Broad Based and Global Stock Options

Broad Based and Global Stock OptionsExamine the broad based stock/global stock options of an employer of your choice. You need to provide a list of questions as you need to ask the right questions to be able to render the right or appropriate solutions or recommendations. You may use some of the questions in the lecture material but you also need to provide references that will also provide answers, spark your questions, statistics, and solutions, as well as best practices.The requirements below must be met for your paper to be accepted and graded:Write between 1,250 – 1,750 words (approximately 3 – 5 pages) using Microsoft Word in APA style, see example below.Use font size 12 and 1” margins.Include cover page and reference page.At least 80% of your paper must be original content/writing.No more than 20% of your content/information may come from references.Use at least three references from outside the course material, one reference must be from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the three reference requirement.Cite all reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) in the paper and list on a reference page in APA style.References must come from sources such as, scholarly journals found in EBSCOhost, CNN, online newspapers such as, The Wall Street Journal, government websites, etc. Sources such as, Wikis, Yahoo Answers, eHow, blogs, etc. are not acceptable for academic writing. A detailed explanation of how to cite a source using APA can be found here (link). Download an example here.Grading Criteria AssignmentsMaximum PointsMeets or exceeds established assignment criteria40Demonstrates an understanding of lesson concepts20Clearly presents well-reasoned ideas and concepts30Uses proper mechanics, punctuation, sentence structure, and spelling10Total100
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Standing Behind the Power of Long-Term Incentives
As we move along in the next chapter, it is imperative that there will be some key details to
remember. Much of this information is designed for upper management, persons who are vested in the
company. They also are the drivers of the organization overall success. So we, will begin to discuss longterm incentives.
Long-term incentives provides variable compensation for performance. It extends beyond a year, in the
form of stock or cash. This is a highly favorable arranges for company executives in the form of capital
accumulation opportunity. The following awards may be generated:
•
Capital stock or the right to purchase or receive capital stock.
•
The right to receive cash under specified terms and conditions
•
A combination of the above elements.
According to Stephen Miller’s article found on the Society for Human Resource Management
(www.shrm.org), a survey released by Buck Consultants revealed an increase in employer’s use of cashbased, multiyear long-term incentives (LTI). The increase rose from 10 to 14 percent. This survey
included responses from 130+ companies in over 40 countries.
Previously there was a practice trend to use more equity based incentives. Now, cash appears to be in
wider. The use of cash LTI awards increased in the U.S. at all employee levels (except the CEO Level) and
more than doubled over the past two years at the director and vice president levels.
Another finding is that the participation in LTI plans continued to decline for lower-level employees,
however in Canada and Europe where there was an increase. The balance between short term and long
term is a good question to consider. Which one gets the shorter end? What comprises a Long-term
Incentive metric? What about the short-term?
Revenues and operating income are involved with short-term incentive plans. Market related metrics
like total shareholder returns, stock price appreciation are associated with Long-term Incentive Plans. A
recent Mercer analysis of compensation for executives at the Standard & Poor’s 100 Index will be
discussed (2015).
Some of the most common short-term incentive metrics are profit-based. Thirty-six percent of the
Standard and Poor’s 100 companies use earnings per share; 49 percent use other profit measures.
The weighting for income statement-derived metrics such as operating income, pretax income, revenue,
or net income is 55 percent, followed by earnings per share at 40 percent. Before we move further into
this discussion, we must address the incentive pay metrics.
Here are the common Long-term Incentive metrics:
•
Total shareholder return of stock appreciation. This was used by 55 percent of the S & P 100.
•
Return on assets or return on equity amount to about 49 percent.
Broad-Based and Global Equity Plans
Moving on to broad-based and global equity plan, there will be comparisons of where they fared from
2002-2003 years ago and where companies are with them currently.
Back in 2002, global stock plans were on the rise.
