Executive Compensation and the Role of the Compensation Committee

Accounting Standards

Topic 718

Topic 718 is the accounting standard for determining the Grant Date Fair Value of compensatory equity arrangements which require the use of an option pricing model like Black Scholes. Since the advent of Topic 718, the Grant Date Fair Value of stock options are required to be expensed regardless of whether the employee derived any compensation (e.g., underwater options that are never exercised).

The standard also differentiates the expense accounting of equity awards that use internal measures, which refer to performance conditions, like revenues or net income as opposed to stock price. When an equity award is tied to performance conditions for vesting and those conditions are not achieved, the expense can be reversed, and the award is considered a forfeiture. However, if the equity award is tied to stock price performance like Total Shareholder Return, it is referred to as a market condition and expensed similar to stock options.