| Term | Definition |
|---|
| Restricted Securities | These are obtained directly or indirectly (such as a gift) from a public or private company or from an affiliate of the company; They are not registered with the SEC and are normally identified by a legend that is typed on the certificate; This legend “restricts” the ability of the owner to sell or transfer the stock |
| IRC Section 83(b) Election | Under this section, an executive can recognize ordinary income as of the date he receives restricted property rather than waiting until he becomes substantially vested; This election must be made within 30 days of receiving the property; The amount included as ordinary income is the excess, if any, of the FMV of the property at the time of transfer vs. the amount the executive paid for the property; By doing this, any subsequent appreciation in the property is treated as a capital gain and taxed at lower rates at the time of sale; The employer gets a tax deduction at the same time the executive includes the amount under a Section 83(b) election |
| Shadow Stock Arrangements | examples are: Phantom Stock Plans and Stock Appreciation Rights |
| Phantom Stock Plans | These plans provide deferred compensation by means of an unfunded and unsecured employer promise to pay cash, stock or a combination of these to an employee at a future date; When an employee dies, becomes disabled or otherwise terminates his or her employment (triggering events), cash, stock or a combination of both are paid to the employee or his or her beneficiaries |
| Phantom Stock Plan | this stock tracks the employer’s actual stock performance as an incentive to spur performance of the executive or other key employee; It does not typically provide shares of stock in the business, thus the owner(s) do not dilute his/their ownership in the company |
| Phantom Stock Plan | At the time the employee receives cash, stock or a combination of both: 1.) The entire value of the property is reported as ordinary income by the employee 2.) If any stock is received, its cost basis equals the amount of ordinary income reported by the employee; The company reflects this amount as compensation that is tax deductible |
| Stock Appreciation Rights (SARs) | These are cash options that entitle an employee to an amount of cash by referencing the fair market value of the employer’s stock at the time of the grant |
| Stock Appreciation Rights (SARs) | are usually granted in connection with the grant of either a qualified or nonqualified stock option plan; this is exercisable at the same time as the stock option |
| Stock Appreciation Rights (SARs) | Income is recognized only when a SAR is exercised; The difference between the stock’s FMV at the time of the SAR grant and the stock’s FMV on the exercise date is recognized as ordinary income by the employee in the year in which this occurs; The difference between the stock’s FMV at the time of the SAR grant and the stock’s FMV on the exercise date is recognized as tax deductible compensation by the employer in the year in which this occurs |
| Performance Cash Plan | The amount earned by the executive does not depend on the value of the company’s stock; The award is based on a maximum cash amount that is pre-established; When the employee receives the cash award, it is taxable at that time to the employee as ordinary income and the employer deducts this amount as compensation for tax purposes |
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