Tax treatment, accounting rules and motivational impact are just some of the differentiating factors. Important issues to consider are the owner or founder's personal financial concerns, valuation of the company's stock, federal and state securities laws, liquidity for employee shareholders and the policies and procedures of stock plan administration. When analyzed together, several employee ownership alternatives should emerge as best suited to a company's particular needs.
The different types of individual equity compensation plans include stock options, restricted stock and restricted stock units, stock appreciation rights, phantom stock, performance shares, and employee stock purchase plans. Stock options give employees the right to buy a number of shares at a price fixed at grant for a defined number of years into the future. Restricted stock and its close relative restricted stock units (RSUs) give employees the right to acquire or receive shares, by gift or purchase, once certain restrictions, such as working a certain number of years or meeting a performance target, are met. Phantom stock pays a future cash bonus equal to the value of a certain number of shares. Stock appreciation rights (SARs) provide the right to the increase in the value of a designated number of shares, paid in cash or shares. Performance shares come in many forms, but often are grants of stock given to eligible employees when individual, divisional, or company performance measures are met. Employee stock purchase plans (ESPPs) provide employees the right to purchase company shares, usually at a discount.
This article provides more information on each of these different types of equity compensation.