This outline presents many of the issues involved in developing a stock based program. The issues below go well beyond those required to develop a legal stock plan document, also raising issues on how firms may use the plan.

Effective Compensation, Incorporated can assist you in understanding the key issues and putting together a program that will be right for your firm, whether it is public or private.

• What is the purpose of the (employee) stock program (may vary by participant category)?
  • Respond to competitive compensation pressures
  • Align employees with shareholders
  • Motivate specific behaviors
  • Reward employees for results
  • Golden handcuffs
  • Attract new employees
  • Offset loss of unvested benefits for new hires
  • Balance a reduction in some other element or restriction (such as the adoption of a non-compete agreement)
• Who should get stock, what should grants be based on?
  • All employees
  • Entitlements, such as position, grade, pay level, longevity
  • Performance, such as personal or unit results
  • Location (U.S. vs. other countries; corporate vs. subsidiaries)
  • Non-employees (Board members, consultants, contractors, etc.)
• How much stock should they get?
  • Typical grant size basis
    • Fixed number of shares
    • Exercise costs of grant as multiple of salary or total cash
    • Projected gains on grant as multiple of salary or total cash (determined through model such as Black Scholes)
  • Adequate grants to achieve objectives (e.g., replace value lost when changing firms)
  • Should cumulative grants be capped?
• When should they get it?
  • Grant interval
    • Every one, two or three years (if longer terms, should grants be larger, e.g., mega-grants?)
    • At discretion of management/board (market timing)
  • Fixed date or Board Committee meeting each year
  • At hire or promotion
  • At "bonus" payout
  • As needed to replenish exercised options
• What form should grants/options take?
  • Appreciation only plans (Incentive Stock Options, Non Qualified Stock Options, Stock Appreciation Rights)
  • Base value plus appreciation (Restricted Stock, Performance Shares)
  • Unit (phantom) plans (e.g., for division or private firm performance)
• What should the grant price be?
  • Price at specific date (various approaches)
  • Premium price (above current market price) to require some gain before exercise
  • Discount price (below current market price) to recognize prior results
  • Fixed price during quarter/year (impact differences for new program participants vs. continuing)
• When should the grants/options vest?
  • Cliff vesting after 2 to 5 years?
  • Staged vesting over 1 to 5 years?
  • Based on performance only
  • Fixed time interval with potential time accelerator
  • Immediately
• How much should they own?
  • Minimums, targets
  • Multiple of salary or total cash
  • Use of ownership guidelines
• How should they be encouraged to own stock?
  • Use of ownership guidelines (see the end of this section for a sample)
  • Larger grants when below guideline level (as long as have not sold stock)
  • Smaller grants if below guideline level and have sold stock
  • If guidelines exist, when should participants be able to sell stock without negative consequences?
    • When sales covers cost of exercise and taxes for stock.
    • When sale does not lower holdings below target
    • When nearing retirement
    • At times of special needs (medical, education, home buying?)
• When should grants be canceled, bought out, or repriced?

                (Please note that accounting repercussions may result from these actions)

• When stock price has significant downturn
• When stock price for entire industry has significant downturn
• Never
• What legal/Board considerations exist regarding grants/buys/sells?
  • Insider regulations
  • What Board or Compensation Committee approvals are required
  • Legal paperwork
• Educating/informing participants - communications approaches
• Record keeping and reporting issues
• Issues related to Board member stock practices
• Issues related to non-employee stock practices