Long-term Incentive Plans - PowerPoint PPT Presentation

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Long-term Incentive Plans

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  1. Long-term Incentive Plans SESSION 6 - Long-Term Incentives

  2. Reward System Reward System Job Analysis Benefits Job Description Managing Base Pay Jpb Evaluation Working conditions Variable Pay Long-term Incentives SESSION 6 - Long-Term Incentives Recognition Awards Recruitment Selection & Hiring Training & Dev’mt Career planning Perf. evaluation HR Planning

  3. Long-Term Incentive Long term Incentives Deferred Compensation Long-term Cash STOCKS Benefits Stock Options SESSION 6 - Long-Term Incentives ESOP ESPP Restricted Stocks

  4. Long Term Incentive • LTI’s are • compensation programs deferring the payout for more than one year • focusing on performance beyond this one-year time line. SESSION 6 - Long-Term Incentives

  5. Deferred Compensation • 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 SESSION 6 - Long-Term Incentives

  6. Long-Term Cash Incentive (LTCI) • 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 SESSION 6 - Long-Term Incentives

  7. Stock Option Plan (SOP) • Definition • 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) SESSION 6 - Long-Term Incentives

  8. Stock Option Plan (SOP) • 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 SESSION 6 - Long-Term Incentives

  9. Stock Option Plan (SOP) Stock Price $ 13 $ 12 $ 11 $ 10 Strike/grant price grant In the money $ 9 $ 8 SESSION 6 - Long-Term Incentives $ 7 $ 6 Underwater $ 5 Exercise period $ 4 Waiting Period 25% 50% 75% 100% $ 3 Vesting Period 10 9 8 1 2 3 4 5 6 7 Years

  10. SOP - Discounted / Premium Prices • 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. SESSION 6 - Long-Term Incentives

  11. 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. SESSION 6 - Long-Term Incentives

  12. 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 SESSION 6 - Long-Term Incentives

  13. 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 pre-established 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 SESSION 6 - Long-Term Incentives

  14. Employee Stock Ownership Plan (ESOP) • 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. SESSION 6 - Long-Term Incentives

  15. ESOP - Advantages • 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. SESSION 6 - Long-Term Incentives

  16. 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 SESSION 6 - Long-Term Incentives

  17. 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 SESSION 6 - Long-Term Incentives

  18. Type of Restricted Stock • 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 SESSION 6 - Long-Term Incentives

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  20. SESSION 6 - Long-Term Incentives

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