Stock in incentive compensation management

by on June 16, 2009 · 0 Comment POSTED IN: HR Info Center

Stock compensation in incentive compensation management are 1/2 motivational and 1/2 prevention.

The two key shareholder stats in incentive compensation management
The key statistic to look at, with stock options in incentive compensation management, is unvested stock value or how much an individual will leave on the table if they decide to go to another company tomorrow. We want that amount as high as possible. Higher for better performers.

Pay attention during the times of the annual burn rate or the number of shares you grant during the year’s percent of outstanding stock and dilution which is the number of shares already granted or could be granted as a percent of outstanding shares.

I can tell you that your shareholders are paying attention to those two numbers because the more stock you grant to employees, the smaller the pie will be for shareholders. And with falling stock prices, you have to be sure the shareholders view your grants or employee grants as fair.

Options and restricted stock in incentive compensation management
Restricted stock in my opinion is a good vehicle to use these days because it pumps up the unvested stock values immediately. And the way restricted stock works is an outright grant, meaning that you get the full value of those shares when the vesting criteria is met.

Stock options are great with incentive compensation management, not only do you have to meet the vesting criteria but you also have to have the stock price go above the strike price or the grant price that you received. If it doesn’t, you’re not going to make any money or the employees are not going to make any money. So restricted stock has seen a huge comeback here. In fact literally, almost 50% of companies out there are using restricted stock for some grants.

The nice thing also about restricted shares is that it uses about 1/3 the number of shares that stock options would. So you may even want to exchange underwater stock options for restricted shares. Again in my opinion, the trade off is about one share restricted stock for three shares of stock options. And it will always have value – restricted stock, unless the price at the time it vests goes to zero, which is probably unlikely for most companies.

Edited remarks from the Rapid Learning Institute webinar:”How to Set up Fair and Effective Pay Plans in an Uncertain Economy” by Rick Olivieri

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