Executive Compensation Planning
Increasingly, employers are realizing that compensation programs are key elements to improving employee productivity and motivation, which then increases profitability and helps ensure the success of their organization. By combining the right technical tools and capabilities, ATI can help you achieve your incentive compensation objectives for management.
The first is technical – ATI has knowledge of trends and techniques in compensation programs, up-to-date information on the competitive compensation market, an understanding of complex regulatory requirements and awareness of the financial consequences of compensation decisions.
Our compensation consultants have expertise in every aspect of compensation planning, design, and administration. Moreover, we can put our sophisticated research facilities and proprietary software systems to work for you.
The second is practical – ATI has pragmatic experience in the realities of business and employee relations. Our consultants have worked with organizations of all sizes in a variety of industries. We know how people react to various kinds of pay arrangements. We know that while certain approaches seem to be intriguing at first glance, they may be difficult to implement, communicate and maintain. In the final analysis, what matters is not what works for your competitors, but what will work for you.
Off-the-shelf approaches to compensation management never achieve the best results. Before ATI designs a compensation program, our consultants analyze the organization’s business strategy, mission, culture, competitive environment, and financial position – and study its people. ATI consultants make sure compensation programs meet the needs of the organization sponsoring them.
Incentive Compensation Plans
Incentive Compensation Plans are an efficient way to reward key employees, executives, or others of your choosing. ATI’s consultants can design and implement a customized Incentive Compensation Plan for your company.
Incentive Stock Options
An ISO is an option plan whereby the executive is granted an option to buy company stock in accordance with several mandated regulations. Such limitations include grants not to exceed $100,000 exercise value in one year (using the value at time of grant), term no longer than 10 years, Fair Market Value basis, and non-transferability of option. The Plan must also be in written format. The key advantage to ISOs is that the executive does not declare income until the stock is sold, and then at capital gains rates, assuming compliance with a holding restriction of eighteen months. The major disadvantages are that the company does not receive a tax deduction.
Phantom Stock Plans
Phantom Stock Plans are based on “phantom or hypothetical” shares or units. These units are usually equivalent in value to actual stock. Phantom plans can be set up to do almost anything actual stock programs can do. However, all payments are chargeable against earnings. With Phantom Stock, the entire value of the Phantom Share is available to the executive, including initial value and appreciation. Phantom Stock Plans do not dilute existing holdings.
Stock Appreciation Rights (SARs)
In the case of Stock Appreciation Rights, a right is granted to an executive to receive appreciation in the value of a share of company stock over a certain period of time. SARs can be attached to stock options or can stand-alone. SARs are helpful if available stock is limited. They are likewise useful as “equivalent shares” for family members who wish to participate in the program, but not receive actual stock. However, there is always a direct periodic charge to earnings for any and all appreciation. SARs can be expensive and some cap or maximum appreciation should be defined in the Plan (e.g. 100% appreciation). Stock Appreciation Rights do not dilute existing stock holdings.
Non-Qualified Stock Option (NQSO)
The executive is granted an option to buy company stock for a specified number of years at a specified price. Usually no other mandated restraint is included, unless contained in the Plan document or individual agreement. In private companies, unless there is a mandatory company repurchase of shares, there is also no charge to earnings. The corporation is entitled to a tax deduction for the amount of income recognized by participants upon the exercise of the option. Because many companies in recent years experience high stock price appreciation and want to avoid earnings charges with a corresponding tax deduction where possible, options are well suited to their needs. Additionally, cash received from the exercise of options can be used in the business and increase cash flow.
Restricted Stock Grants (RSGs)
Restricted Stock Grants are shares of stock granted to an executive subject to restrictions on sale or transfer. Generally, the restriction is limited to continuous employment over the life of the restriction. Although some companies include performance restrictions, those with performance-based stock plans incur negative accounting implications. RSGs, in addition to having attractive executive and retainment features, allow for reasonably favorable accounting treatment from the corporate perspective. The company is afforded a tax deduction equal to the ordinary income realized by the executive including appreciation. Assuming “cliff vesting” (100% vesting at one time), the charge is generally prorated over the restricted period and is based on the initial stock award price, excluding appreciation. The company, however, receives a tax deduction for both the initial stock award price plus appreciation.
Unrestricted Stock Grants/Units
Unrestricted Grants are designed in much the same way as RSGs, but do not include any restraints or restrictions. Because there is an immediate charge to earnings, such unrestricted stock awards tend to be given only at very high organizational levels. Unrestricted stock awards are an appropriate vehicle for rewarding an executive with many years of tenure and performance. These grants, commonly called “Gift Stock,” may also be utilized under “special circumstances.” It can be used in combination with Restricted Stock Grants and Options.
Under these plans, an executive is promised an award of stock (or cash) if specified goals are met over a determined period, usually three or five years into the future. Performance-based unit plans require careful planning and forecasting over a three to five year performance cycle. Such plans result in a direct periodic charge to earnings over the period the executive performs related services. Consequently, such plans have always been more expensive than stock options or restricted stock.
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