The win-win situation when it comes to equity-based compensation is that companies see a tremendous
return on investment from their broad based plans. Employees at the same time get a high sense of
motivation and are looking out to these companies for their win. There was a period of high growth in
the U.S. Most importantly, this plan includes nearly all of the employees of the organization.
Before we continue this discussion, let’s make a case for broad-based equity. How do we increase the
level of engagement in employees from 1 in 8? Will broad based equity plan make the difference? Can it
truly break ground with the following Gallup Poll study?
“While a Gallup study showed that American employees’ emotional attachment with their jobs did not
drop significantly in 2008 or 2009, a study by Hewitt Associates showed that in June 2010, employee
engagement had its largest quarterly decline in more than 15 years, when Hewitt first began tracking
this metric”.
Google, Whole Foods, Starbucks and Apple have adopted broad-based equity plans. Solium has made a
strong case for it.
According to a white paper by Solium, there is a reason to believe that using more broad-based equity
plans can be considered to motivate disengaging employee base.
These three factors – the end of the tech boom, the introduction of FAS 123(r), and the stock
exchange amendments – meant that by 2007, the number of Americans receiving equity compensation
had decreased to 9 million. Owing to a persistently soft labor market, that figure has not changed in four
years.
Clearly these changes didn’t kill broad-based equity compensation, but reduced its popularity and
required proponents to make changes to their plans to make them more palatable in a more punitive
environment. We saw equity being allocated more selectively in most organizations (with the exception
of the technology industry, where the labor market is consistently hot regardless of prevailing condition
and with a few mavericks that take a more democratic view of equity distribution.) We also saw shifts in
preferred equity types, with restricted stock taking the place of options. We saw smaller grant sizes and
a trend towards performance vesting. Broad-based plans are still alive and well today, they just look a
little different and may not be quite as popular as they once were. So if your company is considering a
new broad-based program or whether to continue with an existing one, keep these the following basic
tenets in mind.
The Case for the Broad-based Approach
1. Employees have more skin in the game
Behaving like an owner means having a higher level of commitment. Many companies like the idea of
employees behaving like shareholders and are disappointed when they grant to the majority of their
employees, only to see them turn around and sell their stock a short time after exercising. But in this
economy, it may not be realistic to expect rank-and-file employees to hang on to their shares. And
ownership behavior isn’t necessarily predicated on employees keeping their stock. More to the point,
it’s fruitful to think of equity compensation as the reward for ownership behavior, rather than the
incentive for it. Studies have shown that democratic distribution of equity works best when it’s part and
parcel of a greater ownership culture that includes job autonomy and participation in decision making.
Those that struggled most with broad-based plans were the companies that didn’t understand and
effectively execute this philosophy. When your employees feel valued and have a stake in the
company’s success, your organization reaps the benefits.
2. Employers retain valued employees
In a knowledge economy, your employees are your biggest asset and, in most cases, the most significant
investment. Their education, product knowledge and relationships with customers and other colleagues
are all extremely valuable. For many companies, retention is a constant concern, even in a soft labor
market. Knowing that turnover cost on average 6–12 months’ salary, it’s easy to see why. And when the
pace of economic recovery increases, the labor market will heat up. Star performers will be the most
likely to be lured elsewhere, right when you need them most. A study on employee engagement by
Blessing White shows that even a large proportion of engaged employees are thinking of leaving their
current positions in the next 12 months. Next to the lack of career opportunities, employees cited
financial rewards and a desire for change as the leading causes for looking elsewhere.
3. Employer benefits outweigh costs
Studies by the National Center for Employee Ownership show that companies with broad-based
programs plans spend roughly 30% of their total equity cost on employees below the managerial level, a
fairly low percentage considering that the majority of employees will fall in this category. In unusual
cases, companies spend as much as 50%, but even that proportion does not represent a huge
investment. Costs can be further mitigated by good plan design. For instance, the amount of equity
granted through an Employee Stock Purchase Plan (ESPP) is typically around 2–3% of the total equity
granted per year. And in considering the costs associated with a broad-based plan, one should also
consider the costs of not having one. In a before-and-after comparison, companies had 14.8% higher
productivity and 2.5% higher growth after instituting a broad-based employee ownership
program. Typical results like these will more than pay for the cost of an inclusive equity compensation
plan. So perhaps it’s better to look at the risks of not getting the kind of engagement this type of
program can induce.
