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Stock Awards
Stock awards are also referred to as full value awards meaning these awards deliver the full face value of stock at the time of vesting to the grantee (or employee) and it is generally awarded at "no cost" to the employee.
Restricted Stock Plans (RSPs): The organization grants the manager a certain number of shares of stock, with time-based (also referred to as service or tenure) vesting. There are basically two types of restricted stock plans:
- Restricted Stock Awards (RSAs)
- Restricted Stock Units (RSUs)
Employers offer these plans to align the business leadership with long-term objectives of the company.
RSAs differ from stock options in that, after vesting, ownership of the stock is automatically transferred to the employee with the employee having taken no action. Also, unlike stock options, RSAs almost always retain some value when the award is vested. At the time of grant, company shares are issued to an employee with vesting requirements over some period of time (e.g. 3 to 5 years), and during this time dividends are paid, and the grantee has voting rights.
Let's take a look at a restricted stock award plan:
Roger, CEO of XYZ company is granted 500,000 RSAs. He may not sell the shares until he meets certain conditions:
These conditions might include:
- holding the stock for a period of 5 years
- remaining employed with the organization during that period
If the employee does not meet the requirements for restrictions to lapse, the shares are forfeited.
RSUs differ from RSAs in that the grantee does not receive dividends or have voting rights until the award is vested. For both plans, the company distributes shares or the cash equivalent of the number of shares used to value the unit after the vesting requirement.
Restricted stock does not receive favorable tax treatment. It is taxed as ordinary income at either the time of grant or when fully vested and any capital gain is also taxed.
Performance Share Plans (PSP). In this type of plan, managers receive a grant of stock that is contingent upon how well the stock performs over some time period, such as three to five years, plus meeting established performance goals. These goals may be either internal organization goals or external goals.
How performance share plans work:
Thomas is granted 1,000 performance shares of stock that have a grant date fair market value of $50 per share. If the value of the stock triples in five years, then he would receive the 1,000 shares, which now have a value of $150,000, provided he achieved the performance goals. If he did not achieve the required performance goals, he would not receive the stock grant, and if the value of the stock was lower than the current $50, the grant would not have nearly as much worth. In this type of plan, payouts may either be made in stock or in cash.
There are many variations in the design of performance share plans.
To find out more about equity compensation, see DLC Course 20: The Basics of Equity Compensation
Memory Jogger
Which type of stock option plan offers the best tax advantages?