Planning for Executives Flashcards
Phantom Stock
Also known as “shadow” stock, this type of stock plan pays a cash award to an employee that equals a set number or fraction of company shares times the current share price. The amount of the award is usually tracked in the form of hypothetical units (known as “phantom” shares) that mimic the price of the stock. These plans are typically geared for senior executives and key employees and can be very flexible in nature.
- not subject to rule 144 restrictions
- also pays dividends
- Phantom stock plans and stock appreciation rights (SARs) are two types of stock plans that don’t really use stock at all but still reward employees with compensation that is tied to the company’s stock performance.
RSU vs RSO
Restricted stock also called letter stock or 1244 stock
RESTRICTED STOCK OPTIONS
- Mores conditions than RSUs
- Can be forfeited based on performance
- Have voting rights during vesting.
- For directors and executives
RESTRICTED STOCK UNITS
- for low level employees based on tenure
Not eligible for 83B election
RSUs and RSOs - taxed at vesting on fair market value, any subsequent gain is either a long term or short term capital gain
Registered restricted stock advantages and disadvantages
ADVANTAGES
•Good for high performers – employees, must meet target before receiving shares
•Can carry dividends or voting rights
•RETAIN SOME VALUE EVEN IF PRICE DECLINES
•CAPITAL GAINS TREATMENT AVAILABLE ON 83B ELECTION
•Requires fewer shares to provide a similar level of benefit
DISADVANTAGES
•Company cannot take a tax deduction when employees use 83B election
•Changes in value must be charged as a compensation expense
• Taxes due when shares substantially vest
•83B election involves risk for employees
Restricted stock sale rule 144
Holding Period =
•1 year, if nonreporting company
•6 months, if reporting company
Trading volume
Number of shares sold during a 3 month period cannot exceed:
- the greater of 1% of outstanding shares of the same class being sold on the stock exchange
OR - 1% of the average weekly trading volume during the four weeks preceding the filing of notice form 144.
A notice must be filed with the SEC on form 144 if sales involve more than 5000 shares or a dollar amount greater than $50,000 in a three month period.
Variable Prepaid Forward
Diversifies a large, appreciate it equity position while deferring
The variable contract is to sell a specific VALUE of a security in the future. The number of shares actually delivered will depend on the stock value in the future.
Retains appreciation up to an upper limit or As defined by the client
Protects against depreciation in stock below a lower limit floor price
Short Against the Box
Occurs when an investor borrows shares of stock and sells them short, while at the same time owning shares in the same stock.
This strategy is a legal, but new strategies have been developed to accomplish the same goals.
10 B5-1 plan
Pre-arrange trading plan for insiders and affiliates. Specifies amount, price, and date at which security should be treated. Allows trading during blackout periods, and may provide public with greater disclosure.
Performance Shares
•Company stock given to managers and executives if certain performance criteria are met, such as earnings per share (EPS) targets.
- No income at time of grant
Low test probability
Rule 16(b) the “Short-swing profit rule”
Prohibits insiders (senior officers, directors or beneficial owners with > than 10% ownership) from profiting from any combination purchase and sale of company shares within a period of less than six months.
•Any profits must be returned to the company.
•Profit returned will be calculated by the method producing the highest recover.
*Example: highest sales price matched with lowest purchase price in the period.
83b election can be described as?
•Exercise stock options prior to vesting
•Must be elected within 30 days of grant
•Must be allowed by plan
Stock Swapping or Pyramiding
•Client pays exercise cost with existing shares (not same shares)
•Bargain element on options taxable at exercise
•Avoids capital gain and increase in AGI
•”Reload” feature replaces stock used to exercise options - offers future appreciation
•Works best for buy and hold strategies
