed tax benefit period had been met
Tax benefit period is 2 years from the date of
grant and 1 year from the date of exercise or
purchase

21. Non-Qualified
Any type of equity upon grant, does not meet the
tax benefit rules defined in IRC 421-424
Also, any ISO or ESPP shares that, prior to exercise, do not meet ALL of
the rules under IRC 421-424.
Examples
• Over the $100,000 Limit
• Outstanding beyond 3 months of regular termination
• Modified to so that grant price may not be at least 100% of Grant date
FMV

22. Based on longer periods than most
compensation and with no guarantees of
final values, every equity award can feel like
an extended journey across a sea.

23. But, all equity is not equal

24. You must always remember that the waters
may not be safe, and some tools provide
better protection than others

25. Take a guess at the equity instrument that
creates this path

27. discount = safety
limits = small gains

28. Which type of equity can provide this path?

30. $0 cost = ultimate safety
no limits = big gains

31. And that leaves
perhaps the best and
worst tool

33. no discount = limited safety
no limits + leveraged grant size = big gains (or $0)

34. SHOW ME THE
MONEY, OR AT
LEAST SIMPLIFY
HOW IT IS MADE

46. BUT WHEN ARE
SHARES ISSUED?
AREN’T
THESE
DESIGNED
TO
CREATE OWNERS?

52. Nonqualified
vs.
Incentive Stock Options
vs.
Stock Appreciation Rights

53. Incentive Stock Options (ISOs)
Primary Use
Attract and Motivate.
Retention when stock price is
growing steadily.
Main Features
Preferential tax treatment.
Limits on use. Highly
Leveraged. Pays only if price
increases
Tax Issues
No tax withholding at exercise.
No Ordinary income if held for
qualifying period. Not applicable
to int'l participants. Alternative
Minimum Tax concerns
Typical Plan Sponsor
Typical Recipient
Pre-IPO and Publicly traded
companies (high-tech/biotech
and high growth sectors)
Execs at all sizes, High-tech
staff at Small to Mid-size
companies
Accounting Issues
Legal Issues
Complex valuation and
amortization. Difficult market
comparisons
Limits on Grant Price, Value of
Grant, Term of Grant and Term of
Plan. Shareholder approval
required within 12 months of BOD
adoption.
Communication Issues
Administration Issues
Difficult to show value if
underwater. Leverage can be
issue in highly volatile stocks. Tax
issues, Dispositions, AMT
Activity peaks and valleys. Grant
processing. Exercise processing.
Termination rules. Int'l issues.
Disposition tracking.

54. Non-Qual Stock Options (NQSOs)
Primary Use
Attract and Motivate.
Retention when stock price is
growing steadily.
Main Features
Highly Leveraged. Guaranteed
corporate tax deduction when
exercised. Pays only if stock
price increases
Tax Issues
Ordinary Income and Tax
withholding at Exercise. 409A
Supplemental Wages eligible
($1MM threshold).
Typical Plan Sponsor
Typical Recipient
Pre-IPO and Publicly traded
companies (all sectors)
Widely used, grant size
generally based on position.
Consultants and Outside
BOD members
Accounting Issues
Legal Issues
Complex valuation and
amortization. Difficult market
comparisons. Variable Fair Value
accounting for non-employee
service providers.
General plan documentation.
Detailed documentation when
used for outside BOD members.
Post-termination rules and
regulations.
Communication Issues
Administration Issues
Difficult to show value if
underwater. Leverage can be
issue in highly volatile stocks. Tax
issues at exercise.
Activity peaks and valleys. Grant
processing. Exercise processing.
Termination rules. Int'l issues. Tax
at Exercise.