Mercer highlights pros and cons when considering broad-based stock options. The arguments for such
instruments are:
•
Stock-Based Compensation Aligns the Workforce with the Interests of Shareholders.
•
Stock-Based Compensation is Required to Be Competitive with Other Employers in the Labor
Market.
•
Using Stock in the Compensation Program Provides a Platform for Business Education for
Employees.
•
Stock Options Are a Low-Cash Flow Alternative to Cash Compensation.
•
Stock-Based Compensation Can Be Designed Specifically as a Retention Device Through Vesting
Periods.
•
Company Culture Requires That There Be Some Commonality Between Executive Schemes and
Compensation for “Rank-And-File” Employees.
•
Such a Program Allows the Company to Signal to the Capital Markets Its Interests in Shareholder
Value Creation.
Here are the cons:
•
Rank-and File Employees Have Limited Personal Impact on Stock Price for Their Employer.
•
A Significant Increase Occurs in the Aggregate Dilution and Overhand for Shareholders, Yet the
Financial Impact for Any Given Participant is Relatively Small
•
Administering These Plans Requires Considerable Cost, Resources, and Distraction for Corporate
Human Resources and Finance Functions.
•
Plans Themselves Are Sometimes Not Well Understood by Rank-and- File Employees.
•
In a Down Market, or Worse, When the Company Alone Is Suffering from a Languishing Stock
Price, a Broad Group of Employees Can Be Disenfranchised.
•
Lower Levels of Employees Are More Likely to Cash Out from the Equity Compensation
Immediately upon Vesting.
Now, with these factors to consider for plans designed to appease the top producers and beyond, how
do companies manage their global stock plans?
Global stock plans were on the rise in 2002. But where do they fare currently?
According the Jennifer Namazi’s review of a survey developed by Buck Consultant’s, some interesting
details and trends were found about global stock plans (2014):
A fairly consistent and uniform approach across the global board. The findings included these factors:
1. Full value awards (time and performance based) are squarely the dominant form of equity
compensation.
2. Stock options are out; their use globally continues to decline.
3. The use of broad based equity globally is on the decline, and usage rates are projected to stay
fairly flat in 2014. Senior management levels and above are most targeted to receive grants
from the equity plan.
Key factors that drive global equity plan decisions:
•
Overall objective: the company’s high level objectives filter down to many decisions, including
how and when to use equity compensation.
•
Local talent market: Sometimes it’s easy to forget that there are many other job markets and
economies outside of the U.S. The dynamics of the local market can be a huge factor in
determining a compensation approach. The survey summary cited the examples of China, India
and the Philippines – all of whom have hot labor markets right now.
•
Red tape: This has long been a consideration for U.S. parent companies looking to extend their
compensation programs abroad. Just how many legal, securities, and employment
considerations exist are largely specific to each country and therefore need to be considered in
advance of adopting an equity approach in those regions.
•
Taxes: The tax implications of certain award types are a big driver in determining what will
maximize the value to the participant. Employer taxes are also a consideration.
•
Administration: Last, but not least, the cost and burden to administer these programs abroad is
considered. There are only so many resources available, and in some cases it may not make
sense to issue equity once the administrative analysis comes into play.
Since there are some elements to consider with broad based and global stock plans. It is a matter of
which companies are willing to embrace. Before they are considered, embrace it comprehensively,
making sure that all of the pros and cons are considered. The risks should not outweigh the benefits of
the organization as whole. Is it really worth it in the long term for the organization?

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