Stock Grants and Awards
The term employee stock grants and awards refers to two types of compensation programs that provide a select group of employees with a fixed number of shares of common stock at the current market price, a discount, or free of charge. Stock grants and awards provide these employees with an immediate opportunity to share in the ownership of the company.
These grants can be transferred to the employee unrestricted, or with restrictions.
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 grants and awards are typically provided to a select group of employees the company desires to retain.
These plans provide employees with an immediate transfer of company ownership by granting or awarding the employee with shares of common stock they can purchase at a discount or receive free of charge. Generally, these plans fall into one of the following two categories:
- Unrestricted Shares: as the name implies, these plans involve grants that are not subject to restrictions. In the case of unrestricted grants, the award is considered compensation, and the employer is allowed to expense this benefit once the right is exercised (the employee does have the right to refuse the offer). The employee is required to pay income tax on the difference between the price paid for the stock and its fair market value at the time of the transaction. This is referred to as the “bargain element.” This mechanism can leave the employee with a significant tax burden. When sold, the employee may also realize a capital gain or loss.
- Restricted Shares: companies prefer to place restrictions on the award of common stock. Generally, this restriction involves a vesting schedule, whereby the employee is entitled to retain ownership of the stock over time or when certain performance standards are achieved. When grants of stock are subject to restriction, the tax law allows the employee to declare the bargain element of the award as income as the shares become vested.
While the vesting schedules associated with restricted shares appears to be advantageous to the employee, if the market price of the company’s common stock rises rapidly, the bargain element may be considerably higher than when first granted. The tax law allows employees to lock in this compensation through the use of a Section 83(b) election.
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