Spring 2016 issue of Horizons

Reasons for Using Compensation There can be many reasons for utilizing equity compensation plans, but the three primary reasons are to attract, retain and align talent in the face of potentially competing interests and resource constraints. Public companies often use equity compensation plans to supplement cash salaries and bonuses, aligning employee incentives with increasing shareholder value. Attract Talent Companies compete for talent through compensation, benefit packages and advancement opportunities. Equity compensation plans can be a differentiator when attracting top talent. For companies, equity compensation has an added benefit: preserving cash while still providing attractive compensation packages. Mature companies often use equity to enhance employment offers and motivate performance by fostering a long- term, ownership perspective. Retain Talent Equity compensation plans typically have vesting features such that if recipients receive the full value of the awards, longer- term commitments are required. By having multi-year vesting arrangements, companies can increase the likelihood of keeping key employees with the firm longer. Incentivize Talent By tying compensation to equity, compensation is tied to the long-term performance of the company, thereby aligning employee and company interests. If the company does well, the value of equity increases, so employees do well also. Equity compensation has long been utilized to create incentives that drive employee performance and align employee objectives with firm objectives. Emerging and mature privately held companies can benefit from equity compensation plans as well.

Equity Compensation: Key Considerations Offering an equity compensation plan can impact many aspects of your business, so it should be undertaken with careful consideration. There are a number of items that should be considered including tax, financial reporting, valuation and documentation requirements. Tax Considerations There will be tax implications for both the issuer and recipient of equity compensation depending on the type of equity utilized, elections made by the recipient (if available) and the value of the underlying equity instrument. In most situations, issuers and recipients will want to be aware of potential income and payroll tax implications at grant dates, vesting dates, exercise dates and upon the ultimate sale or other disposal of the equity. Reporting Considerations Equity compensation plans are, by definition, a form of compensation and therefore will need to be reported as such. Typically, the equity compensation expense is determined at the grant date, and then expensed over the life of the performance or vesting period. Recognize that even though cash is not used as compensation, the expense still reduces profitability.

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