An Introduction to Executive Compensation
This text analyzes package elements and, drawing upon practitioner and academic literature, leads readers through the development of optimal plans under varying circumstances.
TABLE OF CONTENTS An Introduction to Executive Compensation
Chapter 6: Stock Grants and Options
I. INTRODUCTION
Stock-based compensation, like bonuses, are a variable or at risk form of compensation, although the risk the executive is subject to depends upon the type of compensation. Stock-based compensation normally falls into one of two broad categories: (1) stock options or stock appreciation rights (SARs) or (2) stock grants. Although the ultimate value of either is based upon stock price performance after the date of grant, the payoffs and risks are different. Appendix 6.1 contains an example of a "nonqualified" stock option award, whereas Appendix 6.2 contains an example of a "restricted" stock award; both agreements are between Delta Air Lines and Leo Mullim, its President and Chief Executive Officer.
A. Stock Options Or Stock Appreciation Rights
Stock options allow their holder to purchase one or more shares of stock at a fixed "exercise" price over a fixed period of time. That period, however, does not necessarily start on the date the options are granted to the executive. Although some options vest immediately, most of the time the executive does not have the right to exercise some or all of the options until a specified time period has passed or performance goal has been met. At Motorola, for example, options vest 25% per year over a 4-year period: "the options vest and become exercisable over 4 years as follows: 25% on 1/31/01; 25% on 1/31/02; 25% on 1/31/03; and 25% on 1/31/04." [1] In contrast, at DuPont certain senior management options vest with the achievement of performance...
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