Stock Compensation Plans

Definition

The term stock compensation plans refers to a variety of programs that provide a select group of employees with the opportunity to share in the ownership of the company.  Compensable stock option plans typically grant employees the right to purchase shares of common stock at an attractive price, or receive stock as part of a performance incentive plan.

Explanation

Unlike stock purchase plans, which are considered non-compensatory and provide employees with the ability to purchase shares of the company's common stock at a discount, stock compensation plans are typically provided to a select group of employees the company desires to retain.

Generally, these plans fall into one of the following four categories:

  • Stock Option Plans:  includes both non-qualified stock options (NQSO) and incentive options, which allow the employee to purchase a specified number of shares of common stock at a given price and in a certain timeframe.
  • Stock Grants:  includes both the restricted and unrestricted transfer of common stock to an employee at the current market price, a discount, or free of charge.
  • Stock Appreciation Rights Plans:  companies may decide to reward an employee based on the appreciation in the value of the company's common stock over time.  Stock Appreciation Rights Plans (SAR) provides the employee with the right to receive the appreciation of the stock's value over time, without the transfer of shares.
  • Performance Plans:  usually limited to the highest level of executives in a company, a performance plan will provide these executives with shares of stock in the company if certain metrics are achieved in a given timeframe.

The income tax implications will vary by plan type, and are discussed in more detail in the documents cited immediately below.

Related Terms

common stock, stock warrants, employee stock purchase plans, stock option plans, stock grants, Section 83(b) election, common stock equivalentcontingent issuance agreement, appreciation and phantom rights, verifying compensation