55. Stock Appreciation Rights (SARs)
Primary Use
Attract and Motivate
Main Features
Can be settled in cash or stock.
Provides option-like features
without needing to deliver stock
Tax Issues
Taxed at time of exercise.
Ordinary Income and Taxes must
be withheld.
Typical Plan Sponsor
Typical Recipient
Privately held companies.
Including S-Corps
Upper and Middle
Management
Accounting Issues
Legal Issues
Stock-settled treated like options
(fixed, Fair Value accounting).
Cash-settled require variable
accounting (quarterly adjustment
of Fair Value)
Possible ERISA issues with longterm holding period on broadbased plans. Generally not
deemed "stock" for S Corps
Communication Issues
Administration Issues
Comparison to options (stock
value no/no stock). Delivery of
only the appreciation rather than
whole grant
Limited support from brokers at
exercise (unlike options). Limited
overall software capabilities

56. Restricted Stock Shares
vs.
Restricted Stock Units
vs.
Performance Stock Units

57. Restricted Stock Shares (RSS/RSA)
Primary Use
Attract and Retain. Motivation
added when awarded at
higher than $0 cost to
participant
Main Features
Value if price drops. Minimally
leveraged. Can be used to
satisfy Executive Ownership
requirements
Tax Issues
No income or tax until vested. 83(b)
election to be taxed at award date. Sell-toCover requires sufficient trade volume.
Withhold-to-cover requires sufficient
corporate cash. Retirement eligibility can
result in income and tax prior to retirement.
Typical Plan Sponsor
Typical Recipient
Closely Held and Publicly
traded companies (less
volatile sectors)
Upper and Middle
Management
Accounting Issues
Legal Issues
Simple Valuation. Value is Intrinsic
value on award date. Cost essentially
equivalent to paying cash. Retirement
eligibility can result in accounting for
expense prior to vesting completion.
Communication Issues
Event-based, forced income and
taxation. Comparison to Options
Private companies are subject to
Blue Sky laws. Public companies
are subject to SEC regulations at
the time of award.
Administration Issues
Award processing. Event planning
with other corporate issues.
Repurchases. 83(b) elections.
Dividend tracking. Share issuance
at time of award.

58. Restricted Stock Units (RSU)
Primary Use
Attract and Retain. Motivation
added when awarded at
higher than $0 cost to
participant
Main Features
Value if price drops. Minimally
leveraged. Better internationally
than RSS
Tax Issues
No income or tax until vested. Dividend
Equivalents taxable unless fully restricted.
Sell-to-Cover requires sufficient trade
volume. Withhold-to-cover requires
sufficient corporate cash. Deferral allowed
with sufficient notification.
Typical Plan Sponsor
Typical Recipient
Closely Held and Publicly
traded companies (mature
tech, less volatile sectors)
Widely used above
operational staff, often broadbased as well
Accounting Issues
Legal Issues
Simple Valuation. Value is Intrinsic
value on award date. Cost essentially
equivalent to paying cash.
Communication Issues
Event-based, forced income and
taxation. Comparison to Options
409A considerations. Registration
of shares prior to award.
Administration Issues
Award processing. Event
Planning with other corporate
issues. Forfeitures. Dividend
Equivalent tracking. Share
movement at time of vest.

59. Performance Stock Units (PSU)
Primary Use
Attract and Motivate
Main Features
Can set thresholds to ensure
payout even if performance is
below expectations Excellent
communication tool for high
performance
Tax Issues
No income or tax until vested. Dividend
Equivalents taxable unless fully restricted.
Sell-to-Cover requires sufficient trade
volume. Withhold-to-cover requires
sufficient corporate cash. Deferral allowed
with sufficient notification.
Typical Plan Sponsor
Typical Recipient
Established public companies
with history to support long-term
goal definition. Progressive
private companies
Upper and Middle
Management
Accounting Issues
Legal Issues
Simple Valuation. Complex accrual.
Expense booked is relative to probable
payout. No expense reversal if goals
are market based
Communication Issues
Regular communication required
to drive performance. Must
provide proximity to goal and what
still needs to be done to attain
goals
409A considerations. Registration
of shares prior to award. 162(m)
considerations
Administration Issues
Stock admin systems do not
support. Dividends are difficult to
track. Difficult to correctly track
proximity and remaining effort to
reach goals

