Transcript Pay for Performance

SESSION 7 - Long-Term Incentives
Long-term Incentive Plans
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Reward System
Reward System
SESSION 7 - Long-Term Incentives
Job Analysis
Benefits
Job Description
Managing Base
Pay
Jpb Evaluation
Variable Pay
Recruitment
Selection & Hiring
Training & Dev’mt
Career planning
Working
conditions
Long-term
Incentives
Recognition
Awards
Perf. evaluation
HR Planning
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Long-Term Incentive
SESSION 7 - Long-Term Incentives
Long term
Incentives
Deferred
Compensation
Benefits
STOCKS
Long-term Cash
Stock Options
ESOP
ESPP
Restricted Stocks
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Long Term Incentive
SESSION 7 - Long-Term Incentives
 LTI’s are
• compensation programs deferring the payout for more than
one year
• focusing on performance beyond this one-year time line.
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Deferred Compensation
SESSION 7 - Long-Term Incentives
 Bonus or incentive deferred at a later date, typically
to increase benefit retirement plan
 No social security or other social contributions to be
paid on the deferred amount until amount cashed
 Tax effective in many countries as not cashed before
retirement, therefore benefiting of favorable tax
rates
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Long-Term Cash Incentive (LTCI)
SESSION 7 - Long-Term Incentives
 Increasingly popular amongst multinationals
 Usually spread over a 3 year period
 Paid at the end of the period if objectives attained
 In addition to the annual incentive plan and, very
often, in replacement of a deficient stock option
plan
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Stock Option Plan (SOP)
 Definition
SESSION 7 - Long-Term Incentives
• The right given:
– by a company (granter)
– to a person (optionee)
– to buy(exercise)
– a stated number of shares of company common stock
– at a prescribed price(grant or strike price)
– over a specified period(exercise period)
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Stock Option Plan (SOP)
SESSION 7 - Long-Term Incentives
 Definition
• Exercise Period: the time when the optionee has the right to buy a stated
number of shares at the prescribed price
• Vesting Period: the prescribed time that needs to be met before a stated number
of shares may be purchased
• Underwater:
when the Grant Price is lower than the option price
• In-the-Money:
when the Grant Price is higher than the option price
• Cash-Less: Simultaneously buy and sell the stock and receive the net
appreciation in exercise price in stock or cash
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Stock Option Plan (SOP)
Stock Price
SESSION 7 - Long-Term Incentives
$ 13
$ 12
$ 11
$ 10
Strike/grant price grant
In the money
$9
$8
$7
$6
Underwater
$5
Exercise period
$4
$3
Waiting
25%
50%
75%
100%
Vesting Period
Period
1
2
3
4
5
6
7
8
9
10
Years
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SOP - Discounted / Premium Prices
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 Discounted
• Option grants made with exercise prices below the fair
market value at grand date
 Premium-Priced
• Option grants made with exercise prices above the fair
market value at grand date.
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SESSION 7 - Long-Term Incentives
SOP - Indexed Stock Options
 The exercise price is moving according to an Index
like S&P 500
 Rationale: an executive should be rewarded for
outperforming the market, not coasting it.
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SESSION 7 - Long-Term Incentives
SOP - Step Option
 Option grants made with a fixed exercise price, but
the grants are subject to forfeiture if performance
goals are not met
 Example: the company achieves 15% annual
earnings per share growth over the next two years
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SESSION 7 - Long-Term Incentives
SOP - Cliff/Accelerated Vesting
 These shares also generally vest after a specific
number of years; however, vesting may be
accelerated if the company achieves certain preestablished goals.
 Example: EPS reached$ 0.65 and maintained for at
least 3 consecutive quarters
 Example: when Operating Profit reach100 mio, 25%
of options are vesting immediately
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Employee Stock Ownership Plan (ESOP)
SESSION 7 - Long-Term Incentives
 An ESOP is an employee benefit plan operating
• through a trust that accepts tax-deductible contributions
from the company
• to accumulate company stock
• which is then allocated to accounts for individual
participants.
 The ESOP can acquire both new and existing stock.
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ESOP - Advantages
SESSION 7 - Long-Term Incentives
 Employees
• ESOPs help employees develop a sense of ownership in
and commitment to the firm, and help to build teamwork.
• No taxes on ESOPs are due until employees receive a
distribution from the trust, usually at retirement when their
tax rate is lower.
 Shareholders of closely held corporations
• Helps to diversify their assets by placing their shares of
company stock into an ESOP trust and allowing them to
purchase other marketable securities for themselves in
their place.
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SESSION 7 - Long-Term Incentives
Employee Stock Purchase Plan (ESPP)
 Gives employees the chance to buy stock, usually
through payroll deductions over a defined "offering
period."
 The price is usually discounted up to 15% from the
market price
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SESSION 7 - Long-Term Incentives
Restricted Stock
 Awarding an employee a number of shares with
restrictions placed on the holder’s ability to sell or
transfer the shares.
 When the restrictions lapse, the employee is
allowed to hold or sell the shares free and clear of
any restrictions
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Type of Restricted Stock
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 Time-Vested
• An award of shares that actually are received only after the
completion of a predefined service period
 Performance-accelerated
• Restricted stock granted only after attainment of specified
performance objectives
 Performance-versed
• This is a grant of stock to employees upon attainment of
defined performance objectives
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SESSION 7 - Long-Term Incentives