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Equity-Based Compensation

In addition to cash compensation executives are often compensated through stock ownership. This can come in several forms, including stock options, restricted stock, and stock appreciation rights (SARs).

Stock Options

Stock options offer executives the ability to purchase company shares at a predetermined strike price no later than a defined expiration date. They typically have vesting periods that prohibit exercise prior to a specific date. Stock options come in two forms: non-qualified and incentive.

Non-qualified stock options are taxable as compensation to an executive upon exercise. Incentive stock options can offer favorable tax treatment if certain conditions are met. However, they also create alternative minimum tax implications for some individuals.

There are many factors that go into stock option planning. Our team focuses on a comprehensive approach that analyzes the relative valuation of each option grant, the tax ramifications of an exercise and the client's overall exposure to the company. Additionally, catalysts such as an approaching expiration or unexpected liquidity need can also warrant exercise. If a decision is reached to exercise, our team can also assist in evaluating methods to pay for the exercise (i.e., cash payment vs. cashless alternatives).

Restricted Stock / SARs

Companies can compensate employees by granting restricted stock. These shares have vesting schedules which prohibit the sale of the stock until the vesting date. Upon vesting, the shares are taxed as compensation at the prevailing market price. The executive must pay for the tax withholding, including federal, state and any applicable local taxes, either through cash or a sale of some of the restricted shares (cashless exercise).

Companies can also issue stock appreciation rights, which act like restricted stock, but are often settled in cash instead of shares. These provide the employee with the same economic benefit as restricted stock, without the company actually issuing shares. This can also be referred to as a phantom stock plan.

Our team is available to help plan for future restricted stock vesting dates and to analyze the possibility of making an 83(b) election within the first 30 days of receiving a new grant. This technique can be useful for executives expecting significant price appreciation in their company's stock. Electing 83(b) requires the employee to pay taxes upon grant of the restricted stock and converts any appreciation between the grant date and vesting date into a capital gain.

Raymond James financial advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact us for information and availability.

Securities offered through Raymond James Financial Services, Inc., Member FINRA / SIPC.
Stewart & Rosenbloom Financial Group is not a registered broker/dealer and is independent of Raymond James Financial Services.
Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
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