60. THE BASICS
OF OPTIONS
AND SARS

62. PRICES
TIME

65. THE KEY IS
EXERCISING AT THE
RIGHT TIME (AND
THAT’S HARDER
THAN IT SOUNDS)

66. THE VALUE
OF NOT
PAYING FOR
THINGS

72. IT SEEMS PERFECT UNTIL YOU LOOK CLOSELY.
MOST PEOPLE ARE CERTAIN THEY WOULD HAVE
TAKEN ADVANTAGE OF THE HIGHEST PRICES!

73. WHAT ABOUT
RSU VS NQSO?
AN
EXAMPLE
OF
THE
COMPENSATORY DIFFERENCES

75. AND…THEY BOTH WIN, SOMETIMES

76. SO…
HOW DO
ESPPs WORK?
(and try to be quick about it,
you’re running out of time!)

86. SOME
MORE
ABOUT
INCENTIVE
STOCK OPTIONS
(ISOs)

95. TAXES

96. RESTRICTED
STOCK UNITS
(RSUs)
BRIEFLY

102. IF YOU COUNT PERFORMANCE UNITS
(and we usually do) THESE MAKE UP MORE
THAN 50% OF THE TOTAL REWARDS
DELIVERED TO MANY EXECUTIVES

103. BUT WE ONLY
GRANT
NONQUALIFIED
STOCK OPTIONS

106. FINANCE PEOPLE LOVE THIS!

108. EMPLOYEE STOCK
PURCHASE PLANS
(ESPPs). SO MANY
FEATURES,
SO
LITTLE TIME

115. WE’RE ON A
ROLE SO LET’S
CLOSE
THIS
OUT STRONG

116. nonqualified vs. incentive stock options
Corporate tax deduction built-in
Very long-term
Income to participant can be mostly
Capital Gains
Simple administration
Great participant tax benefits
No limits
Very long-term
Desired in Tech firms and start-ups
No downside protection
Complex rules and administration
Only performance link is stock
price
Limits for time, shares, values, people
Exercise cost can be an issue
Very few use tax benefits provided

117. restricted stock awards vs. RSU
Instant ownership
No IRC 409A issues
Most lawyers understand these
Downside protection
Instant owners may not fit culture
Repurchase and termination
issues
Easy to link to performance conditions
No need to issue stock until vest
Potential for income deferral
Admin is fairly simple
Downside protection
409A issues: valuation, design, payment
terms
Dividend equivalent issues
Inflexible participant income and
taxation timing
Inflexible participant income and
taxation timing
Perhaps too much downside
protection
Perhaps too much downside protection

118. IRC 423 vs. NQ-ESPP
Excellent participant tax benefits
Very easy and inexpensive to administer
Discount does not have to =
immediate income and taxes
Very easy to roll-out
Partially funded by participants
Mostly, or totally, funded by participants
Creates path to ownership
Wildly flexible in design
Compensation expense and
accounting
Any discount is taxed at time of
purchase
Communication must be strong
Discounts generally too small to inspire
broad participation
Requires a system or outside
administration assistance
Does not work in every
jurisdiction
Not competitive in tech firms and postIPO companies

120. YOU
HAVE
QUESTIONS,
WE
HAVE
ANSWERS

121. Dan Walter
President and CEO
Performensation
Marianne Snook
CEO
Stock & Option Solutions
Tel: +1 415 625-3406
dwalter@performensation.com
www.performensation.com
Tel: +1 408 979-8700
msnook@sos-team.com
www.sos-team.com
LinkedIn: www.linkedin.com/in/danwalter
LinkedIn
www.linkedin.com/pub/marianne-snook/4/752/427
Twitter: @performensation
Twitter: @SOSXtra
SOS Xtra Newsletter
Performensation Blog:
www.performensation.com
http://sos-team.com/screens/SOS-Media/SOS-XtraNewsletter.aspx